How to accept payments online without a merchant account

Do you need a merchant account to sell online? Here's what merchant accounts are, how they help businesses accept payments and why you might not need one.

Last updated on 6 October 2022
  1. Introduction
  2. What is a merchant account?
  3. Merchant account vs business bank account
  4. How do merchant accounts work?
  5. The downsides of merchant accounts
  6. What is a payment facilitator (payfac)?
  7. How to accept credit card payments without a merchant account
  8. How to accept payments online without a merchant account
  9. Stripe benefits vs merchant accounts

As a business owner, deciding how to accept payments from customers is an essential task with countless possible solutions. The type of payment setup you need depends on where your business operates, who your customers are and how they prefer to pay. For instance, a tradeperson's payment setup probably won't be the same as that of an e-commerce retailer. But big or small, every business that conducts customer transactions online shares a common goal: to make the process as simple, comprehensive and accommodating as possible. Choosing to accept payments online without a merchant account is one way to streamline your payment processing strategy.

What's in this article?

  • What is a merchant account?
  • Merchant account vs business bank account
  • How do merchant accounts work?
  • The downsides of merchant accounts
  • What is a payment facilitator (payfac)?
  • How to accept credit card payments without a merchant account
  • How to accept payments online without a merchant account
  • Stripe benefits vs merchant accounts

What is a merchant account?

A merchant account is a bank account that is used specifically to hold funds from a customer transaction before they are deposited into the merchant's business bank account. A merchant account acts as a holding tank for funds from a customer transaction – it's the first place that the funds land after the transaction has been processed.

Banks and financial institutions that provide merchant services offer these accounts. Sometimes, the same banks that issue merchant accounts will supply businesses with payment gateway hardware or software, but they often only provide the account and leave the business to piece together a complete payment system using third-party providers.

Merchant account vs business bank account

The two major differences between a merchant account and a regular business bank account are how the account is used and who operates and maintains the account. A merchant's normal business bank account, which the merchant's bank or credit union owns, is the account from which they can send and receive payments related to every aspect of business operations: paying employees, paying rent on retail spaces, paying for their website and so on. A business bank account is used in the ways we typically associate with a standard bank account.

Merchant accounts, on the other hand, are used for just one purpose: holding funds from a customer sale immediately after the transaction has been completed and moving these funds to the merchant's primary business bank account. Merchant accounts are not bank accounts from which payments are issued (other than moving funds into the main business bank account).

How do merchant accounts work?

Merchant accounts play an important role in the complex process that takes place after a customer initiates a credit card transaction. When the transaction begins (the credit card is swiped, inserted or tapped at the point of sale, or the credit card information is input for online checkout), the payment is sent to the merchant's credit card processor that then contacts the bank that issued the customer's credit card via the credit card network. So, all of those players are immediately in the mix.

Once the issuing bank confirms that the customer has adequate funds or credit to cover the cost of the transaction, it approves a funds transfer for that amount. This transfer is then deposited into the merchant account, which is owned by the merchant's credit card processor, not their actual bank. This is a short "stopover" for the funds. It's only after funds have been deposited into the merchant account that they can be sent to the merchant's actual business bank account.

If this seems unduly complicated, many people would agree. This is why most merchants don't process payments according to this exact process anymore. More on that in a bit.

The downsides of merchant accounts

Although merchant accounts have historically enabled businesses to process customer payments, they come with their own set of cons that relate to the slowness, difficulty and relative risk associated with conventional payment processing methods (in other words, pre-tech methods that are now rapidly becoming outdated). This begs the question of whether you need a merchant account to sell online. Here are a few notable disadvantages of merchant accounts:

  • Increased risk of fraud:
    Due to the many different parts of the credit card transaction process and the multiple parties involved in completing them, there is an increased risk associated with such "piecemeal" payments. Think of it like this: the credit card transaction process is a relay race, with the payment processor, merchant account, issuing bank and credit card network all responsible for running different legs. The transaction information and the funds are the baton that must be passed between each party. But imagine that there's a fraudulent actor on the track, and every time the baton changes hands, this dark figure attempts to take advantage of the potential opening. That's the difficulty when it comes to processing credit card transactions using a conventional payment setup and a merchant account. Even when every party does an exceptional job of tending to security concerns, the more parties involved in a transaction, the less ability they have to maintain total control over the security of the entire process.

