The short answer
A merchant account is a business's own agreement with an acquiring bank, usually through a processor, to accept cards and receive the money. Payment facilitators such as Square and Stripe let a small business skip that account by signing it up under their master account. The trade-off is flat-rate pricing and the facilitator's own holds and reserves.
What Is a Merchant Account?
It is the business's own seat in the card system. An acquiring bank, the merchant's bank for card payments, agrees to accept the business's card sales and settle the money to it, usually through a processor that runs the transactions. When a customer disputes a charge, Visa describes the reversal flowing "by the card issuer to the acquirer, and usually, by the merchant bank to the merchant."
How Is a Payment Facilitator Different?
A payment facilitator holds one master account and signs businesses up under it. Visa's own description says a payment facilitator "signs a merchant acceptance contract with a sponsored merchant on behalf of an acquirer" and receives and distributes the settlement, while "acquirers are responsible for the acts of both PFs and sponsored merchants."
In practice, Stripe explains, the payfac "rents out" merchant account functionality and handles "underwriting and risk assessment, settling funds with submerchants, managing chargebacks and disputes."
How Does Pricing Differ?
"Payfacs usually charge a flat rate for each transaction." A merchant account through a processor often has "a more complex pricing structure that could include interchange fees, assessment fees, and a markup," which is usually cheaper at higher volume. The two models are compared in interchange-plus vs flat rate.
Why Would a Processor Hold Your Funds or Set a Reserve?
To cover chargebacks. Square calls reserves "a common industry practice used by payment processors and other financial institutions to ensure that merchants are able to cover disputes," and uses a "rolling reserve." The money "still belong[s] to you and [is] only used if you are unable to cover a chargeback."
New businesses are the usual target: "If you don't have a processing history with us, among additional risk factors, we may place a reserve on your account," and accounts with reserves "will be reviewed after a minimum of six months." See why Square holds money.
How Is a Payment Gateway Different From a Processor and a Merchant Account?
Three jobs, often sold as one. Stripe puts it simply: "A payment gateway securely sends payment data, while a payment processor authorizes the transaction and moves the money between banks." Authorize.net describes the merchant account as "the bank account that holds your funds after a transaction is approved, before they transfer to your business bank account."
You can buy them separately. Authorize.net's gateway-only plan, at $25 a month plus 10¢ per transaction and a 10¢ daily batch fee, "connects Authorize.net to" an existing merchant account "without replacing your existing account." A payment facilitator such as Square bundles all three: Square's terms say "Square is a payment facilitator."
Which One Is Right for Your Business?
A new or small business usually starts with a payment facilitator: fast approval, one rate, no separate application. Once card volume is steady, a merchant account on interchange-plus pricing is often cheaper, and a business in a higher-risk category may need one from the start. BatchOut offers both, from Square to traditional processors, and shows the effective rate before you switch.
Commonly Asked Questions
Is Square a merchant account?
No. Square is a payment facilitator: it signs businesses up under its own master merchant account rather than giving each one its own.
Do I need a merchant account to accept credit cards?
Not necessarily. A payment facilitator such as Square or Stripe lets a business accept cards under its master account. A merchant account of your own usually costs less at higher volume.
Why did my processor put a reserve on my account?
To cover possible chargebacks. Square says it may place a reserve on accounts without processing history, the funds still belong to the merchant, and reserves are reviewed after at least six months.
Who is responsible for a payment facilitator's merchants?
The acquiring bank. Visa says acquirers are responsible for the acts of both payment facilitators and their sponsored merchants.
What is the difference between a payment gateway and a payment processor?
A gateway securely sends the payment data; the processor authorizes the transaction and moves the money between banks. The merchant account holds the funds after approval, before they reach your business bank account.
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