Receiving payments from your customers is one of the primary yet sensitive areas of any business, particularly in the initial stages of starting a company. Once you have set up a business account, it is important to set up an online merchant account as well. Wondering why? Well, in today’s world of growing technology, customers hardly carry around cash or chequebooks in their wallets. Presently, debit and credit cards are the go-to forms of payment. 

But what is a merchant account? Let’s read further to learn everything about merchant accounts. 

What is a Merchant Account?

A merchant account is a business bank account created and used for business purposes where companies can make and accept payments. For example, a Merchant account enables a business to accept credit or debit card payments and facilitate payment deposits through multiple other payment methods.

Merchant accounts require a business to partner with an acquiring bank or a merchant account provider that facilitates an electronic payment transaction.

Further, your merchant account provider transfers the funds to your business bank account within 3 to 5 working days. Some payment solution providers have come up with the same-day transfer of funds.


How Do Merchant Accounts Work?

A merchant account works as the middleman that allows your business to accept debit and credit card payments both in person and online. Once a payment processing solution sets up a merchant account for your business, you can begin accepting credit and debit card payments in no time.

 Here’s how they work in detail:

  • You apply for a merchant account for your business.

  • The application is reviewed based on the business’s risk factors.

  • Once approved, the account is set up with a unique identification number.

  • You integrate payment processing into the sales channels of your business.

  • When a customer makes a purchase, transaction details are sent to the payment processor.

  • The payment processor requests authorization from the card network.

  • If authorized, the funds are reserved for settlement.

  • Settlement occurs at regular intervals, transferring approved funds to your merchant bank account, minus fees.

  • The merchant account is monitored for fraud and risk.

  • Fees are charged for various aspects of the service.

Types of Merchant Accounts

Several types of existing merchant accounts are available to cater to different business needs. Understanding each one can assist you in choosing the right one for your online business. Here are some common merchant account examples:

Retail merchant accounts

These accounts are suitable for physical brick-and-mortar stores. They allow companies to accept card payments through a point-of-sale (POS) system.

E-commerce merchant accounts

 Designed specifically for online businesses, e-commerce merchant accounts enable your business to accept payments through your website or mobile app.

MOTO (Mail or Telephone Order) merchant accounts

MOTO merchant accounts are designed for businesses that primarily handle orders via mail or telephone. They provide a secure way to process card payments remotely.

High-risk merchant accounts

 These accounts are intended for industries with elevated risk factors, such as gaming or adult entertainment.

International merchant accounts

International merchant accounts support businesses with global operations, enabling them to accept international payments and conduct transactions in different currencies.

Mobile merchant accounts

They are ideal for businesses needing mobile payment processing solutions, such as food trucks or event vendors. They enable your business to accept payments instantly using a mobile device.

Aggregated merchant accounts

These accounts are shared among multiple businesses, often through payment service providers. These accounts are suitable for small businesses or merchants with low transaction volumes.

Benefits of a Merchant Account 

Merchant accounts are an essential component for businesses operating in the digital era. They offer numerous advantages to enhance your business operations and boost your revenue. Here are some key ones:

Accepting electronic payments

With a merchant account, you can easily accept various electronic payment methods, like debit and credit cards, as well as UPI and mobile wallets. This flexibility allows you to cater to a wider range of customer preferences.

Increased sales

By accepting electronic payments, you open up new avenues for customers to make purchases. This convenience leads to higher conversion rates and ultimately increases your sales volume.

Improved cash flow

The merchant payment gateway expedites the payment process by enabling swift transactions between the customer’s bank account and your business account. This streamlined process ensures that funds are quickly deposited into your account, thus improving your cash flow management.

Global reach

A merchant account is crucial to expand your business internationally. It lets you accept payments from customers worldwide, facilitating seamless cross-border transactions and broadening your customer base.

Credibility and trust

Having a merchant account adds credibility to your business as it signals that you have met stringent requirements for secure transactions. Customers are more likely to count on businesses with secure payment options, which enhances their confidence in purchasing from you.

Enhanced security

Merchant or sub-merchant accounts often have advanced security measures in their payment solutions, like encryption and fraud detection tools. These safeguards protect businesses and customers from fraudulent activities, ensuring secure transactions.

Who Can Apply for a Merchant Account?


Individual entrepreneurs and sole proprietors can apply for a merchant account. This includes consultants, freelancers, and small business owners operating as individuals.

Hindu Undivided Family (HUF)

HUFs, which consist of a family unit governed by Hindu law, are eligible to apply for a merchant account. This allows HUFs to accept online payments for their businesses or ventures.

Partnership and sole proprietorship

Partnerships and sole proprietorships are common types of businesses in India. They can apply for merchant accounts and process electronic payments from customers.

Limited company and limited liability partnership

Both limited companies and limited liability partnerships (LLPs) can apply for merchant accounts. These legal entities can benefit from accepting online payments through various payment solutions.

Clubs, societies, trusts and associations

Organizations such as clubs, societies, trusts, and associations can collect membership fees or accept donations electronically once they apply for a merchant account.

How to Get a Merchant Account?

1. Get a Business License

To open a merchant account, it is important to prove that your business is legitimate. Therefore, the first step toward opening a merchant account is to get a business license.  

2. Open a Business Account 

After getting a valid business license, the next step is to obtain a business bank account. Your business bank account will be where your merchant account provider will deposit the funds from your credit and debit card sales and withdraw their fees.  

3. Assess Your Needs 

Before thinking of opening a merchant account, it is important to evaluate your business needs. For instance, you need to decide which credit and debit cards you’ll have to process. Do you want to accept American Express, or will Visa and Mastercard do? Before getting a merchant account, map out everything you need for your business. 

