Why PayPal’s Credit Card Processing Isn’t A Merchant Account (And Why Not Understanding The Difference Puts Your Business At Risk)

Whether you’re launching a new business or you’ve decided to have your cash-only establishment begin accepting credit cards, you need to consider your payment processor. There’s a broad array of options out there to choose from, but your shortlist will probably include some sort of merchant account and that ubiquitous juggernaut of 21st-century commerce, PayPal (check out our PayPal review for a thorough rundown).

But wait.. aren’t they pretty much the same thing? Isn’t PayPal just another merchant account provider?

In fact, no, it is not! Let’s explain.

Why A PayPal Merchant Account Doesn’t Exist

PayPal is not a merchant account provider. It is a third-party processor — also known as a payment service provider (PSP) or a merchant aggregator — and it aggregates all of its seller accounts into one large merchant account. This is a fairly common practice — one that is used by PSPs such as Square and Stripe (which powers eCommerce platforms like Shopify and others) as well. But it means that a “PayPal merchant account” doesn’t really exist, because your payment processing is lumped in with the other millions of PayPal merchants. A merchant account, by contrast, involves a detailed underwriting of your business before you are set up with your own dedicated account and a unique merchant ID number.

However, that said, both PayPal (along with other PSPs) and merchant account providers fall under the umbrella term “merchant services,” which includes any service that accepts and processes customers’ credit card payments.

• Read our piece on third-party payment processors for more about PSPs like PayPal.
• Learn about merchant account providers

While the account aggregation done by PSPs is all completely above-board, aggregating does tend to lead to a higher amount of risk for merchants, which translates to held funds or even account terminations.

Why PayPal Merchants Are At Risk Of Held Funds

PayPal doesn’t spend as much time vetting applicants as a merchant account provider does. When you sign up, it only asks for some basic information to verify your identity. It doesn’t really assess your business history or risk profile.

Instead, PayPal scrutinizes each business very closely once you begin accepting payments. The company’s risk department uses machine learning and some complex algorithms honed by literal decades of transaction data to flag any transaction that could potentially be fraudulent — or at least, looks like it could be.

Unfortunately, it’s still a machine-led and imperfect process, meaning PayPal’s system doesn’t completely stop fraud and sometimes it flags legitimate transactions as suspicious, leading to a hold on funds and a headache for the merchant. In worst-case scenarios, PayPal can and does terminate a merchant’s account entirely, leaving them to find another processor while holding onto any pending transactions for up to 6 months.

The bottom line is that any PayPal merchant deals with the risk of a single transaction — or their entire account — being undeservedly flagged and sanctioned. What’s more, some merchants report trouble getting answers from PayPal as to why a transaction was held in the first place. As you can imagine, this practice generates complaints from PayPal’s user base.

Using PayPal as your primary payment processor is a risk — but for some merchants, it’s a calculated and very cost-effective risk. PayPal makes it easy for a business with no established history to start accepting credit card payments when they would otherwise not qualify for a merchant account. Plus, while it can seem that there’s a massive pile of complaints about PayPal, a few thousand complaints is…well, a very small percentage of the 19 million businesses that use PayPal to accept payments. The fact that an transaction might be held does not guarantee that it will be.

Want to know what the warning signs for suspicious transactions are and how you can avoid them? Check out our guide to avoiding merchant account holds, freezes, and terminations to learn more.

Why A Merchant Account Can Provide More Stability For Small Businesses

By contrast, a merchant account is unique to you. When you apply, the company’s underwriting department will look at your industry, your processing history (if any), your personal credit, your business’ creditworthiness, and other factors. The process isn’t nearly as complicated as it used to be even just a few years ago, but compared to third-party aggregators such as PayPal, it’s a lot more intensive.

