Direct Merchant Accounts vs. Sponsored Accounts: Why Scaling Businesses Should Go Direct

Dec 18

Written By Biliana, Founder & CEO at Streampayments

Merchant Accounts: Direct vs. Sponsored

When it comes to payment processing, merchant accounts are the backbone of every transaction. They’re the silent engines powering the movement of funds from your customers to your business, ensuring smooth operations and steady cash flow. But not all merchant accounts are created equal, and the type you choose can shape your ability to scale and grow effectively.

There are two primary types of merchant accounts: Direct Merchant Accounts, which are accounts you open directly with an acquiring bank, and Sponsored Accounts, which are accounts owned by Payment Facilitators—like Stripe or Square—that you do not own, but instead merely operate under as a sub-merchant. While both allow businesses to accept payments, they do so in fundamentally different ways, with distinct impacts on control, cost, and scalability. We’ll dive deeper into the differences later on.

Here’s the kicker: only merchants with Direct Merchant Accounts are truly equipped to scale without interruption. Sponsored Accounts may offer simplicity and quick onboarding, but they often come with hidden risks—like sudden service interruptions or account freezes—that can cripple a growing business. Direct Merchant Accounts, on the other hand, provide the control, stability, and tailored support needed to handle increasing transaction volumes without skipping a beat.

In this post, we’ll dive into the key differences between Direct Merchant Accounts and Sponsored Accounts, the challenges that scaling businesses face, and why Direct Merchant Accounts are the clear choice for those looking to future-proof their payment systems. If you are a small, growing business, or one that is primed to scale, this is a must read. Let’s get started!

Why Sponsored Accounts Help You Start but Fail When You Scale

Sponsored Merchant Accounts, offered by providers like Stripe, PayPal, and Square, are designed to make payment processing accessible for businesses of all sizes. They’re especially appealing to startups and small businesses, offering a fast and easy way to start accepting payments without the complexities of setting up a Direct Merchant Account. But while Sponsored Accounts are great for getting off the ground, their limitations often become glaringly obvious as your business grows—and that’s where things can take a turn.

Understanding Sponsored Accounts

A Sponsored Merchant Account is provided by a Payment Facilitator (PayFac) under their own acquiring agreement. Instead of having your own dedicated merchant account with an acquiring bank, you operate as a sub-merchant under the PayFac’s master account. This model, also known as the Aggregator Model, allows multiple businesses to share the same infrastructure, which simplifies onboarding.

Key features of Sponsored Accounts include:

Simplified Onboarding: Sponsored providers don’t require extensive underwriting, making it easy to start processing payments in minutes.
PayFac-Owned Accounts: Merchants don’t own their accounts. Instead, they rely on the PayFac to handle compliance, risk management, and settlement.
Shared Risk: The PayFac assumes responsibility for managing risk across its entire portfolio of merchants.

Even large startups with dedicated teams and well-planned strategies often start with Sponsored Accounts. It’s a quick way to test their sales models and marketing strategies without the upfront time or cost of setting up a Direct Merchant Account. However, as transaction volumes rise, the risks of this approach become clear.

The Problem with Scaling

As your business grows, the same convenience that made Sponsored Accounts appealing can become a significant liability. Here’s why:

Service Pauses or Account Shutdowns:
Sponsored providers like Stripe often place holds or terminate accounts when merchants hit certain transaction volumes or exhibit activity that raises red flags. Imagine your growing business processing $50,000 a month and suddenly scaling to $250,000*. That growth, while exciting, could trigger an unexpected service interruption while the provider reassesses your account.
- *Note that this figure is meant to demonstrate a threshold. The actual triggers are decided by Card Schemes.
- Card schemes are global networks that facilitate payment card transactions between merchants, cardholders, and financial institutions. Examples include Visa, Mastercard, American Express, and Discover. These networks set the rules and standards for processing payments, including transaction fees, and chargeback management.
Why This Happens:
Sponsored providers perform minimal due diligence during onboarding, opting for speed over scrutiny. However, when transaction volumes increase, they are forced to conduct a reactive review of the merchant’s business, compliance, and risk profile. This delayed assessment can lead to sudden freezes, harming revenue and customer relationships. This can kill your business.
A Risk to Your Investment:
For startups, the stakes are even higher. Teams invest significant time and effort into building customer goodwill, perfecting marketing strategies, and optimizing payment pages to drive conversions. A sudden account freeze not only halts your revenue stream but also undermines the trust and goodwill you’ve worked so hard to build with customers. The interruption can derail campaigns, frustrate loyal customers, and invalidate much of your team’s hard work.
Protecting the Portfolio:
These interruptions aren’t personal—they’re a matter of survival for the Payment Facilitator. Sponsored providers must protect their overarching merchant account from scrutiny by acquiring banks and card networks. If one merchant is deemed high-risk, the Payment Facilitator may cut ties to safeguard its entire portfolio.

