Square VS Merchant Account: How Does Square’s Credit Card Processing Compare To A Good Merchant Account?
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Way back in 2009, a novel company called Square introduced the world to pay-as-you-go processing, using only a smartphone and a card reader plugged into the audio jack. In doing so, Square changed the payments game. Before that, most retailers, restaurants, and other businesses had to open traditional merchant accounts. Artists and other small vendors typically had to accept cash or check only. (Check out our Square review for a closer look.)
Now, at the dawn of the 2020s, everything looks a lot different. Most merchant account providers have done away with multi-year contracts with high early termination fees and started introducing transparent, highly competitive processing rates.
If you’re a new business owner trying to decide whether to get a merchant account or opt for Square, the decision can be a complicated one. While Square is a third-party processor (which means users share a merchant account) that offers the same slate of products to all its customers, traditional merchant accounts vary in features, pricing, and contract terms. For this comparison piece, however, we will generally be using the practices of the better merchant account providers out there as reference points.
The right choice depends on the nature of your business. New companies will have an easier time setting up a Square account. Small businesses might find the streamlined, all-in-one solution that Square offers to be more convenient as well. But medium-sized and even larger businesses might chafe under Square’s pricing structure. Nor will all companies find exactly what they need with Square, making a merchant account the better choice for many.
We've done in-depth research on each and confidently recommend them.
Table of Contents
Square’s Merchant Services Aren’t The Same As A Merchant Account
With Square, there’s no application fee, and anyone is welcome to open an account. Square will ask you a bit of basic information about your business and verify your identity, but there are no credit checks involved. You’ll be up and processing within a few days.
Obtaining a merchant account is a more involved process. The applications themselves are often quite streamlined, but you can expect the process to take longer. Part of this is because the processor’s underwriting department will scrutinize every aspect of your business to decide just how likely they are to encounter chargebacks, claims of fraud, and everything else that processors hate to deal with. You might have several back-and-forths with a representative before you get an account.
In this respect, Square is more advantageous for small or new businesses.
Account Stability Issues
There is a major trade-off for this convenience, though: Square’s “come as you are” approach means that its underwriting department won’t hesitate to slap a hold on your first significantly (or suspiciously) large transaction until it decides you’re not a risk.
Merchant accounts, because they have a more intensive vetting process, are less likely to do this to you. That’s not to say they won’t ever hold your funds, but good merchant service providers do everything they can to minimize the potential for this.
If you are just getting started and need an account quickly, Square is for you. If you have a bit more time to shop around, or you are concerned about account stability, you’re better off going with a merchant account. Check out our piece on avoiding account holds, freezes, and terminations to learn more.
Note that if your business is considered high risk, Square will not work with you, and you’ll need to get a merchant account to process credit card transactions. However, many merchant account providers won’t work with high-risk merchants, either. Read our article on the best high-risk merchant account providers to see which merchant accounts are suited to this type of business.
Understanding Pricing Differences
As a small or even brand new business, every penny matters. That means getting a fair rate for payment processing is essential.
Square charges a flat rate of 2.6% + $0.10 per swipe (more for manual or offline transactions). There’s no contract and no hidden fees. You only pay for the transactions. There’s no messing around with different rates for different cards or types of transactions. See our article on Square pricing to see the exact details.
Merchant accounts vary more in their pricing structures. Interchange-plus is the most transparent and often lowest-cost model, but some processors rely on tiered pricing, while others may offer flat-rate pricing to low-volume mobile businesses. Factors such as the age of your business, the type of industry you’re in, and even the type of cards you process all factor into the rates your merchant account provider will offer you.
That said, merchant accounts typically offer you better rates than Square will. The bigger the volume that you deal in, the better your rate will be. While Square does offer volume discounts, these are not well advertised at all and tend to be available only to the highest-volume merchants.
And if you process a lot of debit cards rather than credit cards, a merchant account will be much less expensive. Square doesn’t distinguish between debit and credit — which means you don’t benefit from the low interchange fees on debit cards.