Theoretically, having a merchant account will translate into higher stability than you’d get with a third-party processor. However, not all merchant accounts are created equal — not by a long shot. Your processing rates, your contract terms, the extra services you get — even the quality of the customer support — will vary pretty significantly between merchant account providers. Working with a poor merchant account provider might also lead to frequent held transactions and other headaches, and very little customer support to guide you through the process.

However, there is a way to reduce the inconsistencies you might encounter: pick a reputable processor. While you will still see some variance in contract terms and the extra services you have access to, you’ll see a lot more consistency in pricing terms and high-quality customer support. Often, that comes in the form of a dedicated account representative who is your go-to contact.

I can’t stress enough that it’s important to research a company before you apply, and then read contract terms and ask questions. Many of the larger processors use networks of resellers who promise merchants the world to get them to sign that piece of paper. Then they find out they’re locked into multi-year contracts with costly early termination fees (ETFs) — or worse, a liquidated damages provision.

One additional point to make here: If you fall into the “high risk” category, you’re likely going to have to obtain a high-risk merchant account (and you won’t be able to use PayPal). “High-risk” industries include:

• Multi-level marketing (MLM)
• Estate sales and antiques
• Adult entertainment
• Many kinds of financial services

And that’s just for starters. With a high-risk payment processor, you’re going to get a more stable account, but you’ll pay higher processing rates as a result.

It’s time to dive into the many differences you’ll encounter in the ongoing Paypal vs. merchant account debate. However, please note that our claims about merchant accounts are generalized and based on some of the most affordable and most ethical merchant account providers out there — they are by no means true of every single merchant account provider.

You can check out our full PayPal review here, or compare our top-rated merchant accounts here.

How PayPal’s Merchant Services Compare To Actual Merchant Accounts

One of the big draws of PayPal for a merchant is the fact that you get many different services bundled together, whereas merchant account providers vary greatly in terms of the services they offer alongside merchant accounts. Some merchant account providers offer an “all-in-one” experience that mirrors the array of services provided by PayPal, while others are much more limited regarding what they offer.

Let’s compare the services offered by PayPal with the services offered by merchant account providers.

eCommerce

If you don’t ever plan to sell online, solid eCommerce features are not going to be a concern for you at all. But if you do, making sure your card processor is friendly to online sales is important.

With a merchant account, you might get an integrated eCommerce package, or at least one for a low monthly fee. At minimum, to accept payments online, you’ll need a payment gateway (usually for a monthly fee and/or a per-transaction fee, typically on top of a setup fee). And then there’s the website and shopping cart or eCommerce plugin, of course. Your eCommerce package could include some or all of these; a gateway package (usually at a discount) is fairly common.

Gateways can vary in their compatibility; typically your merchant account provider will tell you which gateways you can use. If nothing else, Authorize.net is well known, recognizable, compatible with almost everything, and fairly affordable.

PayPal offers its own gateway, PayFlow, which comes bundled with a PayPal Business account. In fact, you can also use PayFlow as your gateway if you’re not using PayPal as your payment processor, as PayFlow is compatible with most payment processors. PayFlow is offered in two tiers:

• PayFlow Link is offered without any setup fees or monthly charges whatsoever. The only fee charged is a $0.10 gateway fee per transaction. PayFlow Link lets you embed a checkout form on your website that will redirect to the PayPal site to complete the transaction. Link also adds PayPal and PayPal Credit buttons.
• PayFlow Pro keeps this same $0.10 per-transaction fee while adding a $99 setup fee and a $25 monthly fee. With PayFlow Pro, you get a completely customizable checkout page that’s hosted on your own website, with the options to add PayPal and PayPal Credit options.

Of course, you’ll still need to have your own website and find a compatible shopping cart. The good news is that a lot of shopping cart options are compatible with PayPal. You could completely build your own custom website if you wanted, too. PayPal has the kind of ubiquity and consumer recognition few other payment solutions possess, which goes a long way toward establishing trust.

All of that sounds pretty good, right? Well, you probably want to look extra hard at processing rates. Online transactions are considered “card not present” and are therefore more expensive than “card present” transactions.

