You can accept credit cards through third-party payment processors without opening a traditional merchant account

A merchant account is a bank account that lets you accept credit and debit cards directly. For decades, getting one meant calling your bank, waiting for approval, and paying monthly fees whether you processed payments or not. Today, you have faster routes that skip the bank entirely.

Payment processors like Square, Stripe, PayPal, and Toast let you accept cards through their systems instead. You don't need a separate merchant account with a bank. You sign up online, connect your business bank account, and start processing within days. They charge you per transaction — typically 2.2% to 3.5% of each payment plus a small flat fee — rather than monthly minimums.

The trade-off is straightforward: you pay a bit more per transaction, but you avoid upfront costs and monthly fees. This works well if you're starting out, selling part-time, or have unpredictable sales volume.

Key Takeaways

  • Third-party payment processors let you accept cards without a merchant account, and most charge only per transaction with no monthly minimum.
  • Setup takes one to three days online, and you can start processing when ready after approval without waiting for a bank decision.
  • Transaction fees typically range from 2.2% to 3.5% plus a flat fee per transaction, which is higher than traditional merchant accounts but lower if your volume is low.
  • Different processors work best for different situations: in-person sales, online stores, invoicing, or donations each have a processor designed for it.
  • You will need your Social Security number or EIN, a business bank account, and basic business information to set up any processor.

How payment processors replace a merchant account

When you use a payment processor, the company acts as the middleman between your customer's bank and your business bank account. The customer swipes, taps, or enters their card information. The processor checks with the card network (Visa, Mastercard, Amex, Discover) to confirm the card is valid and has funds. If approved, the processor deposits the money into your business bank account, usually within one to two business days.

You never touch the card information directly. The processor handles all the security and compliance work that a merchant account would require you to manage yourself. This is why they can afford to let you start so quickly — they're already set up to handle the legal and technical side.

The processor keeps a small cut of each transaction as their fee. That's how they make money instead of charging you a monthly account fee. If you process $1,000 in a month, you pay roughly $25 to $35 in fees. If you process $100, you pay $2 to $3. This makes them ideal for businesses with uneven or low sales volume.

The main payment processors and what each does best

Square is built for in-person sales. You can use a small card reader that plugs into your phone or tablet, or a full point-of-sale system if you have a physical location. Square also handles online payments and invoicing, but the in-person experience is where it shines. Fees are 2.6% plus 30 cents per transaction for in-person cards, and 2.9% plus 30 cents for online or phone orders.

Stripe is built for online businesses and developers. If you're selling through a website, Stripe integrates cleanly and handles recurring billing well. You can also use Stripe in person with a card reader, but it's not the primary focus. Fees are 2.9% plus 30 cents for online payments and 2.7% plus 5 cents for in-person.

PayPal works everywhere — online, in person, and through invoices. It's the oldest and most recognizable name, which matters if your customers are older or less tech-savvy. PayPal's fees are slightly higher: 3.49% plus 49 cents for online, and 2.7% plus 5 cents for in-person with their card reader. The trade-off is that almost everyone already has a PayPal account, so checkout is faster for repeat customers.

Toast is designed for restaurants and food businesses. It includes features like menu management, kitchen display systems, and delivery integration that other processors don't offer. If you run a restaurant or food truck, Toast is worth comparing to the general-purpose processors.

What you need to set up a payment processor

Every processor asks for the same core information. You'll need your Social Security number or Employer Identification Number (EIN), your business name and address, and a business bank account to receive deposits. Some also ask for your personal address, phone number, and email.

If your business is a sole proprietorship, you use your Social Security number. If it's an LLC, S-corp, or C-corp, you use your EIN. You can get an EIN for free from the IRS website in about 15 minutes, even if you haven't formally registered your business yet.

The business bank account doesn't need to be anything special — a basic checking account at any bank works. Some processors let you use a personal account if you're just starting, but they'll ask you to switch to a business account once you're processing a certain amount per month (usually $500 or more).

Setup takes 10 to 15 minutes online. Approval usually comes within one to three business days. You can start processing payments as soon as you receive the approval email.

In-person payments: card readers and point-of-sale systems

If you're selling in person — at a farmers market, pop-up shop, or physical store — you need a way to read the card. Most processors offer a small card reader that plugs into your phone or tablet via the headphone jack or USB port. These readers cost $20 to $50 and work with the processor's app.

