Which is Better: Paypal or a Merchant Account?

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question-markRecently, in one of the Facebook groups I participate in, the question arose again. Should one use Paypal or a merchant account in one’s business? I used to run marketing teleseminars weekly for a merchant account vendor and this question came up on almost every call.

Paypal: Let’s Review

You’re probably all quite familiar with Paypal. It’s a third party processor. You, the merchant, never see your customers’ credit card information. Paypal collects it and puts the money into your Paypal account. From there you can spend the money by paying for things with Paypal, using the Paypal debit card to spend the money, or transferring it to your bank account, which takes about 2-3 days.

You don’t need a shopping cart to use Paypal – you can create buttons right in Paypal to use on your site or in emails. There are many carts that will integrate with Paypal, however, should you want to use one.

Typically, the merchant is charged 2.9% of the transaction to use Paypal. There are better rates available for merchants with higher monthly sales.

What About a Merchant Account?

A merchant account allows you to take credit cards directly. You will have a relationship with a merchant account vendor, such as DirectPay, PowerPay, Stripe, or even your own bank. Behind them will be a gateway, such as Authorize.net or Verisign that allows transactions online. It’s the account information for your gateway that you will set up in your shopping cart in order to accept payments.

While you can manually enter transactions with a gateway, for most online sales, you will want a shopping cart to work with a merchant account.

Merchant account fees are often pretty complicated. There will be per transaction fees. They will be something like 2.6% plus 30 cents per transaction. No-swipe fees – when you don’t swipe the card, such as in online purchases, are higher. You will almost always have a monthly minimum for the fees. If it’s $25 for example, if your transaction fees for a month add up to $25 or more, you’re good. If they don’t, you will be charged the difference between what they add up to and $25. You will also have a monthly statement fee – usually around $10 – and a monthly gateway fee – also usually around $10.

Whew! Pretty confusing, huh? And it seems like all those fees must make a merchant account cost more than Paypal, right? Not necessarily. I’ll get into that in just a bit.

The money from a transaction will automatically be deposited into your bank account in 2 days with a merchant account.

What Do Customers Think?

Does using Paypal instead of a merchant account affect how customers view your business? Will they avoid buying from you if you only accept Paypal?

When I started my business more than a decade ago, Paypal was seen as the more amateur choice for smaller vendors who couldn’t afford a merchant account. Online business was just getting going and a merchant account allowed the online vendor to look more like an offline ‘real’ business.

It’s different now. There are very reputable and big businesses who use Paypal. I don’t feel the image of a business is harmed by using Paypal today.

So How Do You Decide?

It really comes down to two things. The first is financial. Even though merchant accounts have all those costs, there is a monthly sales point where Paypal’s higher transaction fees will be more than a merchant account’s lower transaction fees plus all the other fees. Do the calculation for a particular merchant account and see how it fits with your projected sales.

The second factor is customer service. I’ve never had a problem with Paypal, but others have. I also know some online marketers whose merchant account suddenly stopped functioning in the middle of a big launch. If you have a merchant account, you will most likely require support at some point and I prefer phone support for potentially complicated issues around online transactions. So if you’re contemplating getting a merchant account, do some research, ask your colleagues, and pick one that has a good reputation for customer service.

What do I use? I used to have a merchant account, and now I use Paypal. I’ve never had a serious problem with either, and never had a customer who found it questionable that I use Paypal.

So remember, this is just your next decision, not your last one. You can always change your mind!

What experiences have you had with Paypal and/or merchant accounts, and which would you recommend?

Amethyst September 6, 2014 at 11:11 am

I always caution people against PayPal once they are making more than $2,500 or $3,000 a month consistently in sales. PayPal can suddenly decide that you’re making “too much,” and withhold ALL of your money for 30 days. Not part of it – ALL of it. Their customer service has always been non-existent for me, while DirectPay has been amazing.

While you may pay a gateway fee for using them or a service like them, you actually save money in fees once your income hits a certain level.

For people who want to use PayPal funds to purchase one of my programs, I offer that option if it is full-pay. The biggest challenge with PayPal is if someone decides they no longer want to pay for something they signed up for. All they have to do is cut off the subscription, and there’s nothing you can do about it. PayPal is NOT on your side, even when you provide documentation that they SIGNED for a program stating the terms, fees, and refund policies.

Peggy September 6, 2014 at 12:36 pm

If you’re making that much every month, it’s actually cheaper to use a merchant account rather than Paypal. And you’re right about the subscription issue. If the product is a membership, you can remove their access. But if it’s a payment plan and they’ve already had full access, you have no recourse. On the positive side, I’ve rarely heard of anyone actually doing this. It’s kind of the same issue as people’s ability to share your content – PDFs, mp3s, etc. Of course people can do it. But most don’t. It just becomes a risk/cost of doing business online.

Perhaps the most elegant solution is to use a cart system that allows you to offer your customers the choice of paying directly with a credit card or via Paypal. That way your customers choose the option they prefer.

Amethyst September 6, 2014 at 6:20 pm

I’m glad you haven’t heard of stopping subscriptions much, but I can tell you in the circles I run in, it’s a concern. Somewhere after 4 or 5 thousand people on your list, and it’s just gonna happen. Once you surpass 10,000 you’re gonna hit a few duds. It’s inevitable.

There are also things like dealing with people’s fears around coaching or bigger programs. I dont see it the same as being afraid people will share your atuff at all. Mostly what comes up is people’s fears around money.

When you’re looking at $500 – $1,000 a month per person, hopefully you were smart enough to get their credit card info and not let them go through PayPal subscriptions or it could cause major issues with your finances.

Of course, sometimes PayPal decides to NOT let you manually enter someone’s credit card info if it is attached to an account, and you don’t have their log-in info. This is a sporadic issue that has cropped up occasionally over the past 2 or 3 years or so. So then you have your client’s payment info, but you can’t process it, and you look pretty stupid.

For all of these reasons, PayPal is on my list of “things to find better solutions for as soon as you’re able” in business. If you haven’t hit several thousand dollars a month or several thousand people on your list yet, it’s no biggie, and PayPal will do for now. Just know that when you do start making more, you’ll need to find better solutions OR make sure you have some kind of workable plan in place for any contingencies or make sure you have a contact and working partnership with someone at PayPal to fix all of the things that will come up.

And make sure you have at least an extra month’s income stashed so if they decide to hold your money for a while you can still make rent.

Peggy September 7, 2014 at 12:40 am

I guess my point was that when we do business online, we’re always going to “hit a few duds” with regard to people taking our content without paying, or paying in full. As long as it isn’t a large percentage, most online business people consider it a cost of doing business.

You have strong feelings about Paypal and I respect that. Thanks for sharing the information. I’m not trying to propose that everyone – or even anyone – should use Paypal. People do have questions and I try to provide a balanced opinion of the pros and cons of the options available. Many people do use Paypal with no problems. Others do have issues. Everyone will make their own choice for their own situation.

Thanks for contributing to the discussion!

Darlene Cary September 6, 2014 at 12:31 pm

Paypal so far has served me well. Shopping cart software is next on my list, to support group programs and launches. I tried 1ShoppingCart, but it was too awkward to make work.

Thanks, Peggy!

Peggy September 6, 2014 at 1:28 pm

I’ll be writing an article on what to look for in a cart soon. In the meantime, one I’ve recently come to like is Red Oak Cart.