A merchant account is a form of bank account which provides the capacity for merchants to accept transactions by credit cards and debit cards.
Sometimes also known as merchant IDs, these specialised accounts facilitate customer transactions utilising credit, debit and various other types of store payment card, and are essential for processing such transactions.
Merchant accounts are held in agreement between a merchant and a merchant acquiring bank. When a payment by card is attempted, the funds from the transaction are transferred to the merchant account (provided the customer possesses sufficient funds on their payment card), and later transferred to the merchant’s own business account.
The role of the merchant acquiring bank is to process and authorise transactions made by payment card. To accomplish this role, physical Electronic Point Of Sale systems (EPOS), such as a credit card terminal is used.
The chip on the card is read and the PIN keyed in, at which point the details of the transaction are sent electronically to the merchant acquiring bank for processing and authorisation.
Exceptions to this physical EPOS system requirement include e-commerce payment gateways, where a cardholder-not-present transaction takes place sometimes with a 3D secure password used to provide another layer of security.
One of the key advantages of merchant accounts is their impact on a merchant’s customer base. Rather than being restricted solely to cash transactions, the capability to accept payments through credit, debit or store cards can increase a merchant’s business by an estimated 30-70%.
The use of a merchant account and payment cards also significantly increases the speed at which transactions can be processed, thereby improving customer experience.
Types of Merchant Account Fees
All acquiring banks will apply fees for the use of merchant accounts.
The actual costs for merchant accounts in the UK will vary from provider to provider, although most will structure their fees in a similar way.
Common types of fee include: activation/setup fees, monthly fees, transaction fees, authorisation fees and equipment fees. It is useful to consult the smallprint of the merchant account agreement to look for any possible hidden fees, such as a high chargeback fee, which might sting you later.
It is strongly advisable for merchants to consult their provider and confirm the precise fees beforehand, use the form at the top of the page to receive free quotes tailored to your business.
As their title would suggest, activation and setup fees are based upon the initial setup of a merchant account. Common setup fees fall in the range of £70-£200+, with Web-Merchant currently offering initial setup fees of £50 for low to medium-risk businesses, increasing up to £200 and £300 for high-risk and adult businesses, respectively. By contrast PayPal charges merchants no initial setup fee.
Common to the vast majority of merchant accounts, however, are monthly fees. As a general rule, typical monthly fees can range between £10 to £20 for the cheapest and most expensive providers respectively.
For example, Web-Merchant’s cheapest payment plan for low risk businesses charges a monthly fee of £10, one of the cheapest monthly fees of any UK merchant account, however this fee increases up to £25 for high-risk and adult businesses.
Streamline charge £19.95 per month for their services, with PayPal’s monthly fee standing at a similar £20.
There is also significant variation in the fees charged per transaction, with different fees sometimes applied to specific payment cards.
For instance, SagePay apply a transaction fee of 2.5% for credit and business cards, with debit cards charged a fixed fee of 40p. However, when such cards do not possess 3D secure (an additional layer of payment card security, such as Verified by Visa and MasterCard SecureCode), an additional 0.5% and 10p fee is applied to credit and debit card transactions, respectively.
Transaction fees applied by Web-Merchant are significantly higher with regards to high-risk and adult businesses, with fees of over 5% applied to credit and debit card transactions.
Their fees for low-risk businesses are similar to SagePay, however, at 40p and 2.5% for debit and credit cards, respectively.
PayPal’s transaction fee policy is somewhat unique amongst UK merchant accounts in that fees are based upon the merchant’s monthly sales.
Sales of up to £1,500 per month carry a transaction fee of 3.4%, with sales including and in excess of £55,000 being charged at 1.4% per transaction.
Businesses with a low level of customer traffic may benefit from Streamline’s merchant account in which 350 transactions are included within the monthly fee. Beyond 350 transactions, a 10p transaction fee is applied.
Authorisation fees, sometimes confused with transaction fees, are applied to every attempted transaction made by payment card.
One of the key aspects which distinguishes an authorisation fee from a transaction fee is that the application of the former does not depend upon the approval of a transaction – even in instances where a transaction is refused (such as due to lack of adequate funds), an authorisation fee will be applied. Such fees may range from 3p to 10p per transaction.
Where physical EPOS systems are required, merchants must also factor in the cost of this equipment. The exact systems required, and therefore exact cost to the merchant, will depend upon the nature of the business.
A small-scale business with low levels of customer traffic may only require a single payment card terminal, costing approximately £60 to £100, depending upon the model and condition. Obviously, the larger the business and the more systems required, the greater the cost.
Read the smallprint of your merchant agreement to find out what fees you may incur in the event of a chargeback. A chargeback happens when a customer disputes the charge and gets refunded by the card issuer. Typically if they have ordered goods online that arrive damaged or not as described, although in the UK this is limited to value of transactions under £100, or transactions made on credit cards. Chargeback fees vary, for instance PayPal charge merchants £14 per chargeback, while other merchant accounts fees might be up to £30 per refunded transaction.
Also check the agreement for other hidden fees such as customer support fees and early termination fees.
Account Fees – Foreign Comparison
As in the UK, fees charged by foreign merchant accounts vary from provider to provider. Gotmerchant for example, a USA based merchant account provider, offer fees somewhat similar to the UK providers discussed above, with a 25 US dollar monthly fee (*£15.34) and 25 US cents transaction fee (*15p).
As an example of the variation in fees, however, American Express charge a significantly smaller monthly fee compared to UK-based merchant accounts of 7.95 US dollars per month (*£4.88).