  • Merchant account underwriting:
    The fraud risk is not lost on the banks that issue merchant accounts. Because of this, they take measures to mitigate their risk when providing a merchant account – and those measures can translate into tedious underwriting processes for the merchant businesses themselves. During the underwriting process for a new merchant account, banks consider the following factors:

    • What industry the business is in
    • How long the business has been operating
    • Business history (payment history, defaults, bankruptcies etc.)
    • Any previous merchant account history
    • The applicant's personal credit history
  • Merchant account fees:
    Merchant accounts are notorious for their fees, including (but definitely not limited to):

    • Application fees
    • Setup fees
    • Account maintenance fees
    • Transaction fees
    • Currency conversion fees
    • Monthly minimum fees
    • Chargeback fees
    • Batch fees
    • Annual fees
    • Early termination fees

That's a lot of fees. The actual amount of these fees can vary significantly depending on a number of factors, including what arises during the underwriting process. For example, if you have a newer business and a less-than-perfect personal credit history, your fees will almost certainly be higher than those of someone with a more established business and better personal credit.

  • Merchant account transfer delays:
    Because funds from a customer transaction land in the merchant account before the merchant's business bank account, and because these transactions are often processed in batches (as opposed to individually in real time), there are often delays between when a customer transaction takes place and when the funds arrive at their final destination. For businesses that operate with a comfortable cushion of funds to hand, this doesn't particularly matter. However, for others, having payments arrive in your account after a short delay can mean that bills are paid late or that payroll doesn't go out on time. If nothing else, it disrupts a merchant's ability to reliably predict their cash flow, which isn't ideal for any business.

What is a payment facilitator (payfac)?

A payment facilitator, also known as a payfac, is a provider that extends all the functionality of a merchant account to merchants, without requiring them to go through the process of acquiring their own individual merchant account. Payfacs therefore offer a solution to accept payments without a merchant account. Instead, the payfac has a master merchant account that it uses to process payments for all the "sub-merchants" in its network, enabling them to accept payments without a merchant account.

How to accept credit card payments without a merchant account

Because using a merchant account through a merchant service provider is a relatively bulky and expensive way to handle credit card payments, many merchants simply aren't interested in taking this route anymore. Which begs the question of how to accept credit card payments without a merchant account. The answer for most merchants when they ask themselves, "Do I need a merchant account to sell online?" is to use a more modern, technology-first payfac solution from a commerce provider such as Stripe. Using a payfac is increasingly becoming the preferred way for merchants to accept payments without a merchant account of their own.

In addition to a payfac service that can functionally replace a merchant account, merchants also need a basic battery of hardware and software to accept credit card payments from customers, including:

  • Point-of-sale hardware and software
  • A card reader for in-person purchases, ideally one that can accept these payment types:
    • Swiped card payments, using a credit or debit card's magnetic stripe (magstripe)
    • EMV chip payments, where you insert the credit or debit card into the reader
    • Contactless payments, using near-field communication (NFC) technology
  • A business bank account (again, this is different to a merchant account)

How to accept payments online without a merchant account

For online payments, merchants will need a digital storefront, either on their own website or on a platform or marketplace (e.g. Etsy, Airbnb). On merchant-owned e-commerce websites, they'll need a checkout interface with a payment gateway that can accept credit and debit card details.

Stripe's payfac solutions can empower businesses to accept payments online without a merchant account or merchant identification number (MID) of their own. Most payments providers that fill the role for businesses that merchant accounts used to serve, such as Stripe, offer a full scope of services that make end-to-end online transactions possible without the need for a merchant account.

Stripe benefits vs merchant accounts

Stripe, a tech-enabled evolution on the traditional payfac model, offers a complete solution that combines the functionality of a merchant account and a gateway all in one. This means that businesses only need Stripe to accept payments and deposit funds into their business bank account. Stripe offers numerous benefits for businesses compared with accepting payments using a conventional merchant account.

  • Stripe benefits for individual businesses
    For individual businesses, using Stripe instead of a merchant account has a selection of perks, including:

    • A vastly streamlined application and onboarding process
    • Lower fees
    • Access to an expansive range of additional merchant services, all operating within a cohesive ecosystem

In other words, Stripe is easier, less expensive and much more functional than using a separate merchant account. For businesses that use (or plan to use) Stripe in any capacity, it's worth noting that Stripe can't be used with external merchant accounts.

  • Stripe benefits for platforms and marketplaces
    Compared with single-merchant businesses, platforms and marketplaces have unique needs when it comes to accepting and processing payments, largely based on the two things that most of them have in common:

    • Whatever they're doing with payments, they must be able to do it at scale.
    • Their payments process is a fundamental part of their customer experience, raising the stakes even higher.

Beyond simply facilitating payments, Stripe empowers platforms and marketplaces to leverage payments as a way to differentiate themselves, cultivate an elevated customer experience and monetise transactions on their platforms. And of course, all the benefits for individual businesses also apply to platforms and marketplaces that use Stripe instead of merchant accounts. To learn more about using Stripe to accept payments without a merchant account, here's how to get started.

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