Is there a solution available from the Payment Facilitator?

Yes, some merchants opt to remain with their Payment Facilitator (PayFac) for various reasons. Often, this decision is driven by constraints such as limited time to explore partnerships with an ISO, concerns about mitigating the impact of service interruptions, or a lack of in-house expertise to manage complex tasks like disputes and chargebacks. Many merchants prefer the PayFac’s templated approach to handling these issues, as it simplifies operations and shifts the burden of customer management back to the facilitator.

If a merchant decides to work with their PayFac to resolve the service interruption, the following outcomes may occur:

Signing a Direct Agreement with an Acquirer partnered with the PayFac:

Card schemes may require the merchant to sign a merchant agreement with an acquiring bank. This transitions the setup to a Direct Merchant Account model.
The PayFac (Stripe for example) often facilitates this process by connecting the merchant with one of their acquiring partners. This retains the PayFac’s services (payment page, gateway, and API integration) but the acquiring relationship is now directly between the merchant and the bank, which may change some operational processes.

Operational Changes:
From the merchant’s perspective, not much changes operationally— but settlement and risk management may be handled directly with the acquirer under the new merchant agreement.
Why This Happens:
Card schemes enforce these rules to mitigate risk as transaction volumes grow. By transitioning to a Direct Merchant Account, the acquiring bank takes on the direct risk and underwriting responsibilities for your business.

Why Direct Merchant Accounts Are the Backbone of Scalable Payments

When your business is ready to move beyond the limitations of Sponsored Accounts, a Direct Merchant Account becomes the cornerstone of stability, control, and growth. Direct Merchant Accounts aren’t just about processing payments; they’re about building a scalable infrastructure that supports long-term success. From proactive underwriting to unmatched customer service and dispute management, Direct Merchant Accounts empower businesses to thrive in ways that Sponsored Accounts simply can’t.

Built for Scaling: Proactive Underwriting and Stable Growth

Direct Merchant Accounts are purpose-built for businesses with ambitions to grow. Unlike Sponsored Accounts, which rely on minimal upfront checks, Direct Merchant Accounts start with a proactive underwriting process. This sets the stage for scalability without interruptions.

Proactive Underwriting at Setup:
- Merchants undergo a comprehensive risk evaluation when opening a Direct Merchant Account.
- This detailed review ensures compliance, transparency, and alignment with the acquiring bank’s standards.
- The result? No surprises down the line—your payment processing keeps pace with your growth.
Stable Payment Processing:

A Direct Merchant Account provides your business with a dedicated Merchant ID (MID). Unlike Sponsored Accounts, where risks are pooled across thousands of merchants, your risk is evaluated independently.
This independence reduces the likelihood of freezes or account shutdowns caused by another merchant’s behavior in a shared portfolio.

Flexible Infrastructure:

Direct Merchant Accounts offer customizable pricing structures, settlement terms, and integrations tailored to your specific business needs. This flexibility ensures your payment system grows with you.

The Customer Service Advantage

One of the most overlooked benefits of a Direct Merchant Account is the elevated level of customer service. With a Sponsored Account, you’re often one of thousands—or even hundreds of thousands—of clients. This creates a bottleneck when you need assistance.

