What is a merchant account and
How do they work?

In today's world, the ability to accept credit and debit card payments is vital to your business and expected by your customers. There were a total of 19.7 billion debit and credit card transactions made in the UK in 2019 by cardholders from both the UK and from overseas countries. This reflected a total spend of £721.7 billion.

In order to accept these payments, whether face-to-face, over the telephone (MOTO) or online, you will require a merchant account.

What is a merchant account and why do I need one?

If you’re completely new to accepting credit or debit card payments, you’ll need to apply for a merchant account before you can start taking card payments.

A merchant account is a specific bank account that acts as a holding pen for money before it is moved into your actual business bank account.

Merchant Accounts are normally sourced from a Merchant Acquirer or an Independent Sales Organization (ISO)​ whom will provide you with a Merchant ID (MID), which is unique identification number assigned to the business.

You would normally have a MID for each channel that you wanted to accept card payments, whether that be face to face, e-commerce or over the telephone.

Once a transaction has been authorised, checking that there are sufficient funds in the customers account, it will be processed, with the funds will be paid into your merchant account. These are usually transferred automatically to your business bank account, minus any transaction fees, typically within 3-7 days, although some providers can now settle the funds into your account, the same day.

The following graphic explains the flow of money when using a merchant account:

Payment Flow

Once your merchant account is set up, you will need some way of accepting card payments from your customers. That might be some physical card terminals/electronic point of sale hardware for 'Cardholder Present' face to face transactions, to expect chip and pin and contactless payments.

For e-commerce/website transactions you will require a payment gateway​, which is sometimes referred to as a PSP (payment service provider).

A payment gateway is an online service that securely transmits card information, subject to necessary fraud checks and verification of available funds, and debits the customer’s account for the required amount.

For payments over the phone, these types are payments are known in the industry as MOTO (mail order/telephone)

​Sometimes these are also referred to as 'Cardholder Not Present' or CNP for short. This means that the cardholder/customer is not present to use Chip & Pin to authenticate the transaction as they would in a physical shop, often using their 4 digit pin code to prove the card belong to them.

Information Section

There are a number of options available to do so. Some are much more safe than others, so please consider the right option and understand the potential risks, by reading our How to take payments over the phone guide.

Gala Technology work with a number of leading providers for all the payment solutions you may need, across all channels. Is it very important that a business understands the charges associated with a merchant account. Gala Technology can provide some free and independent advice, cutting through the industry jargon and help you set up the right merchant account for you, with the right provider. Click here to find out how.

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