In 2022, more than 50% of payments in the UK were made with a card for the first time, which shows how quickly we’re moving towards a cashless society. Traditionally, businesses have relied on merchant accounts to facilitate these types of transactions. While effective, these accounts come with their own set of challenges, such as steep fees, delays in receiving funds, and often a rigorous application process.
So, what if you don’t want to use a merchant account?
My comprehensive guide aims to explore how to achieve this, whether you’re a brick-and-mortar shop, an online storefront, or a market stall.
What is a Merchant Account?
A merchant account is a specialised financial account established between a business and a merchant acquiring bank. Its primary function is to facilitate the secure and efficient processing of credit and debit card transactions.
Unlike a regular business bank account, which holds your funds and allows for basic transactions like deposits and withdrawals, a merchant account is designed to hold and process your card payments before transferring them to your regular bank account.
So why would a business choose a merchant account over simply using a regular bank account? The primary reason is that merchant accounts are equipped to handle the complexities of card transactions, such as security checks and authorizations.
When a customer makes a payment using a card, the funds are initially deposited into the merchant account. Following the completion of necessary authorisations and verification procedures, these funds are then transferred to the business’s regular bank account.
The merchant account serves as an intermediary in this process for several reasons. First, it allows for the reconciliation of transactions, including adjustments for refunds, chargebacks, or discrepancies.
Second, it ensures compliance with card networks’ regulations and security protocols, providing a layer of protection against fraudulent activities.
Finally, it often includes additional features like detailed reporting, analytics, and sometimes even inventory management functionalities.
Choosing to forgo a traditional merchant account in favor of alternative payment solutions is a decision that depends on various factors, including the nature of your business, volume of transactions, and your need for flexibility.
Reasons to Consider Alternatives to a Merchant Account
For those wishing to avoid a merchant account, here are the typical reasons:
- Cost-Effectiveness: Merchant accounts often come with a range of fees, including setup fees, monthly service charges, and transaction fees. Alternative solutions like payment service providers usually operate on a simpler fee structure, often charging only per transaction.
- Ease of Setup: Obtaining a merchant account can be a rigorous process that requires extensive documentation, credit checks, and sometimes even collateral. Alternative solutions are generally easier and quicker to set up.
- Flexibility: Modern alternatives like mobile payment apps and card readers offer a level of flexibility that traditional merchant accounts may not. These solutions are particularly useful for businesses that operate in temporary settings or have fluctuating sales volumes.
- Speed of Access to Funds: With a merchant account, it can take several days for funds from transactions to be transferred to your regular bank account. Many alternative solutions offer quicker access to funds.
Is It a Wise Choice to Accept Card Payments Without a Merchant Account?
The wisdom of choosing an alternative over a traditional merchant account depends on your specific needs.
- For new or small businesses with lower transaction volumes, the cost and complexity of a merchant account may not be justified, making alternative solutions more attractive.
- For businesses that require rapid access to funds or operate in temporary locations, the flexibility and speed offered by modern alternatives can be beneficial.
- However, if your business is large, has high transaction volumes, or requires the more advanced features and reporting capabilities that often come with merchant accounts, then a traditional route may be more suitable.
4 Card Readers that Don’t Require a Merchant Account
| Provider Name | Card Reader Model | Transaction Fee | Setup Fee | Additional Features | Visit |
|---|---|---|---|---|---|
| Square | Square Reader | 1.75% | £16-£19 | Inventory tracking, Virtual Terminal | Visit Square |
| iZettle | iZettle Reader 2 | 1.75% | £19-£29 | Contactless Payments, Invoice Sending | Visit iZettle |
| SumUp | SumUp Air | 1.69% | £29 | Virtual Terminal, SMS Payments | Visit SumUp |
| Worldpay | Worldpay Reader | 1.95% | Varies | Multi-Currency Support, Virtual Terminal | Visit Worldpay |
Two Ways to Accept Card Payments Without a Merchant Account
Accepting In-Person Payments
For businesses looking to accept card payments in physical locations, modern Point of Sale (POS) systems and mobile card readers offer a straightforward solution that eliminates the need for a traditional merchant account. These devices work directly with payment service providers like Square, Stripe, or PayPal to handle all aspects of the transaction.
In simple terms, when a customer pays by card, the modern POS system or mobile card reader processes the payment through the associated payment service provider. This bypasses the need for a separate merchant account, streamlining the transaction process and often providing quicker access to funds.
These solutions are generally easier to set up, with fewer application hurdles and faster approval times. Fees are usually based on each transaction, and there are often no monthly charges, making it a more cost-effective option for many businesses.
By using these modern POS systems or mobile card readers in conjunction with a payment service provider, businesses can accept in-person card payments without the complexities and costs of a traditional merchant account.
Accepting Online Payments
For businesses operating in the digital sphere, there are also straightforward methods to accept card payments without the need for a merchant account. Payment service providers such as PayPal, Stripe, and Square offer online payment gateways that can be easily integrated into your website or e-commerce platform.
Simply put, when a customer makes an online purchase, the payment is processed directly through the payment service provider you’ve chosen. The provider handles the transaction, including security checks and fund transfers, without requiring an intermediary merchant account.
Setting up these online payment gateways is generally straightforward. Many providers offer plugins or APIs that can be quickly added to popular e-commerce platforms like Shopify, WooCommerce, or Magento. The fees are usually structured on a per-transaction basis, and there are often no monthly charges, making it a cost-effective option for businesses of all sizes.
Mobile Payment Processing
For businesses that operate in temporary or mobile settings—such as markets, fairs, or events—mobile payment apps and card readers offer a simple and efficient way to accept card payments without a merchant account. These mobile solutions work in tandem with payment service providers like Square or PayPal Here.
In practical terms, these mobile apps and card readers connect to your smartphone or tablet and allow you to accept card payments on the spot. The payment is processed through the payment service provider, eliminating the need for a separate, traditional merchant account.
Setting up these mobile payment solutions is generally straightforward and quick. You’ll often receive a card reader that plugs into your mobile device, and from there, you simply download the corresponding app to begin accepting payments.
Fees are typically per-transaction, and many providers offer tiered pricing based on your sales volume. The funds from transactions are often available almost immediately, enhancing your business’s cash flow.
FAQ’s about Accepting Card Payments Without a Merchant Account
Do I Need a Business Bank Account to Use Alternative Payment Solutions?
No, many alternative payment solutions, such as payment service providers, allow you to link a personal bank account. However, having a separate business account is generally recommended for accounting and tax purposes.
How Secure are Payment Service Providers for Accepting Card Payments?
Payment service providers adhere to stringent security protocols, including encryption and fraud detection, making them a secure way to accept card payments without a merchant account.
Are There Hidden Costs in Alternative Methods for Accepting Card Payments?
While most fees associated with payment service providers are transparent and based on transactions, it’s advisable to scrutinize the terms and conditions. Some providers may charge additional fees for services like chargebacks or international transactions.
Can I Accept Multi-Currency Payments Without a Merchant Account?
Yes, many payment service providers and modern POS systems offer multi-currency support, allowing you to accept card payments in various currencies without the need for a traditional merchant account.
How Quickly Can I Access Funds When I Accept Card Payments Without a Merchant Account?
With most alternative payment solutions like payment service providers, the transfer of funds is usually quicker than with a traditional merchant account, often within one to two business days.
What Hardware Do I Need to Accept In-Person Card Payments Without a Merchant Account?
For in-person transactions, modern POS systems or mobile card readers are typically required. These devices often come as part of a package when you sign up with a payment service provider.