Better Client Support:

With a Direct Merchant Account, your acquiring bank or ISO partner provides direct, personalized support, depending on their service agreement. When working with an ISO, you have an account manager who will handle your queries.
Whether you need help troubleshooting a payment issue or optimizing your setup, you have access to knowledgeable teams who understand your specific business.

Faster Resolutions:

Unlike Sponsored Accounts, where service requests are funneled through layers of support, Direct Merchant Accounts prioritize direct communication. This ensures faster resolutions to issues, minimizing downtime.

Tailored Advice:

Direct Merchant Account customer support teams can offer tailored advice based on your transaction history and business model, helping you refine operations and reduce risks like chargebacks.

Dispute Management

Chargebacks and disputes are an inevitable part of payment processing, but how they’re managed can make or break your business. With a Direct Merchant Account, dispute management becomes far more efficient and effective. The direct Merchant-Acquirer relationship gives you access to all the tools and data you need to manage disputes effectively. You’re not relying on a PayFac to submit templated responses on your behalf, which in some cases may not make the best claim. The hands-on approach with a direct Merchant-Acquirer relationship ensures you can present strong, customized evidence that reflects your business practices.

Scalability Without Compromise

Direct Merchant Accounts don’t just enable growth—they ensure stable and sustainable growth. By offering proactive risk management, tailored support, and direct relationships with acquiring banks, Direct Merchant Accounts eliminate the interruptions and inefficiencies that hold back Sponsored Account users.

In the next section, we’ll explore how an Independent Sales Organization (ISO) partner can make transitioning to a Direct Merchant Account seamless and help you unlock the full potential of your payment processing system.

Control Over Growth Through an ISO Partnership

With a Direct Merchant Account, your Independent Sales Organization (ISO) acts as your gateway to a trusted network of acquiring banks. This partnership enables you to benefit from tailored solutions designed for growth and scalability without the limitations of a Sponsored Account.

Access to Acquiring Expertise:

Your ISO leverages its relationships with multiple acquiring banks to secure terms and thresholds that align with your business’s unique needs.
This flexibility means your ISO can help adjust transaction limits and accommodate higher volumes as your business scales, ensuring you’re never caught off guard by your growth.

Proactive Scalability:

Direct Merchant Accounts, through an ISO, are designed for growth from the start. Your ISO works with acquiring banks to ensure your account is structured to handle scaling seamlessly, eliminating the need for reactive reviews that can interrupt operations.

Negotiated Advantage:

Instead of relying on a one-size-fits-all approach, your ISO collaborates with acquiring banks to negotiate terms and pricing that reflect your business’s volume and risk profile.

By partnering with an ISO to manage your Direct Merchant Account, you gain not just a payment solution, but a team of experts dedicated to helping your business thrive at every stage of growth.

Your Winning Formula for Scale: A Direct Merchant Account with an ISO Partnership (Plus a Handy Comparison Table)

Merchants using Sponsored Accounts may enjoy the simplicity and convenience these solutions offer at the start, making them ideal for launching a business quickly. However, as the business scales, these accounts often become a liability, with risks like service interruptions, unexpected account reviews, and limited flexibility stalling growth at critical moments.

In contrast, Direct Merchant Accounts, supported through an ISO partnership, provide the proactive underwriting, dedicated infrastructure, and tailored scalability required for long-term success. An ISO acts as your advocate, leveraging its network of acquiring banks to ensure your Direct Merchant Account is built to handle increasing volumes, minimize risk, and maintain seamless operations. Whether you’re a small business preparing to scale or an established company seeking greater stability, a Direct Merchant Account offers the reliability and growth potential that Sponsored Accounts simply can’t match.

Ready to take control of your payment processing? Evaluate your current setup and contact StreamPayments — info@streampayments.com for a free analysis. Let us help you open, or transition to, a Direct Merchant Account and unlock scalable, reliable payment solutions tailored to your business.

   
      Direct Merchant Account

      Sponsored Account

      A payment processing setup where a merchant has their own, direct relationship with an acquiring bank.

       A merchant operates under the umbrella of a larger Payment Facilitator's account, such as Stripe or Square.
     