4. Compare Merchant Account Providers 

Now that you are thorough with your needs, you can start researching different merchant account providers to find the one best suited for your business. Let’s look at a few features to keep in mind while looking for a merchant account provider.

  • Strong security: As a merchant, it is your responsibility to protect your customers’ sensitive credit and debit card information. You can do so by choosing a PCI-compliant merchant account provider.

  • Flexible customer service: Look for a provider that offers 24/7 in-house customer service free of cost to solve your issues.

  • Instant funding: Some merchant account providers like Razorpay provide next-day funding services so you can get the funds in your account faster. 

  • Transparent pricing models: Credit card processing fees can be confusing. So, if your merchant account provider is unclear about the fee, it might be a sign to shift to another provider.

5. Fill Out the Application 

After selecting a provider, you need to fill out an application form that will require detailed information about your business. You might need to provide the following documents –  

  • Contact information 

  • Authorized signer information 

  • Bank account number 

  • Tax ID

6. Start Payment Processing Once Your Merchant Account is Approved 

Opening a merchant account can take somewhere between one business day and a week, depending on your provider. Once approved, you can start accepting credit and debit card payments right away. 

Merchant Account Fees and Pricing Models

There are three main pricing models for merchant account fees –

  • Flat-rate pricing: This is the simplest and most transparent pricing model, where you pay a fixed percentage of each transaction, irrespective of the card type, network, or amount. This model is suitable for businesses that have low to medium sales volume or those that process a lot of small transactions. 

  • Interchange-plus pricing: This is the most cost-effective pricing model, where you pay the interchange fee (charged by the card issuer), plus a fixed markup (the fee charged by the payment processor). The main benefit of this model is that it offers the lowest possible rates for each transaction, as you only pay what the card issuer charges, plus a small margin. 

  • Tiered pricing: This is the most common and opaque pricing model, where you pay different rates for different categories of transactions, based on the risk and reward factors. This model is suitable for businesses that have a diverse mix of transactions or those that want to optimise their rates for different types of customers.

In addition to these pricing models, businesses may also encounter some common additional fees when using merchant accounts, such as:

  • Monthly fees: These are fixed fees that you pay every month to maintain your merchant account, such as account maintenance fees, statement fees, reporting fees, etc.

  • Gateway fees: These are fees that you pay to use a payment gateway service, which connects your website or app to your payment processor and facilitates secure online transactions.

  • Monthly minimum fees: These are fees that you pay if your monthly transaction volume does not meet a certain threshold set by your payment processor.

  • PCI compliance fees: These are fees that you pay to comply with the Payment Card Industry Data Security Standard (PCI DSS), which is a set of rules and regulations that ensure the security of cardholder data.

  • PCI non-compliance fees: These are fees that you pay if you fail to comply with the PCI DSS requirements, which may result in fines or penalties from your payment processor or card networks.

  • Batch fees: These are fees that you pay to settle your transactions at the end of each day or period. This involves transferring the funds from your payment processor to your bank account.

  • Address Verification Service (AVS) fees: These are fees that you pay to use a service that verifies the billing address of your customers with their card issuers. This helps prevent fraud and chargebacks.

  • Retrieval fees: These are fees that you pay when your customers request copies of the transaction receipts or statements from their card issuers, which may indicate a dispute or chargeback.

  • Chargeback fees: These are fees that you pay when your customers initiate chargebacks (claims to reverse transactions) with their card issuers, which may result from fraud, dissatisfaction, error, or other reasons.

  • Cross-border fees: These are fees that you pay when you accept payments from customers who use cards issued in different countries or regions than theirs.

It is imperative to conduct due diligence when selecting a payment processor. This research helps avoid unnecessary or unexpected charges. You must carefully review and understand the fee structure before entering into a merchant account agreement.


A merchant account allows businesses to accept credit and debit card payments, providing customers with more payment options. It is essential for online businesses, where cash payments are not feasible. The setup process involves approval from a merchant-acquiring bank, which may take some time. The benefits of attaining a merchant account include streamlining business operations, expanding payment modes, and enhancing payment security compared to cash or cheques.

Frequently Asked Questions (FAQs)

1. What is a merchant account example?

If you run an online store and want to accept credit card payments, you would need a merchant account to process transactions from customers securely. This is a common merchant payment example.

2. Can anyone get a merchant account?

Yes, anyone who operates a business or sells products or services online can apply for a merchant account. However, certain eligibility criteria need to be met, such as having a valid business license, a good credit history, and being in compliance with legal requirements.

3. What is a merchant transaction?

A merchant transaction refers to any payment made by a customer to a business or seller. It includes the transfer of funds from the customer’s bank or digital wallet to the merchant’s designated bank account.

4. What is the merchant limit for UPI?

The merchant limit for UPI (Unified Payments Interface) varies depending on different banks and payment service providers. It can range from ₹1 lakh to ₹10 lakhs per transaction, allowing you to accept large payments securely.

5. How are merchant fees calculated?

Merchant fees are typically calculated based on a percentage of the total transaction amount. The exact fee percentage may vary depending on factors like the type of business, volume of sales, and the chosen payment solution provider. Additionally, some providers may charge additional fees such as setup fees or monthly maintenance fees.

6. What documents are required for a merchant account?

To apply for a merchant account, you will typically need to provide documents such as proof of identity (Aadhaar or PAN card), proof of address (utility bills), bank statements, business registration documents (GST registration), and any other relevant legal certifications or licenses.

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    Author Giri Sandeep

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