Is PayPal A Merchant Account? Here’s The Difference Between PayPal & Merchant Accounts

Whether you’re launching a new business or you’ve decided to start accepting credit cards at your cash-only establishment, 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.

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

In fact, no, it is not! With this PayPal vs merchant account article, we’re going to explain the key differences between the two.

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
• See how PayPal competitor Square fares against merchant accounts
• Learn about merchant account providers

Is PayPal A Merchant Acquirer?

PayPal is not a merchant acquirer. While PayPal does connect to various merchant acquiring banks behind the scenes to facilitate your transactions, PayPal acts as the payment processor, not the merchant acquirer.

While the concept of a merchant acquirer defies simple explanations, the acquirer’s role is to act as a go-between with the customer’s issuing bank to facilitate the transfer of funds. While some payment processors also act as merchant acquirers, PSPs like PayPal do not. Read our explainer article on acquirers for a deeper understanding of merchant acquirers and the role they play in payment processing.

Why PayPal Merchants Are At Risk Of Held Funds

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.

Unlike merchant accounts, PayPal doesn’t spend much time vetting applicants prior to signing up. After you provide some basic information to verify your identity, you’re in. Your business history and risk profile won’t be assessed (though you may undergo such underwriting if you apply for more advanced products like Payments Pro and/or the Virtual Terminal).

Instead, PayPal scrutinizes your 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 even potentially be fraudulent.

To learn more about the account stability risks inherent with PSPs, what the warning signs for suspicious transactions are, and how you can avoid them, read our guide to avoiding merchant account holds, freezes, and terminations.

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. Compared to third-party aggregators such as PayPal, the application process is a lot more intensive.

Theoretically, having a merchant account will translate into higher stability than you’d get with a third-party processor. However, 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.

If you choose from between our top-rated merchant accounts, you’ll still see some variance in contract terms and extra services, but you’ll also see a lot more consistency in terms of pricing and high-quality customer support. Often, that comes in the form of a dedicated account representative.

In any case, it’s extremely important to research a company before you apply, and then read contract terms and ask questions.

One more point: If your business is considered “high risk,” you’ll likely have to obtain a high-risk merchant account (and you won’t be able to use PayPal). Read our guide to high-risk processing to learn which industries are typically considered high-risk and what conditions you may have to accept with your merchant account.

PayPal VS Merchant Account: Key Differences For Small Businesses

Here’s a big-picture look at the main differences businesses will find in the ongoing PayPal vs. merchant account debate. We’ll get into specifics later, but this table covers the biggest points of departure.

Pricing-wise, using PayPal as your payment processor over a merchant account makes sense for occasional sellers, smaller businesses, and merchants just starting out, while using a merchant account makes sense for higher-volume businesses and those with more complex business needs (we’ll talk more about pricing later). And while we’ve discussed the greater likelihood of experiencing account holds and terminations with PayPal, you’ll also get a more personalized customer support experience with a reputable merchant account provider than you will with PayPal (unless you use PayPal Payments Pro for $30/month).

Perhaps the biggest point for new merchants in favor of PayPal is the convenience of having so many different business services bundled together, many of which come at no additional cost. With a merchant account, the included features will vary between providers and may be more difficult to implement, adding a layer of complexity that smaller businesses may not want to deal with.

Does The Difference Between Merchant Accounts & PayPal Merchant Services Matter?

The reality is that many merchants could choose either PayPal or a traditional merchant account and have a reasonable chance of thriving. With PSPs like PayPal, the deal is that in exchange for the convenience of having the PayPal merchant services ecosystem at your fingertips, you accept certain trade-offs, like higher processing costs (on a per-transaction basis) and a greater risk of having a transaction flagged and your funds held.

However, this risk poses particular dangers for certain types of merchants. For example, some PayPal merchants have had their accounts frozen after processing a much larger amount of money than usual (perhaps after a seasonal event or product launch). Now, these merchants have not violated PayPal’s rules, but they still run the risk of having their accounts frozen due to the simple fact that PayPal views uneven revenue as inherently suspect. In cases like this, the difference between PayPal and a merchant account comes into play. With a merchant account, your company goes through significant underwriting prior to being accepted, so the provider is familiar with the nature of your business and won’t be spooked to see big revenue spikes.

Do the differences between merchant accounts and PSPs matter? For some businesses, these differences won’t be too consequential. For others, the consequences can be major.

PayPal Merchant Fees VS Merchant Account Pricing

PayPal built its reputation on clear, transparent flat-rate pricing. Unfortunately, the company’s pricing overhaul (enacted August 2021) complicated matters, with pricing now dependent on the nature of the transaction, your subscription level, and other factors. Here’s what  PayPal charges per transaction in key instances:

• Online transactions: 3.49% + $0.49 for PayPal digital transactions (where the funds come from the customer’s PayPal account) and 2.59% + $0.49 to 2.99% + $0.49 for credit/debit transactions
• Swiped transaction: 2.29% + $0.09
• Keyed transactions: 3.49% + $0.09
• Invoices: 3.49% + $0.49

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, and some merchants may be able to enroll in the Microtransactions plan to save money on smaller transactions. See our PayPal pricing guide for the complete rundown.