      Unique Merchant ID (MID): The merchant is assigned a dedicated MID for processing card transactions.
       Shared MID: The merchant does not get a unique MID; instead, they are a sub-merchant of the PayFac’s master account.
     
      Direct Acquiring Relationship: The merchant signs an agreement directly with an acquiring bank. 
       PayFac’s Acquiring Relationship: The Payment Facilitator maintains the acquiring relationship, not the individual merchant.
     
      Custom Underwriting: The merchant undergoes a more thorough underwriting process, often requiring detailed business and financial information, ensuring they are fully compliant, avoiding any unforeseen disruptions.
       Simplified Onboarding: Merchants are onboarded quickly without detailed underwriting which will lead to a sudden disruption in service once the merchant reaches a specific threshold.
     
      Flexibility: Merchants have more control over pricing, settlement terms, and integrations, often guided by the ISO partner specifically for their business needs.
       Less Control: The Payment Facilitator handles risk, compliance, and many operational decisions, which could result in account freezes or termination if issues arise.
     
      Lower Fees: Transaction fees are often lower than in aggregated models, especially for high-volume merchants.
       Higher Fees: Typically, transaction fees are higher to account for the PayFac’s risk and infrastructure.
     
      Merchant-ISO Led Support: Merchants work with their ISO or, at times, directly with their acquiring bank to handle payment issues, enabling faster, tailored resolutions.
       Generic Provider Support: Merchants rely on Sponsor's standardized support, but limited flexibility and communication gaps could delay resolution of payment issues.
     
      Best for Scaling or Established Businesses: Direct accounts are suited for merchants with high processing volumes or specific needs.
       Best for Small or New Businesses: This model is ideal for businesses that need fast setup or lack the volume to negotiate a direct account.

Biliana, Founder & CEO at Streampayments

Biliana is a veteran of the payment services industry with extensive experience leading strategic growth and innovation. A recognized leader in the field, she has worked with a vast network of merchants, helping them navigate complex payment ecosystems to achieve long-term success. Her expertise includes cultivating acquiring relationships and building scalable payment frameworks that empower businesses to grow and thrive. She shares actionable insights on strategy, innovation, and industry trends.

Direct Merchant Account	Sponsored Account
A payment processing setup where a merchant has their own, direct relationship with an acquiring bank.	A merchant operates under the umbrella of a larger Payment Facilitator's account, such as Stripe or Square.
Unique Merchant ID (MID): The merchant is assigned a dedicated MID for processing card transactions.	Shared MID: The merchant does not get a unique MID; instead, they are a sub-merchant of the PayFac’s master account.
Direct Acquiring Relationship: The merchant signs an agreement directly with an acquiring bank.	PayFac’s Acquiring Relationship: The Payment Facilitator maintains the acquiring relationship, not the individual merchant.
Custom Underwriting: The merchant undergoes a more thorough underwriting process, often requiring detailed business and financial information, ensuring they are fully compliant, avoiding any unforeseen disruptions.	Simplified Onboarding: Merchants are onboarded quickly without detailed underwriting which will lead to a sudden disruption in service once the merchant reaches a specific threshold.
Flexibility: Merchants have more control over pricing, settlement terms, and integrations, often guided by the ISO partner specifically for their business needs.	Less Control: The Payment Facilitator handles risk, compliance, and many operational decisions, which could result in account freezes or termination if issues arise.
Lower Fees: Transaction fees are often lower than in aggregated models, especially for high-volume merchants.	Higher Fees: Typically, transaction fees are higher to account for the PayFac’s risk and infrastructure.
Merchant-ISO Led Support: Merchants work with their ISO or, at times, directly with their acquiring bank to handle payment issues, enabling faster, tailored resolutions.	Generic Provider Support: Merchants rely on Sponsor's standardized support, but limited flexibility and communication gaps could delay resolution of payment issues.
Best for Scaling or Established Businesses: Direct accounts are suited for merchants with high processing volumes or specific needs.	Best for Small or New Businesses: This model is ideal for businesses that need fast setup or lack the volume to negotiate a direct account.