PayPal charges 2.9% + $0.30 per transaction (which is a fairly common rate). Your merchant account rates will vary. And don’t forget to compare the cost of the eCommerce package to something you can put together on your own with a bunch of third-party services.

A final thought: Online selling is definitely where PayPal shines — but that doesn’t mean you should automatically choose a merchant account just because you don’t need eCommerce. You’ll still get plenty of support for in-person and mobile transactions via PayPal. And, if you want the benefits of PayPal with more account stability, there’s always Braintree, which does offer merchant accounts but is owned by PayPal.

You can also check out our list of the best online credit card processors.

In-Person Sales

Next, we’re treading into POS territory. It’s not something all merchants will think about until after the fact, but which point-of-sale software you can use (or want to use) may affect your choice of credit card processor.

• Merchant Accounts: Many POS systems are set up to work with specific merchant account providers. These are called “integrated” solutions. However, you can sometimes choose a non-integrated solution. The only major difference between the two is a few extra steps in the checkout process. Which POS systems you can integrate with depends on the merchant account provider you choose. There are many, many options. If you are dead-set on a particular POS, you should contact the company and ask which merchant accounts integrate with it (or check the website)
• PayPal: PayPal has also chosen to take the direct integration approach via partnerships with Lavu, TouchBistro, Vend, Revel, Franpos, and a few others. It’s a small pool, but one filled with industry-leading names that should serve you well.

Mobile Support

One of the biggest advantages of choosing PayPal is its mPOS service, PayPal Here. While it’s not the most full-featured option on the market, it’s certainly a capable option. It has one of the best EMV readers available right now.  You’ll pay just 2.7% per swipe, and no additional fees on top of that.

Even better, while PayPal Here doesn’t have advanced inventory management, it does support cash drawers, receipt printers, and barcode scanners. You can run a functional — if no-frills — register this way. And PayPal does integrate with Shopventory for more advanced inventory, though this will cost you more.

By comparison, most merchant account providers will use a reseller’s mobile solution. Clover Go (by First Data) is a common one, but you might also encounter Authorize.net, Converge, or something else entirely. Features and cost will vary pretty significantly. While in most cases your rates will be comparable to your standard rates, you might also pay a monthly fee for the use of the service, plus the cost of hardware.

You should ask your merchant account provider about their mobile solution.

Accounting Integrations

Accounting is another facet of doing business that PayPal facilitates through integrations. The following are just some of the accounting outfits that partner with PayPal to provide accounting integrations:

• Xero
• QuickBooks Online
• Invoice2go
• FINSYNC

Additionally, if it’s just an invoicing solution you’re looking for, PayPal provides this with its own in-house app, PayPal Invoicing. PayPal actually does really well in this category — it has multiple options of varying complexity for all types of business.

With merchant accounts, every provider is different with respect to the accounting integrations they provide. QuickBooks tends to dominate the space and many, if not most merchant account providers (such as Durango and Fattmerchant), offer an integration. Integrations for other accounting (or invoicing) software tend to be more inconsistent.

Of course, you’ll want to research specific merchant account providers beforehand to determine whether the accounting integrations (if they exist) meet the needs of your business. If in doubt, talk to a sales rep or customer support agent from the payment processor of your choice to confirm before you sign up.

Global Payment Acceptance

Here’s an area in which PayPal shines. PayPal is available in more than 200 countries and accepts 25 different currencies. With more than 286 million active PayPal accounts worldwide accepting PayPal payments — either as a primary or supplementary payment method (more on this later) — this can be a big boon to your online store, particularly if your products and/or services appeal to the international market.

How do merchant accounts stack up with PayPal in this regard? As with so many other services, it depends on the merchant account provider. For instance, with Braintree (a merchant account provider that happens to be owned by PayPal), you can accept payments in over 130 currencies. Many merchant accounts are far less global-friendly, however, so you should ask a merchant account provider about global currency acceptance and accepting payments from outside the US beforehand if there is any ambiguity.