Understanding merchant account pricing can be a little more complicated than Square’s super-simple payment model. And if you pursue an account, you’re going to need to compare different plans. Just about every merchant account provider charges a basic monthly fee as well, ranging from $5 to $35 per month in most cases. For sporadic or low-volume users, this could be an unwelcome expense. But if you do the math, paying the monthly fee still allows for savings in most cases when compared to Square — all except for the lowest-volume and smallest-ticket businesses.
A merchant account may also include additional fees. These include statement fees, gateway fees, PCI compliance, and more. They vary from company to company, so be sure to check with each option that you’re considering.
What it comes down to is this: The costs associated with using a merchant account mean that they tend to become more cost-effective than a service such as Square once you start doing upwards of $10k/month in card processing. Some merchant accounts may be price-competitive for businesses doing around $5K/month in sales volume, but $10K/month is the point at which merchants will nearly always start to see savings. For small-time sellers doing less than $5K/month in sales — and particularly for merchants with no history — Square is simply a better deal all around.
If you want to understand more about credit card processing rates and how to draw effective comparisons, check out our complete guide to credit card processing rates and fees.
Customer Service & Support With Square VS Merchant Accounts
You will never get the same level of service from a company such as Square that you will with a quality merchant account. Merchant account providers typically offer you a dedicated account manager who can address problems you’re having and provide support as needed. Square’s customer service, though better than it once was, still can’t come close to the kind of care and concern you’ll get from the best merchant account providers. For instance, Square merchants need to get a customer code to call in for support. Live support is not available 24/7, and if you find your account terminated, you’re locked out of support, making it exceedingly difficult to rectify an unfair decision.
That said, not all merchant accounts excel in the customer service department. Do your research and look for red flags. Beware of independent sales reps and deal directly with the corporate offices whenever you can.
The quality of service is a crucial factor in all the companies we review, so if you’re not sure, check out our top-rated processors.
Contracts, Cancellation, & Switching Accounts
Square was the first processor to offer pay-as-you-go processing, and that continues to be one of its biggest draws. There’s no monthly fee, no application fee, no early termination fees for leaving, and no long-term commitments. You can stop using Square at any time and start up again later if you need to.
Merchant accounts vary much more in their contracts. You may still encounter merchant account providers offering one- to three-year contracts, some of which auto-renew unless you provide proper notification, typically at least three months in advance and in writing. Some have early termination fees, or ETFs, (usually in the $300-$400 range) if you cancel your contract before that. Even if you don’t have a long-term contract or ETF, you might still have to provide formal notice if you plan to switch.
Given that the top providers have moved away from this kind of pricing model, there really isn’t any good reason to subject yourself to this. Read our article on ETFs for more on why we don’t care for them!
We can’t stress enough how important it is to read a contract carefully before you sign. Ask questions before you agree to anything, and make sure you get any statements about waiving the ETF or auto-renewing clause included in the contract in writing. You do have some negotiating power, even as a new business.
Like Square, our favorite MSPs also have month-to-month contracts with no early termination fee, so you don’t have to settle for Square just to avoid being locked into a contract. But you will have to consider the cost of having a monthly fee with a merchant account, which can significantly increase the effective rate for low-volume businesses.
Compatible Software & Hardware
For small businesses, the simplicity of Square’s setup works well. All you really need for a barebones setup is internet access, a card reader, and a compatible smartphone or tablet with the free Square Point of Sale app installed.
The question comes down to costs. The Contactless + Chip Reader from Square will cost you $49. That doesn’t include a receipt printer (an additional $299 expense), a tablet stand, or a cash drawer (cost varies). For reference, the full Square Register integrated POS system goes for $799, or you can get the Square Terminal for $299.
However, the list of Square’s supported equipment is small when compared with the options a merchant account offers.
Merchant account providers, such as Helcim, can give you an EMV-compliant terminal with a built-in receipt printer for as little as $229. Again, that doesn’t cover a cash drawer or any other equipment, such as a scanner — nor does it include a POS. But you can save some money by opting for a merchant account that has a great deal on an EMV terminal/receipt printer.
