A merchant account is a specialist bank account that allows a business to accept payments by credit card and debit card. When a customer pays by card, the funds are first held in the merchant account before being transferred to the business’s regular bank account, usually within 1 to 3 working days.
Card payments are the most popular payment method in the UK. Understanding how the system works — and what it costs — is essential for any business that sells goods or services.
How Card Payment Processing Works
Every card transaction involves several parties:
| Party | Role |
|---|---|
| Cardholder | The customer making the payment |
| Merchant | The business accepting the payment |
| Acquiring bank (acquirer) | The bank or processor that provides the merchant account and handles the transaction on the merchant’s side |
| Issuing bank (issuer) | The bank that issued the customer’s card |
| Card network | Visa, Mastercard, or American Express — routes the transaction between acquirer and issuer |
| Payment gateway | The technology that securely transmits card data (for online transactions) |
The Transaction Flow
- The customer presents their card (in-store) or enters card details (online)
- The payment gateway encrypts and sends the data to the acquirer
- The acquirer forwards the transaction to the card network
- The card network routes it to the issuing bank
- The issuing bank checks the account and either approves or declines the transaction
- The response travels back through the chain to the merchant
- Funds are settled into the merchant account, typically the next business day
This entire process takes seconds for the customer but involves multiple fees charged to the merchant.
Fees and Costs
Card payment fees comprise several components:
Interchange Fees
The interchange fee is paid by the acquirer to the issuing bank. In the UK, interchange fees are capped by regulation:
| Card Type | Maximum Interchange Fee |
|---|---|
| Consumer debit card | 0.2% of the transaction value |
| Consumer credit card | 0.3% of the transaction value |
| Commercial/corporate cards | Not capped — typically 1% to 2%+ |
Scheme Fees
Visa and Mastercard charge fees for using their networks. These are relatively small (typically 0.01% to 0.05%) but add up at volume.
Acquirer Margin
The acquirer (or payment processor) adds its own fee on top of interchange and scheme fees. This is the negotiable element and varies by provider.
Total Merchant Service Charge
The total cost to the merchant for each transaction is known as the Merchant Service Charge (MSC) and is typically:
| Card Type | Typical MSC |
|---|---|
| UK debit card | 0.3% to 0.6% |
| UK credit card | 0.6% to 1.5% |
| Corporate/business card | 1.5% to 3%+ |
| International card | 1.5% to 3%+ |
| American Express | 1.5% to 3.5% |
Other Fees to Watch
- Monthly account fee — £10 to £30 per month for the merchant account
- PCI compliance fee — £5 to £15 per month (for maintaining payment card security standards)
- Gateway fee — £10 to £25 per month for online payment processing
- Per-transaction fee — A fixed amount (e.g. 5p to 20p) on top of the percentage
- Chargeback fee — £15 to £25 per disputed transaction
- Minimum monthly service charge — A floor on the fees you pay, typically £15 to £25
- Terminal rental — £10 to £30 per month per device for in-store card machines
Traditional Merchant Account vs Payment Facilitator
Businesses have two main options for accepting card payments:
Traditional Merchant Account
A dedicated merchant account with an acquiring bank such as Worldpay, Barclaycard Payments, or Global Payments. Features include:
- Your own merchant ID number
- Individually negotiated fees
- Direct relationship with the acquirer
- Longer setup process (application, credit checks, underwriting)
- More suitable for businesses with higher transaction volumes
Payment Facilitator (PayFac)
Services like Stripe, Square, SumUp, and PayPal act as aggregators. Your transactions process through the facilitator’s master merchant account. Features include:
- Fast setup (often within minutes)
- Flat, transparent pricing (e.g. 1.4% + 20p for UK cards on Stripe)
- No monthly minimums or long contracts
- Less control over settlement and disputes
- Better suited for startups and lower-volume businesses
Comparison
| Feature | Traditional Merchant Account | Payment Facilitator |
|---|---|---|
| Setup time | Days to weeks | Minutes to hours |
| Pricing | Interchange+ or blended | Flat rate |
| Monthly fees | Yes (account, PCI, gateway) | Usually none |
| Contract length | 12 to 36 months | Rolling (no commitment) |
| Cost at volume | Lower (negotiable rates) | Higher (fixed rates) |
| Chargebacks | Merchant manages directly | Facilitator manages |
For a business processing over £50,000 per month in card payments, a traditional merchant account typically offers better value. Below that threshold, a payment facilitator is often simpler and cheaper.
PCI DSS Compliance
Any business that accepts card payments must comply with the Payment Card Industry Data Security Standard (PCI DSS). This is a global security standard designed to protect cardholder data.
Compliance requirements depend on your transaction volume:
| Level | Annual Transactions | Requirement |
|---|---|---|
| Level 4 | Under 20,000 e-commerce or up to 1 million total | Self-assessment questionnaire |
| Level 3 | 20,000 to 1 million e-commerce | Self-assessment questionnaire |
| Level 2 | 1 million to 6 million | Self-assessment questionnaire |
| Level 1 | Over 6 million | On-site audit by a Qualified Security Assessor |
Most small UK businesses fall into Level 4 and need only complete a self-assessment questionnaire (SAQ). Using a payment facilitator often simplifies PCI compliance because the facilitator handles most of the cardholder data.
Chargebacks
A chargeback occurs when a cardholder disputes a transaction with their issuing bank. Common reasons include:
- The customer did not recognise the transaction
- Goods were not received or were not as described
- The transaction was fraudulent (stolen card)
- The customer was charged the wrong amount
When a chargeback is raised, the funds are withdrawn from the merchant account and the merchant must provide evidence to dispute it. Chargeback fees apply regardless of the outcome.
Reducing chargebacks requires:
- Clear merchant descriptors so customers recognise the charge on their statement
- Prompt delivery notifications and tracking information
- Responsive customer service to resolve disputes before they become chargebacks
- 3D Secure authentication for online transactions (reduces fraud chargebacks)
Card Payments and Your Accounts
- Card transaction fees are an allowable business expense for Corporation Tax or income tax
- Revenue should be recorded at the gross transaction amount (before fees are deducted)
- Card processing fees appear as a separate expense line in the profit and loss account
- The settlement delay (1 to 3 days) means your bank balance may differ from your sales records — accounting software handles this through bank reconciliation
- VAT is calculated on the gross sale price, not the net amount after card fees
Alternatives to Card Payments
Depending on your business model, other payment methods may complement or replace card payments:
- Direct Debit — Lower cost for recurring payments
- BACS payment — Bank transfer for B2B invoices
- Faster Payments — Instant bank transfers
- Open banking — Account-to-account payments at lower cost than cards
- Recurring invoices — Automated billing for subscription-based businesses