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A merchant account is a third-party service that processes debit and credit payments from a customer to a business. Merchant accounts are commonly used today due to the increased volume of e-commerce transactions and the use of cards over cash. If you’re not sure if a merchant account is right for your business, you can learn more about them below to aid your decision.

What Is A Merchant Account And How Does It Work?

A merchant account is a third party service that allows a business to accept and process customer’s debit and credit purchases. In other words, a merchant account is the middleman between the customer’s bank account and your business’ bank account. A merchant account can be used both for sales and refunds. 

When a debit or credit card transaction is processed, information is gathered to determine whether the cardholder has sufficient funds to facilitate the transaction. Usually this process is completed by the point of sale machine which is the hardware you tap, insert, or swipe a card with. This is common practice for in-store purchases, such as at a mall or in a restaurant. 

Merchant accounts also operate over the internet. If a customer is purchasing something online, they must enter their debit or credit card information to complete the transaction. Once the information has been entered, the same process of verifying sufficient funds is performed. This process would be the same if a vendor accepts payments over the phone. 

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What Makes A Merchant Account High Risk?

Generally speaking, card-present transactions are low risk since the cardholder is present, as the name implies. They may need to enter a PIN or sign to verify their identity and confirm the transaction. Card not present or keyed in transactions are higher risk because the cardholder is not present. Fraud is much easier to commit over the phone or internet. Because the latter is higher risk, there is an additional monthly fee for the payment gateway and the rate per transaction is higher. 

High-Risk Merchant Accounts

Some businesses are higher risk than others and may require a high-risk merchant account. Examples of businesses and transactions that might need a high-risk merchant account include: 

  • Online dating sites
  • Debt service
  • Horoscope and fortune-telling businesses
  • Bail bonds
  • Adult or 18 plus products
  • Firearm dealers
  • Travel services
  • Electronics sold over the internet
  • Annual memberships
  • Home-based businesses
  • Online auctions
  • Telemarketing

You might also require a high-risk merchant account if: 

  • You or your business has poor credit 
  • The business sells expensive products, such as furniture or auto parts
  • The business has been blacklisted by credit card companies
  • The industry has a history of high volumes of chargebacks
  • The business sells prohibited products or services by banks
  • The business sells future delivered products or services, such as concert tickets or hotels

These are simply a few examples. In reality, there are a million and one risks, the nature of your business will determine whether or not a high-risk merchant account is required. 

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How To Get A Merchant Account

Card companies carry a lot of risk when processing transactions on behalf of a business. If a good or service is not delivered to the customer, that customer has a right to their money back. If the business doesn’t reimburse the funds, the card company is responsible for repaying the customer and may lose that money. For this reason, businesses must apply for a merchant account and be approved. There are often fees for application submissions as well. 

When looking for potential merchant accounts, it’s important to remain cautious. The company you choose to work with will be handling your money and you’ll develop a close, long term relationship with them. If anything seems odd during the application process, for example, they’re unable to provide documentation requirements or approval timelines, proceed with caution. 

When you’re applying for an account, be sure to negotiate. Having a merchant account is often a long term arrangement, you’ll want to get the best terms and conditions possible. Providing financial statements and a cover letter as a part of your application is a good idea. Anything else you can do to put your best foot forward will help you negotiate better terms. Possible documentation requirements for the application could include: 

  • Type of business
  • Length of time in the business or industry
  • Business history or credit
  • Previous merchant account history
  • Credit history of business owner

Once you apply and get approved, you can start accepting debit and credit card transactions.

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How Much Does A Merchant Account Cost?

The cost of a merchant account varies from company to company. In general, there are three types of pricing models offered for merchant accounts. They’re discussed in depth below.

Flat-Rate Pricing Model

A fixed percentage is charged for every transaction processed with this model. The flat-rate model is ideal for businesses with small ticket items and lower sales volume. 

Tiered Pricing Model

Transactions under this model are categorized as either qualified, non-qualified, and mid-qualified transactions. Qualified transactions have the lowest rate while non-qualified transactions have the highest rate. Typically qualified transactions are card present and non-qualified are keyed in, but this can vary from company to company. 

Mid-qualified transactions are typically keyed in transactions that also verify the cardholder’s address for an additional layer of security. 

Interchange Plus Pricing Model

The processing company will set a processing rate. The business will be charged this rate plus a markup. Usually this is expressed as a percentage and fee per transaction, for example 2.75% + $0.15. This is a common pricing model used by small businesses. 

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Additional Fees Associated With Merchant Accounts 

  • Gateway Fee. If you incur card not present or keyed in transactions, you’ll need a payment gateway which comes with a monthly fee. 
  • Address Verification Service (AVS) Charge. This is an additional service for payment gateways which verifies the cardholder’s address as an extra security measure. This service costs extra. 
  • Monthly Fee. Also referred to as a statement fee, this is the monthly charge for the preparation of your statement and customer support. 
  • Monthly Minimum Fee. Some transaction processing companies require that you incur a minimum amount of transactions every month. If you fail to meet this quota, you’ll be charged a fee. 
  • Retrieval Fee. If a customer disputes a charge and the customer’s bank requests records related to the sale, you could be charged a retrieval fee. 
  • Chargeback Fee. If a customer successfully disputes a charge and demands a refund, then you could incur a chargeback fee. The fee is essentially the cost to reverse an already processed transaction. 
  • Batch Fee. When you post a batch of transactions, occurs once or twice per day, there could be a batch fee. This fee is usually 10 to 25 cents per batch. 
  • Cross Border Fees. International transactions tend to have additional costs to cover foreign exchange rates.
  • PCI Compliance Fee. The Payment Card Industry (PCI) has regulations related to data security with efforts to reduce identity theft and fraud. Many processing companies help you stay compliant as a part of maintaining a merchant account. A fee could be charged to help you remain compliant, but the exact fee is not always disclosed, it is usually included in the monthly cost. 
  • PCI Non-Compliance Fee. If a business fails to comply with PCI, there could be a fee. Usually businesses are given a few months to become compliant, if they don’t do so within that timeline, the fee is charged. 

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Pros And Cons of Using A Merchant Account

Merchant accounts are a powerful business tool, especially in the growing e-commerce world. However, there are drawbacks too. Let’s explore the pros and cons below. 


  • Customers Like Choice. Having payment options allows the customer to pay whichever way they like. This decreases the risk that you’ll lose a sale. 
  • Increased Sales Volume. Debit and credit transactions are more common, by offering these forms of payment your sales will increase. 
  • Security. Dealing with cash is riskier because there is a high risk of misplacement, errors, and theft. This risk is greatly reduced with debit and credit payments. 
  • Quick Checkout. Accepting debit and credit payment is instant and easy. Checkout is quicker and you receive your money faster. 


  • Fraud and Identity Theft. The risk of fraud and identity theft is higher, especially with over the phone and internet payments. 
  • Additional Cost. Offering a debit and credit payment option for customers comes with a price. Keep in mind that it is simply an operating cost to close a sale. 
  • Chargebacks. You’re required to abide by the credit card company’s regulations. Chargebacks are possible and are an additional risk of using payment processing systems. 

Improve Your Business With A Merchant Account Today

Merchant accounts can greatly improve a customer’s experience with a business and optimize the collection process for businesses. Even though the service comes with a price, think of it as a cost to operate your business. 

Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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