Merchant accounts also offer an advantage in that most of the great providers will let you bring any existing equipment you have with you, and they’ll reprogram it to work with their system. Square’s equipment works only with Square, so if you decide to switch, you’ll have to buy new equipment. If you have multiple registers or even multiple locations, the costs start adding up.
Just beware of merchant accounts that offer terminal leases: These almost always cost you more in the long run. You’re better off just buying a terminal outright, especially if you opt for a “future-proof” one equipped with EMV and NFC because it should last you for several years.
An additional note about equipment: Square is super convenient for mobile setups, so if you have employees who are on the go or vend at events, you have everything you need to operate. Merchant account providers vary much more widely in their mobile offerings. Some are great, while some are perfectly adequate — and a few don’t have any mobile support at all.
In those cases, you’ll have to choose a processor, such as Square, as a backup when you’re on the move. Given there’s no long-term contract or monthly fees, it’s hard not to recommend Square as a mobile solution if you need one.
For small startups that don’t need the more advanced software, and first-time online sellers who just want to test the waters, Square often provides better value. But for businesses that need a feature-rich POS, comprehensive customer management, and extensive eCommerce offerings, a merchant account is the only way to integrate with the necessary software. And if you are just starting, you can still find great, feature-rich options for little or no cost. Mailchimp, for example, offers a free email plan for entrepreneurs with fewer than 2,000 subscribers. Appointy has a basic free service as well as paid plans that start at $19.99/month (billed yearly).
For businesses that don’t mind being locked into Square’s software ecosystem or the limited number of integrations, it’s tough to beat Square on value with so much offered for little or nothing at all. In terms of flexibility, however, a merchant account provides far more options for system customization.
Should You Become A Square Merchant Or Get A Merchant Account?
Do we recommend Square for merchants? Yes. Do we recommend traditional merchant accounts? Absolutely. So which one is better? That’s hard to say.
When it comes to payments and payment processing, there is no one-size-fits-all solution. The age of your business, its size, your industry, and even how you operate daily all factor into choosing a payment processor. There are some undeniable facts: Getting a Square account takes a lot less time — but you sacrifice stability. Customer service will always be better with a highly rated payments processor. With Square, you don’t get a choice in what hardware or software you use; merchant accounts give you many options.
If you find yourself leaning towards getting a merchant account, reading our merchant account comparison chart will give you a sense of what your best options are.
As always, the decision comes down to what stands to benefit you and your business. Weigh the pros and cons. If you’re still unsure about what the best option is, reach out to us, and we can point you in the right direction!
Do you still have questions? What have been your experiences with Square or your merchant account provider? Leave us a comment — we’re always eager to hear from our readers!
We've done in-depth research on each and confidently recommend them.
Melissa Johnson
Melissa Johnson has been writing about payment processing and mobile payments since 2014, and has been quoted in articles for Credit Karma and The Next Web, among others. She graduated from The University of Kansas in 2010 with bachelor's degrees in English and journalism.
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This has probably been asked somewhere before, but are there any (decent) companies that are similar to square, which have flat rate pricing like square but also lets you set up a Merchant Account? I know interchange rates are highly touted, but in a typical month my cc charges are $800/mo or less, so I wouldn’t really benefit that much from using interchange. I like the convenience of square, but have read too many horror stories on how they can withhold funds for whatever reason they see fit, so having a merchant account is a must for me.
This comment refers to an earlier version of this post and may be outdated.
You’re really better off sticking with Square or a comparable platform. If you elected a merchant account, you’re going to run similar fees with batch, and statement fees.
The real advantage lies in the form of leveraging your monthly volume for purposes of capital, equipment purchases, etc. You cannot do that with Square, nor do any of my financing partners work with Square. Also, to attest to your comment about holding funds. They have held funds for a number of folks. They ended up electing to choose a merchant account. They did leverage that monthly volume as a startup and were able to purchase new equipment, company vehicle, and the like, as well as invest into a customer-centric marketing strategy.
Square is great if you’re running some low volume or minimal transactions. I really say it’s for hobbyist.
This comment refers to an earlier version of this post and may be outdated.
The one I’ve ran into that allows this, as a merchant account provider myself, is Shopkeep.
This comment refers to an earlier version of this post and may be outdated.