Developer Tools

PayPal features an extensive list of developer tools to help you build customized solutions that fit your needs. Here are just some of the developer tools PayPal has to offer:

• PayPal Checkout
• PayPal Invoices
• PayPal Subscriptions
• PayPal Payouts
• PayPal Here SDK
• PayPal For Marketplaces

With merchant accounts — stop me if you’ve heard this before — the developer tools available to you will vary depending on the merchant account provider. You’ll need to do some research if you’re seeking a merchant account and developer tools are important to your business. I’ll mention Braintree again in this section as the quality of its developer tools is second to none. However, PayJunction also does really well in this regard.

Other Services

PayPal offers much more in terms of features and integrations than I’ve listed here. For example, PayPal offers such extras as a Marketing Solutions package to help eCommerce businesses with marketing and analytics and a Mass Payout feature that allows you to send multiple payments at once (instead of just one at a time) using either a spreadsheet or the PayPal API.

You can certainly find merchant account providers offering similar tools (and much more). No two merchant accounts are exactly alike, however, so be sure to get the complete picture on your chosen merchant account provider before signing up — otherwise, you could find yourself saddled with a merchant account that doesn’t do what you need it to do.

PayPal Merchant Fees VS Merchant Account Fees: Can PayPal Actually Save You Money?

The first thing many merchants think about credit card processing (and indeed most services) is, “how much is this going to cost me?” Fortunately, PayPal has built its reputation as a provider of clear, transparent, flat-rate pricing:

• Online transactions: 2.9% + $0.30
• Swiped transaction: 2.7%
• Keyed transactions: 3.5% + $0.15
• Invoices: 2.9% + $0.30

That’s it, for the basic package. But PayPal also offers nonprofit discounts and a micro-transaction payment plan that can actually save merchants money on transactions that are less than $5 on average.

There are no PCI compliance fees and no statement fees. PayPal does assess a fee for chargebacks, as will many merchant account providers. However, beyond that, you won’t encounter any hidden costs. See our PayPal pricing guide for more information.

On the other hand, merchant account pricing varies considerably. The less-reputable processors often offer a tiered (or “qualified”) pricing plan. Tiered pricing plans are confusing and difficult to compare because of massive inconsistency from one processor to the next.

A top-tier merchant account provider will offer flat-rate processing or an interchange-plus plan. Interchange-plus is the gold standard for processing rates because it’s so transparent. In addition to the interchange fees assessed by the card networks, your processor will charge a markup — a percentage of the transaction as well as sometimes a flat per-transaction fee (anywhere between $0.05 and $0.30). Interchange plus is the easiest pricing scheme to make direct comparisons for.

It is also worth noting that some merchant account providers will assess monthly fees, PCI compliance fees, statement fees, and other charges that add up over time and contribute to your overall cost. In fact, monthly fees could eat away at any savings that come from a lower processing rate. So please consider these costs in deciding which processor offers the most affordable solution for you.

Some of our favorite merchant account providers with an interchange-plus plan include:

• Dharma Merchant Services
• Helcim
• PayJunction (notably, PayJunction has a lot of eCommerce and developer tools)
• CDG Commerce

Other top-rated processors that offer membership packages with flat monthly fees include:

• Payment Depot
• Fattmerchant

We know, we know — this is a lot of information to take in. However, there are some general rules-of-thumb that can be drawn from a PayPal vs. merchant account pricing comparison.

• It’s easy to get set up with PayPal, and with so many services included, it’s little wonder that PayPal is a compelling choice of payment processor for a new business. However, for high-volume businesses, if you find a good merchant account with interchange-plus pricing, you’ll be paying less for payment processing than you will with PayPal under most scenarios.
• On the other hand, PayPal is — under almost any circumstance — a better deal than a merchant account that features tiered pricing. Tiered pricing schemes typically soak you with hidden fees, which is why we recommend avoiding tiered pricing no matter what your circumstance.
• New businesses can always go with PayPal to start off with — once you’re doing enough business to make the cost difference more pertinent, you can always switch to using a merchant account.
• Alternately, you can use both PayPal and a merchant account. More on this later!

