Choosing between PayPal or a Merchant Account?

by MLawson on April 20, 2011

If you are starting an online business many merchants quickly come to the dilemma of how to accept payments for their services/goods. PayPal is likely the most well known option that merchants consider – but is it the best way to accept money. I will try and lay out the pros and cons of PayPal versus a standard online merchant account to help individuals make the decision that is right for them.

The first thing to address is that despite the marketing efforts and labels that PayPal uses such a “PayPal Merchant account”, it is important to note that PayPal is not a merchant account – it is a gateway allowing individuals to deposit money into a PayPal account. Individuals using an actual merchant account, deposit money directly into their or their business’ bank account.

If you are not comfortable having your funds stored in your PayPal account rather than going directly into your bank account – this may be a deal breaker to your considering PayPal.


The main factor that most individuals consider between the two methods of accepting payments is which method will save them the most amount of money. The actual savings between the two methods of accepting credit cards are dependent on both what your processing volume and the number of transactions you will see during the course of a month. I’ve seen a number of calculators online that look to provide a “real” cost analysis on the differences you can expect to see –however I have yet to see one that was realistic in its pricing methods. These calculators seem to average and group the rates one will see using a merchant account. Of course this defeats the very idea behind deciding to use a merchant account – as one of their main benefits is the ability to personalize a payment method that will save you money on the cards and transactions your business will be seeing.

A safer rule of thumb that I have found to be true for the vast majority of merchants I have worked with is to think that if you plan on accepting over $250 a month in credit card transactions, you will always save money of processing costs by choosing a merchant account over PayPal.

Customer Service:

Another factor in choosing whether to use a merchant account or PayPal is the level of customer service you will be looking for. One of PayPal’s biggest drawback is its lack of customer service. This may not be a factor smaller merchants concern themselves with, again if you are processing less than $250 a month, its unlikely having a transaction get lost or your account working strangely will be something that makes or breaks your business. If however your website is going to potentially be dealing with multiple transactions a day, having an issue with your payment method for any amount of time could have a real impact on your bottom-line and the success of your business.

Customer service is something you will have to pay for, and this is one of the reasons that while your processing costs will likely be lower with a merchant account, some merchants find that their overall costs are in fact higher.

The question that you need to consider is “Will the loss of revenue from not having my account working for a day/week/month with PayPal be greater or less than the costs of paying the premium for customer service with a merchant account?”. You must also remember to offset this cost with the savings from your reduced processing costs – it may turn out that the savings from your merchant account processing rates is greater than the cost of the customer service costs –in which case going with a merchant account over PayPal is an obvious decision.

Additional Pros/Cons:

One other factor that leads me to recommend merchant accounts instead of PayPal for most merchants that I work with is that for any merchant that is processing real volume with their account, they will unfortunately almost definitely have to deal with a chargeback at some point. If you are working with PayPal that money is gone, you have no recourse and I have never heard of a merchant who was successfully able to lobby PayPal to side with them and fight the chargeback.

It is also important to note that if you have what PayPal determines to be suspicious activity with your account, the account will be frozen and you have next to no options for unfreezing it. Once again the lack of customer service becomes a real issue for your and your business, when these situations arise.

Another consideration a merchant may want to consider is the flexibility a merchant account offers. While PayPal is fairly easy to integrate into most websites, if you are using a merchant account you have the ability to work with various shopping carts and software. Another upside is the ability to expand beyond the website and use mobile payment solutions allowing you to take credit cards over your mobile phone, or potentially a storefront location if your company expands.

A final item to consider is the level of authority having a merchant account lends to your site. Simple to set up and limited qualifications make PayPal an easy option, but this ease of use also brings with it a feeling of a website that may be run by anyone and not the established professional business you likely wish for your customers to think of, when they visit your website.

Final Recommendation:

If you are just getting start and will be running a very low volume business online, PayPal is a great option. For those business owners looking to run a successful small business online, I strongly recommend that you find a merchant account provider that is willing to work with you to customize the right merchant account to best fit your business. Along with the benefit of having a customer support staff behind you if issues arise, a well-built merchant account will assure you the lowest possible rates on your transactions. Saving you money, while providing peace of mind is a tough combo to beat when determining what is the best option for accepting payments with your online business.

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