A merchant account is an account that allows businesses to process credit card transactions. Linked to a bank account, merchant funds are deposited or withdrawn to a business checking account. When a sale is made and puts the transaction through the merchant account, the transaction’s funds are deposited into the bank account directly. Conversely, when a return or refund is processed the funds are withdrawn directly from the bank account.

When a credit card transaction is processed, information must be sent to a payment gateway to see if the cardholder has sufficient funds. For traditional transactions, this is generally part of the point of sale (POS) system, which reads the cardholder’s data and checks with the credit card company to ensure the transaction can go through. This is known as a “swiped” or “card present” type of merchant account, which can include retail, restaurant, or lodging merchants.

In a “keyed” or “not present” transaction, this is done online by a payment gateway, which connects to the credit card company. These kinds of merchants can include mail order companies, telephone order companies, or e-commerce/Internet merchants. When a merchant account is set up, the same company, often called the payment processor, can set up the payment gateway in the same process.

Types of merchant accounts

Within the e-commerce category, there are a number of different kinds of merchant accounts.

Direct – Applied for directly at a merchant bank

Local – An account in one’s home country

Offshore – An account outside of the country of the merchant, known as an international merchant account

High risk – For online businesses with a high percentage of chargebacks and returns

Third party – Connected via an additional secure payment gateway to a direct credit card payment processor, contributing to the work of the processor and sharing its expenses. Ideal for beginner e-commerce companies.

Generally, merchant transactions are not posted to the account at the time of purchase/refund. These transactions are usually posted in a batch during the merchant’s settlement process. Depending on the business, the settlement process can either be automated to occur at a specific time of day, or manually initiated. This is dependent upon the specific payment gateway.

To get a merchant account, a business must apply and be approved. Credit card companies guarantee that a cardholder is entitled to receive a promised good or service; if such good or service is not delivered, then the cardholder is entitled to their money back. As one of the most basic consumer protection principles, this also mitigates the risk that the credit card processor faces. The payment processor has the potential to lose money every time they process a credit card transaction for your business.

All businesses who want a merchant account must apply. When applying for a merchant account, it’s important to have financial documents together. In addition, having a strong processing history is a valuable tool that you could use to leverage your application. A cover letter will help explain exactly what your business does and why it deserves a merchant account.