When You Should Get a Merchant Account

MasterCard Credit Card

Anyone new to e-commerce might think that getting paid online is easy. After all, watching any number of intro videos makes it seem that way. Unfortunately it's actually very complicated. There are hundreds of different vendors, complex fee structures, and an infinite number of ways to implement the solution.

Payment Gateways

The first thing you'll need to get paid online is a payment gateway of which there are two broad categories.

Traditional Gateway

One of the oldest and most popular payment gateways is Authorize.net and they're what I like to call a traditional gateway. Traditional gateways receive the credit card number from your e-commerce system and confirm with the issuing bank (the customer's credit card) that the transaction is valid. They forward this response back to the website and also send it to the payment processor (your merchant account). Your funds will sit in your merchant account for a few days and then they'll be deposited into your business bank account.

Modern Gateway

A relatively new payment gateway on the market is Stripe and they're what I like to call a modern gateway. Modern gateways work just like traditional gateways except that they deposit the funds into an aggregated account. The funds will still sit in that account for a few days before being deposited to your business bank account. The end result is that you don't need a merchant account.

The whole process looks something like this:

Online Payments Flowchart

Why Are Funds Held?

It doesn't matter if you use a modern or traditional gateway; either way your funds will be held in an account for several days before being deposited into your bank account. While it would of course be great to receive your funds immediately the whole purpose of holding these funds is to protect the gateway. If the customer cancels the charge the gateway immediately returns the funds. Having a hold on the funds makes sure that the gateway always has enough capital to handle any chargebacks.

Merchant Accounts VS Modern Gateways

Now that you know how the different types of gateways work you have to decide if you want to go with payment gateway & merchant account (traditional) or a payment gateway that holds the funds themselves (modern). There are good reasons for both.


The fee structures for traditional gateways and modern gateways are very different. Modern gateways try to make it as easy as possible. For example Stripe's fee is 2.9% + $0.30.

Authorize.net's pricing on the other hand is a bit more complex:

  • Setup Fee –  $99.00
  • Monthly Gateway Fee – $20.00
  • Transaction Fee – $0.10
  • Batch Fee – $0.25

Authorize.net also has some upsells (that are usually included for modern processors):

  • Advanced Fraud Detection Suite™ – $9.95/month
  • Automated Recurring Billing™ – $10.00/month
  • Customer Information Manager – $20.00/month

With a traditional gateway you need to get a merchant account which have their own fee structure. These vary wildly but typically you'll see:

  • Discount rate (2-6% depending on the type of card used)
  • Monthly minimum fee
  • Customer service fee
  • Annual fee
  • Chargeback fee

Merchant accounts are pretty good for massive online stores that have huge volumes but once you take into account all of the fees you only start to save money if you're processing more than $8,000 a month or $100,000 a year. If you're processing less than $8,000 a month and you're using a traditional gateway you might as well be throwing away money.

Set Up

Signing up for a modern gateway is really simple (especially a test account). Merchant accounts are a giant pain to set up. To sign up for a merchant account through Chase you have to call them (are we still in the 90s?) and that's not uncommon. Be prepared to have business information handy, be prepared for mandatory PCI Compliance, and be prepared to be turned down. You may have to apply to multiple services.

Cash Flow

One of the nice things about merchant accounts is that they tend to move the money into your account much faster than a modern gateway. Typical transfers for a merchant account is 1-3 days. Typical transfers for modern gateways is 5-7 days.

There is an exception to this rule: Stripe accounts based in the US now have a 2 day transfer. As the modern gateways get more popular (and have more cash on hand) the transfer times will get lower and lower.

Offline Processing

Online payment gateways obviously don't work when you don't have an internet connection. That's why a brick and mortar merchant has a point of sales (POS) system that can charge credit cards. To us a POS system you'll need a merchant account. There aren't any offline systems that work with modern payment gateways.

Are Merchant Accounts Worth It?

The biggest advantage for a merchant account are the reduced fees. The slightly delayed cash flow from modern gateways is getting smaller and smaller and soon that wont be a difference at all. The exact costs are hard to calculate but right around $100,000 / year you start to save money with a traditional gateway + merchant account. You could probably even wait a bit longer to save yourself the hassle.

With most e-commerce solutions it's easy enough to change how you're getting paid. With WooCommerce it's as simple as inputting your new credentials. I recommend every single store starting with a modern gateway and moving to a traditional once you start making $8,000 / month on a regular basis.

The only exception to this is for merchants who already have a merchant account. If you already have a merchant account then it's probably worth sticking with it as you'll get slightly lower rates and you already have the hard work done.

Photo Credit: Håkan Dahlström

Flowchart Credit: Michelle Schulp

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