Square's reader is called the Square Reader and costs about $29. Stripe's is the Stripe Reader, also around $29. PayPal's is the PayPal Card Reader, similar price. They all do the same job: they read the card's magnetic stripe or chip and send the data to the processor's servers.

If you have a permanent location and process a lot of volume, you might want a full point-of-sale system instead. Square offers Square Register, a dedicated tablet with built-in payment processing, inventory tracking, and employee management. Toast and other restaurant-focused processors have their own systems. These cost more upfront ($300 to $1,000) but give you features that a phone reader doesn't.

Online payments and invoicing

If you sell online, you can embed a payment form directly on your website. Stripe and Shopify (which uses Stripe) make this easiest — you paste a few lines of code and a payment button appears. Customers enter their card information and the payment processes when ready.

If you don't have a website or don't want to build one, you can send payment links or invoices. Square, PayPal, and Stripe all let you create an invoice, email it to a customer, and they pay by clicking a link. The processor handles everything from there. This works well for service businesses like consulting, tutoring, or freelance work.

For recurring payments — subscriptions, memberships, or monthly retainers — Stripe and Square both handle automatic billing. You set up the amount and frequency, and the processor charges the customer's card on schedule. If a card declines, the processor retries automatically and notifies you.

Fees, deposits, and what happens if a payment fails

Transaction fees vary by processor and payment method. In-person card payments are usually cheapest (2.6% to 2.7% plus a small flat fee). Online payments cost a bit more (2.9% to 3.5% plus 30 cents). ACH transfers (bank-to-bank payments) are cheaper but slower. Invoices and payment links usually cost the same as online payments.

Deposits arrive in your business bank account within one to two business days for most processors. Some offer next-day deposits for a small extra fee. A few hold back a small percentage of each deposit as a reserve for chargebacks and refunds — this is normal and the reserve is usually released after 90 to 180 days of good history.

If a payment fails — the card is declined, the customer disputes the charge, or the card is reported stolen — the processor handles the investigation. They'll deduct the amount from your account and notify you. You can dispute a chargeback, but the processor's decision is usually final. This is why keeping good records of what you sold and when is important.

When a traditional merchant account might make sense

If you process more than $10,000 per month, a traditional merchant account from your bank might be cheaper. Banks charge lower per-transaction fees (sometimes 1.5% to 2%) but require a monthly minimum fee ($25 to $50) and a longer approval process (one to two weeks). At high volume, the lower per-transaction rate saves you money. At low volume, the monthly minimum makes it expensive.

Some businesses also prefer a merchant account because it feels more "official" or because they already have a relationship with their bank. The downside is that banks are slower to set up, slower to resolve disputes, and less flexible if your business changes.

For most small businesses, freelancers, and part-time sellers, a payment processor is simpler and cheaper. You only pay for what you use, you can start in days, and you can switch processors easily if you find a better fit.

Frequently Asked Questions

Can I accept credit cards on my phone without any equipment?

Yes, through payment links and invoices. You create a link in your processor's app or website, send it to the customer via text or email, and they pay by clicking. No card reader needed. This works well for phone orders or remote sales, though it's slower than in-person card reading because the customer has to click a link and enter their information manually.

What happens if a customer disputes a charge?

The processor investigates the dispute and decides whether to refund the customer or side with you. If they refund, the money comes out of your account. You can provide evidence (receipts, emails, tracking numbers) to dispute the chargeback, but the processor's decision is usually final. This is why keeping records of every transaction matters.

Do I need a business license to use a payment processor?

Most processors don't require a formal business license, but they do ask if you have one. You can set up a processor as a sole proprietor without any registration. However, if your state or city requires a license for your type of business, you should get one before you start selling — processors may ask for proof later.

Can I use a payment processor if I'm self-employed or a freelancer?

Yes. You can use your Social Security number and a personal bank account to start. Most processors ask you to switch to a business account once you reach a certain volume, but there's no minimum to begin. Many freelancers use Square or Stripe for invoicing and payment collection.

What's the difference between a payment processor and a payment gateway?

A payment processor handles the entire transaction — reading the card, checking with the bank, and depositing money into your account. A payment gateway is just the software that encrypts and sends the card information to the processor. For most small businesses, you don't need to think about this distinction — you pick a processor and it includes the gateway.