If you already have an established business or want to start one, you would want to be able to accept payments via credit and debit cards. Given the rising trend of Buy Now Pay Later options, many consumers prefer paying merchants via these payment sources.
Besides this, you might also want to offer other payment options like UPI, net banking, and digital wallets to your customers. To be able to do so, you will need a merchant account.
For many businesses, this means having two different types of accounts – a merchant account and a bank account. Amidst the high dependence on cash transactions in the past, it is possible that you are not entirely sure what a merchant account is, how it works, and how it fits into the need for digital payments.
Another common misconception related to a payment gateway vs. merchant account comparison is that your business needs only one or the other. However, in reality, you will need both of them for successful payment processing.
Still confused? We are here to help you understand merchant account meaning and how it differs from a payment gateway.
What is a merchant account?
A merchant account is a type of bank account that allows your business to securely accept payments via credit cards, debit cards, and other electronic payment modes. It acts as an intermediary that connects your business with the card-issuing banks that offer your customers the debit and credit cards to make purchases.
It is the payment aggregator that sets up the merchant account for your business. Besides this, your merchant account will require an agreement with the acquiring bank or other parties involved in payment processing. Whether this agreement is between you and the acquiring bank, or a payment aggregator, it requires you (the merchant) to adhere to certain operating regulations.
An acquiring bank is a financial institution that processes credit and debit card payments for different merchants.
In simple terms, your merchant account is the holding account where information related to the payment transactions is collected. If you accept card payments via a payment gateway, all the funds that you receive first reach the merchant account and are then passed on to the linked business bank account.
Key takeaways
- A merchant account is a type of bank account created for business purposes to facilitate merchants to accept and make payments.
- Merchant accounts allow individuals/businesses to accept payments via credit cards and similar other modes of electronic payments.
- Merchant accounts often come with an additional fee but are worth paying the price because of the array of benefits you can get.
- Payment gateway + Merchant Account = Ease of Accepting Payments Online
An analogy to cover payment gateway vs merchant account comparison
Let’s understand the basic difference between a merchant account and a payment gateway with an analogy:
You buy a new home for your family and want to move into it as soon as possible. But before you do that, you need to get an electricity connection to be able to light up bulbs, fans, and other essential equipment. For such needs, it does not make sense to install a small power plant within your home as it will cost you a lot of money. Instead, you can simply ask the local electricity provider to set up a connection in your new home. This way, you will become an electricity consumer for that service provider and only need to pay as per the electrical units you consume every month.
This analogy is quite similar to the combination of a payment gateway and a merchant account.
- For your business, you need to avail service from a payment aggregator (electrical service provider as in the analogy) that offers you the services as they do for other merchants (creation of your merchant account similar to your electricity consumer account).
- All you need to pay is the MDR for the business-related transactions (similar to the monthly electricity bill).
- Also, the electrical technology that brings electrical power to your home is analogous to the payment gateway.
Also Read: MDR, PSP Fee, Interchange Fee, and Other Payments Charges – Explained
Payment gateway vs. merchant account: How do they work?
A merchant account is a key component of operations for most business types. While a brick-and-mortar business can choose not to accept card payments and only rely on cash or UPI without a merchant account, online businesses do require a merchant account. It is because electronic payments form a major proportion of online purchases made by their customers.
Here’s how the payment is processed through a merchant account in general:
- After an electronic payment transaction is made by a customer, the merchant sends the information to the acquiring bank.
- The acquiring bank then asks the payment processor to contact the card issuer.
- The card issuer then authenticates the transaction based on the fund availability and security checks.
- Once the transaction is authenticated, the approval for the same is sent to the acquiring bank.
- The merchant acquiring bank then authorizes the transaction and settles the funds in the merchant account.
- Here, the payment gateway acts as the technology provider facilitating and routing online payments. However, it is the payment aggregator that partners with different banks and card networks to process payments. All these steps are followed in a matter of a few seconds.
- All of the card communications and payment processing incur a fee for the merchant.
- If you want to know more about how a payment gateway works, read this blog post.
You Might Also Want to Read: A Complete Guide to Payment Gateway Charges
Merchant account vs. business bank account – Comparison
A merchant account is not the same as a traditional bank account. Rather, it is a business account with a payment aggregator. The funds you receive in this account from the issuing bank are transferred to the linked bank account as per the payment gateway settlement cycle.
This makes many people wonder about the differences between a merchant account and a business bank account.
What is a business bank account?
A business bank account refers to the repository for all the company’s funds – whether cash or the amount received through online sales. This can be the account into which you will receive funds from the merchant account.
Now, you might be wondering:
Do you need both a merchant account and a business bank account?
If you want to accept payments online via a payment gateway, then you will need both the accounts related to your business.
Now, the next important thing is:
How to choose a merchant account?
As you now know that a payment aggregator will set up your merchant account, the actual question turns out to be – how to select the right payment aggregator for your business needs?
For this, there are two crucial aspects you need to keep in mind:
Customer information security
Loss or data breach with payment-related customer information can lead to severe consequences. Along with the legal actions, it can also reduce the customer’s trust in a business. As a whole, the financial implications of such frauds can be unbearable.
Hence, your merchant account provider should be PCI-DSS compliant along with having a fraud/risk management system in place.
Scalable solutions
If you are running a small business these days, you would want to grow it further over time. Correspondingly, you will need a merchant account that is robust enough to handle the growing business needs.
To check the scalability factor, you can simply ask the chosen aggregator or look at the existing clients similar to your business scale. Make sure that the aggregator is trusted as a brand in the market.
Interestingly, you can select a payment aggregator that also offers payment gateway solutions.
How to get a merchant account for your business?
Many payment gateways, like Paytm Payment Gateway, are full-service payment solution providers. It means that they also create merchant accounts for businesses along with offering a payment gateway.
In general, it does not make sense to select a payment gateway that leaves the task of setting up a merchant account to you.
If you already have a business bank account, you can also inquire about recommendations for payment aggregators to get a merchant account.
FAQs
Who are merchants in relation to online payments?
The term ‘merchant’ refers to the business or an enterprise accepting online payments from their customers. These merchants integrate a payment gateway to their websites or apps and have a merchant account for the collection of funds.
Is a merchant account the same as a payment gateway?
A merchant account is like a bank account for businesses in which the payments from customers are credited via the payment gateway (after deducting the payment gateway charges). Here, the payment gateway acts as the technology that facilitates the transactions.
When will I receive money in my merchant account?
Once a customer pays you a certain amount for online purchases, the funds will get credited into your merchant account first via the payment gateway and then into the linked bank account.
Is a merchant account the same as an individual bank account?
A merchant account is a business bank account and is different from savings accounts held by individual account holders.
How much does it cost to set up a merchant account?
The cost largely depends on the merchant account provider you select. You can ask a payment gateway provider to set up a merchant account for you at zero set-up fees.