For more information about credit card processing rates, read our article on the subject, How Much Should You Pay for Credit Card Processing?

Cost Of Value-Added Services

Here’s where considering cost can get tricky when looking at PayPal versus a merchant account. Some merchant service providers might have optional services that you can add-on (such as an eCommerce suite, an mPOS app, a virtual terminal or recurring billing). So while comparing processing rates is a good start, you need to consider the value of these additional services. Pricing varies considerably, from “absolutely free” to $80 or more per month.

PayPal offers a virtual terminal and hosted payment page ($30/month) as well as recurring billing ($10/month). Beyond that, most everything else PayPal offers at no additional charge, including its mPOS. It’s also worth noting that PayPal has partnerships with a large assortment of software vendors as well, and you may be able to take advantage of special promotions from time to time, to get a discount on the software, or on processing rates.

What Really Sets a Good Merchant Account Apart From A PayPal Business Account: Customer Service

One thing you absolutely want to consider is the value of good customer service. It’s no secret that PayPal’s customer service is, well, spotty at best. Go to any site featuring user reviews of PayPal and you’ll likely find a deluge of critical comments from both merchants and buyers concerning PayPal’s customer support.

A good merchant account provider will give you 24/7 technical support, plus assign a dedicated representative to be your point of contact so you get the personalized attention you deserve. Now, there are legions of merchant account providers that do not provide this level of user support. That’s why it’s so important to do your due diligence when looking for a merchant account!

PayPal & Merchant Accounts Are Not Mutually Exclusive

Here at Merchant Maverick, we like to give clear answers. However, there’s simply no definitive response to the PayPal vs. merchant account debate. The best choice is always the one that meets your needs.

If you primarily sell online, there’s a definite advantage to PayPal: its eCommerce suite is very, very difficult to beat, though some premium features will cost you more. However, it also has partnerships with some very solid POS systems in the retail and hospitality worlds. While there’s an inherent risk in using PayPal, it’s not guaranteed that you’ll encounter trouble and you can take steps to mitigate your risk and reduce the chances of a transaction being held up.

If you choose a merchant account, you could see lower rates and better reliability. You’ll also potentially have access to a much larger pool of POS systems, a more diverse selection of rates, and a wide range of additional tools. However, it will depend entirely on the merchant account provider you choose, as merchant service providers are most definitely not created equal.

A merchant account will typically give you more account stability. But to get it, you’ll likely have to have an established processing history and bring in at least $5,000 per month in credit card transactions. (However, $10,000/month is more appropriate.) Fall below that volume and you may pay more per transaction or be subject to monthly minimum fees. Those fees can quickly stack up and eat into profits.

Thankfully, you can enjoy the benefits of both approaches to payment processing by using PayPal in conjunction with a traditional merchant account. If you’ve ever found yourself using an eCommerce site that accepts both credit card payments and PayPal payments, you already know this. Considering PayPal’s huge global user base, adding PayPal to your online checkout to supplement your existing payment method can see you earning extra revenue.

You can also use PayPal for specific purposes, such as sending out invoices or using their mobile processing service at trade shows (thereby avoiding the need for expensive convention center-provided internet connections), while retaining your merchant account for everyday sales.

Still looking for more information about payment processing?

• Check out our ebook, The Beginner’s Guide to Payment Processing.
• Head on over to our full PayPal review.
• Have a look at our merchant account comparison chart.

Merchant accounts and payment processing are Merchant Maverick’s original specialty, so if you need advice or have additional questions, please don’t hesitate to reach out! We’re always here to help!