Merchant accounts let businesses accept credit card payments. Stripe also lets businesses accept credit card payments. So, what exactly is the difference?
The short answer
A merchant account is a type of business banking account. It allows a business to accept credit card payments electronically. Stripe is a modern solution that allows businesses to accept credit card payments without a specific kind of bank account.
A merchant account relies on a payment gateway and a processor. Stripe acts as a merchant account, payment processor, and gateway rolled into one.
Gateways and processors
Gateways are the interfaces that accept and encrypt payments. They’re the card swipers you use at checkout time. They’re also the technology behind payment acceptance during the checkout process on websites.
A merchant account is just a bank account. It doesn’t necessarily come with gateways to actually accept the payments. Some larger banks may offer payment gateway hardware or software, but they don’t always do that.
Payment processors are the businesses that conduct the transaction between the gateway and the bank account. Transaction processing is often a service a bank provides.
Stripe was originally a software-only gateway. At the time of this writing, the company is planning to expand its offering to include POS (point of sale) systems to accept credit card payments in brick-and-mortar businesses. But the actual transaction devices are still “coming soon.”
The biggest difference between the gateways and processors, though, is what you can expect to pay.
The cost of doing business
It’s becoming less and less common, but many small mom-and-pop shops still refuse to take anything but cash. While that may be a way to avoid paying taxes, it’s more likely a result of the cost of doing business with merchant accounts.
Payment processors charge anywhere from 2–5 percent per transaction plus a flat fee between 20–30 cents. That may not sound like a lot, but it adds up. A $2 sale can cost up to 40 cents.
That’s why so many small convenience stores have a minimum purchase price for credit and debit cards or charge you extra. They could literally lose money on most of their transactions.
But the fun doesn’t stop there. Processors will often lock businesses into long-term contracts and charge thousands to get out of them. They also charge a fee for PCI compliance, which is a set of security standards businesses have to meet to accept digital payments. And there may be a monthly fee for the bank account as well.
We’re not done losing money yet. Payment gateways also charge a setup fee, a monthly fee, and transaction fees. Some gateways even charge a percentage of each transaction as well.
Traditionally, gateway hardware itself was also expensive. It would cost hundreds or thousands of dollars. Of course, the hardware included a cash register, printer, swiper, and so on, but it’s still a pain point for a small business. Several services, like Square, now offer payment terminals for less than $100. Stripe’s upcoming counter terminal will cost about $300.
Since Stripe is functionally a gateway, processor, and merchant account all in one, it removes all of the middlemen and simplifies the fees. Currently, Stripe costs 2.9 percent plus 30 cents per transaction. There are no setup or monthly fees, and Stripe offers bulk pricing.
The difference in technology
Stripe started out as a tool to make it easy for programmers to accept credit card payments in their apps. It was revolutionary at the time. Because there have always been many hoops to jump through with traditional banking, accepting credit card payments was a major hurdle for a lot of early-stage startups.
Because programmers built Stripe for programmers, it’s more technologically advanced than the traditional credit card payment structure. Features like recurring payments, international payments, and machine learning-powered fraud prevention come baked in.
All that and much more comes standard with Stripe. Older banks, gateways, and processors are still playing catch-up.