Merchant accounts: Why you can't accept payments without one

A merchant account is an account that businesses need to process payments. It works as an intermediary between the customer’s bank and the business's bank account. 

In short, when a customer initiates a payment, their money goes to the merchant account that temporarily holds it until the payment is complete. Once that happens, the funds are transferred to the business bank account held at Adyen or a different bank.

Businesses can’t access funds while they’re in the merchant account. They need to wait until they’re transferred into the business bank account. How long that takes depends on the provider but can range from an instant payout to five business days.  

Why do you need a merchant account?

The payment processing infrastructure requires businesses to have a merchant account. The only way to process payments is through a merchant account.

Now that we’ve explained what a merchant account is and why you need one let’s dive deeper into its role in the payments value chain. 

The payments value chain consists of two main phases: authorization and settlement.

Authorization happens in a few seconds when a customer makes a purchase. During this phase, the acquirer initiates a request to authorize the payment. This request goes via the card network to the customer’s bank. If everything goes well, they authorize the payment.

Settlement happens over the next few hours or days. The acquirer sends a request to the customer’s bank. The funds then move through the card network into the merchant account. The acquirer processes the payment before sending the money to the business bank account.

There are many other parties involved in the payments value chain, like a payment processor, payment gateway, and an issuing bank. Learn more about payment processing in our article on payment processor vs. gateway.

How many merchant accounts do you need?

The number of merchant accounts you need depends on your business. You need one merchant account for each legal entity you process payments with.Typically, businesses have one account per region, but some businesses disregard region and are purely based on legal entities.

We also recommend creating separate merchant accounts for your different channels, one for ecommerce (online payments) and one for point of sale (in-person payments) in each region. This is beneficial as it separates fund flows and reporting (e.g., if the business is accounting for ecommerce and pos separately) and allows for different access set-ups (e.g., a store owner does not have access to ecommerce data).

Setting up a merchant account is a necessary step to accepting payments. There are two main routes to setting up a merchant account: 

1. Apply for a merchant account with an acquiring bank

2. Set up merchant account with your payment provider

Let’s have a look at what to consider for each approach.

Applying for a merchant account with an acquiring bank

Setting up a merchant account with an acquiring bank includes benefits such as lower fees and personalized support. However, setting one up can take time. Acquiring banks often conduct an underwriting process to minimize the risk. The application time can range from a few days to a few weeks.

This process usually requires you to share information about your business, such as your legal company name, company tax ID (in the US, this would be your Employer Identification Number or EIN), and business bank account details. With this information, the acquiring bank does a risk assessment to find out if you’re eligible.

Pros

• Low fees for high sales volume

• Personalized customer support

• Offered to high risk industries

Setting up a merchant account with your payment provider

Some payment providers offer merchant accounts to their customers without doing an underwriting process. This is generally a faster way to set one up. Since payment providers already have access to your payments data, it’s easier for them to assess the risk.

Pros

• Fast application process

• Simple flat-rate pricing structure

• Flexible contracts

Setting up a merchant account with Adyen

Setting up a merchant account with Adyen is a lot easier as it comes as part of the Adyen package. You automatically get a merchant account when you start accepting payments with us. Once you're set up, you get personalized customer support and can lower your fees for higher sales volumes.

With Adyen, you don’t need to share your business information with multiple providers. We offer one integration and back-end to manage all payments from all countries and channels. You don’t need to open accounts with each payment provider as you would with legacy providers, which means reduced operational complexity. This contributes to higher authorization rates, lower transaction costs, and faster funds settlement.

Since you’re already using our platform, you automatically get merchant accounts as you scale to other regions rather than having to fill out lengthy forms each time. These are Adyen’s application requirements. 

We also offer a different product called Accounts which is part of our Embedded Financial Product Suite. This is different from a merchant account.

The merchant account fees differ depending on whether you choose an acquiring bank or or use an aggregated merchant account from your payment provider.

With an acquiring bank, the most common pricing model is charging a percentage per transaction volume. Sometimes the acquiring bank also charges a setup or contract termination fee.

Payment providers often bundle processing fees into one fee. This price can include card scheme fees, interchange fees, and merchant account fees. It can also include costs for additional services like 3D Secure and fraud prevention.

Before you get started setting up your merchant account, let’s do a quick summary of what we’ve learned in this article: 

• A merchant account is an account that businesses need to process payments. 

• It temporarily holds the funds before they move into your business bank account. 

• Unless your plan is only to accept cash payments, you need to have a merchant account, as it’s an integral part of the payment infrastructure. 

• There are two options for setting up a merchant account: through an acquiring bank or some payment providers.

• By setting up an account with Adyen, you get the best of both options and can be up and running quickly.

Do you want to learn more about how to accept payments? Explore Adyen’s payment offering.