On the other hand, merchant account pricing varies considerably. The less-reputable processors often offer a tiered (or “qualified”) pricing plan. A top-tier merchant account provider will offer flat-rate processing or an interchange-plus plan. Also, some providers will assess monthly fees, PCI compliance fees, statement fees, and other charges that add up over time and can eat away at any savings that come from a lower processing rate. For more information about merchant account costs, read our article on the subject, How Much Should You Pay for Credit Card Processing?

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, PayPal is a compelling choice 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.
• 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, as we’ll discuss later, you can use both PayPal and a merchant account.

PayPal Merchant Services VS Traditional Merchant Accounts: Features & Functionality

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.

PayPal Business Credit Card Processing Includes…

• eCommerce: Naturally, PayPal offers an integrated eCommerce package. PayPal’s own gateway, PayFlow, comes bundled with your PayPal Business account. And while you can use PayPal Checkout to add PayPal buy buttons to your site and avoid paying monthly fees, your customers will be redirected to PayPal’s site to complete their checkout. If you’d rather your customers check out on your site, the Payments Pro package gives you hosted checkout pages and a virtual terminal for $30/month. Recurring billing is also available for $10/month. Additionally, shopping cart integrations from big players like Shopify, BigCommerce, and Ecwid are offered.
• In-Person Sales: For POS solutions, PayPal offers direct integrations via partnerships with industry leaders like Lavu, Vend, and Franpos.
• mPOS: With PayPal’s mobile payments solution, PayPal Zettle, you get a modern chip/contactless/PIN card reader for just $29, and you’ll pay just 2.29% + $0.09 per swipe — a lower rate than PayPal charges for online transactions. Cash drawers, receipt printers, and barcode scanners are also offered, allowing you to run a functional (if no-frills) register. With QR code support, inventory tracking, and support for QR code payments, there’s a lot to like for merchants on the go.
• Accounting Integrations: PayPal offers accounting integrations from industry leaders like Xero and QuickBooks Online.
• Other Features: PayPal offers a number of other business tools, such as PayPal Invoicing, a Marketing Solutions package to help eCommerce businesses with marketing and analytics, and a feature called Payouts (formerly Mass Payouts) that lets you send money to multiple vendors at once.

Merchant Accounts Include…

• eCommerce: With a merchant account, you might get an integrated eCommerce package, or at least one for a low monthly fee. 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). You’ll need website and shopping cart plugins as well. Your eCommerce package could include some or all of these; a gateway package (usually at a discount) is quite common. Your provider will tell you which gateways you can use. In nearly all cases, Authorize.net is one of them.
• In-Person Sales: 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. If you are dead-set on a particular POS, contact the company and ask which merchant accounts integrate with it (or check the website).
• mPOS: 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 costs will vary pretty significantly. In most cases, your rates will be comparable to PayPal’s in-person rates, though you might also pay a monthly fee for the use of the service, plus the cost of hardware. Ask your provider about their mobile solution if this is something you’ll need.
• Accounting Integrations: With merchant accounts, every provider is different with respect to the accounting integrations they provide. QuickBooks tends to dominate the space, with many providers (such as Durango and Stax by Fattmerchant) offering a QuickBooks integration. Integrations for other accounting (or invoicing) software are often available but tend to be more inconsistent.
• Other Features: Many merchant account providers offer tools akin to those offered by PayPal in the marketing/invoicing/payouts realm (and much more). No two merchant accounts are exactly alike, however, so get the complete picture on your chosen merchant account provider before signing up. You don’t want to get saddled with a merchant account that doesn’t do what you need it to do.

Which Is Best For My Business Needs: PayPal Or A Merchant Account?

We’ve thrown a lot of information at you, but now it’s time to distill it all down. Let’s discuss the types of businesses that should consider PayPal vs those for whom a merchant account might make more sense.

Choose PayPal If…

• You sell only occasionally
• You are a lower-volume merchants
• Your new business is just starting out

Choose A Merchant Account If…

• Your established business has particular needs
• You are a high-volume seller
• Your business is considered high risk

One caveat: We’ve been comparing PayPal with traditional merchant account providers. However, PayPal’s recent pricing changes (particularly the rise in the fixed portion of the online per-transaction fee from 30 cents to 49 cents) have not been well-received by online merchants with small average tickets. For these merchants, traditional merchant accounts are not the only alternative. Other PSPs like Square and Stripe offer business service packages that are similar (though not identical) to those of PayPal, and, for some merchants, may be more cost-effective than PayPal.

Can You Use PayPal & A Merchant Account Together?

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 visited 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, while retaining your merchant account for everyday sales.

Merchant Account VS PayPal: The Final Verdict

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. What’s more, you always have the option of offering PayPal as a supplementary payment option.

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, a wide range of additional tools, and, in most instances, more personalized and responsive customer support. However, everything depends 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 ($10K/month is more appropriate) in credit card transactions. 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.

Merchant accounts and payment processing are Merchant Maverick’s original specialty, so if you need advice or have additional questions, please let us know! We’re always here to help!

Looking for more information about payment processing?

• Check out our eBook, The Beginner’s Guide To Credit Card Processing.
• Head on over to our full PayPal review.
• Read a rundown of our top 10 online credit card processors.
• Have a look at our merchant account comparison chart.
• New business owners should read our small business guide to setting up credit card payments.