Merchant Account

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Mary is good at making stuffed toys. She wants to sell them online and she wants customers to be able to purchase her toys using a credit card. In order to accept credit cards on her website, she needs two things:

  • A Gateway Account
  • A Merchant Account

A Gateway account provides a method for encoding all the credit card information, such as the number, CVV code, zip code, address etc. The Gateway forwards all this data to Mary’s merchant account.

The Merchant account is basically where all the money comes at the end of the day when all transactions have been completed.

Usually a bank provides merchant account to a business that wants to accept credit cards online. First Data is one of the big players in this market. A financial institution that provides a business with a merchant account is called a “Merchant Account Provider”. Merchant Account Providers are also called “credit card processors”. The Gateway forwards any request to the Merchant Account Provider and they are responsible for processing the swiped or keyed-in credit card. They are also called “Merchant Bank” or “Acquirer”.

A Merchant Account is a pass-through account. This means that the money does not stay in the Merchant Account for long. All the money from credit card transactions comes to the Merchant Account when settlement is done at the end of the day. Then, the money from the Merchant Account is deposited into the company’s bank account within 24 hours.


As a business owner, if you request a Merchant Account, the bank will ask you a number of questions about your business. The merchant account holder bank is taking a great amount of risk, so they must make certain you are an honest business person.

Let’s say that on the first day of business, Mary is able to sell 20,000 toys. A toy costs $10. So at the end of the day when settlement is done, Mary’s Merchant Account will have $200,000.00 in it. The next day she takes all this money and disappears without shipping the toys to the customers.

Since the customers did not receive their toys, they will demand a refund from their credit card provider.

The credit card provider companies, in turn, will ask the “Merchant bank” to refund the money. So the “Merchant bank” is at the risk here if Mary is not an honest business person.

This is why banks ask for detailed financial information about the business before a bank agrees to provide them with a “Merchant account”.

In some cases, banks ask for some type of personal collateral also. In some other cases, the merchant bank holds on to the money for a week (or longer) before releasing the money, just in case the product shipped by the business is not of the described quality and the customers start asking for refunds.

This explains why it is very hard to get a “merchant account” for a risky business. In the credit card industry, any business related to gambling, adult entertainment and some aspects of travel industry is deemed “high risk”. Business owners of these industries need to work extra hard to convince the bank to provide them with a “merchant account”.