Is PayPal A Merchant Account? Key Differences Between A PayPal Business Account & A Merchant Account

PayPal, the colossus of 21st-century commerce, has helped make the payment processing industry a more accessible space by making it easier than ever for small businesses to accept not just PayPal digital payments, but nearly every modern form of payment, from credit and debit cards to Apple Pay to Bitcoin. There are no long-term contracts, no hidden fees, and no equipment leases. Just sign up for a PayPal business account, and you’ll be accepting payments in short order.

However, as your business grows and its needs evolve, you might find that PayPal processing fees, which are relatively high, don’t scale well with your business. You may also need more account stability than PayPal can provide. For these and other reasons, you might consider switching to a merchant account for payment processing at some point, as a merchant account can offer cheaper processing, greater account stability, and a higher degree of control and customization.

If you were wondering “Is PayPal a merchant account?” It’s probably clear now that the answer is no.

Finding the best credit card processing for small business is a matter of finding what fits your particular business needs and goals, which is why we’re comparing PayPal with full merchant account providers in terms of pricing, features, account stability, and other factors particular to certain business types.

PayPal VS Merchant Account: 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 an 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 Payments (which powers eCommerce platforms like Shopify and others) as well.

This 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. You’ll have to provide more business documentation, and there’s a chance you might not be accepted at all.

Due to this, PayPal may be a better choice for occasional sellers and new businesses than a full merchant account due to the relative ease of obtaining your account and beginning to accept payments.

However, this doesn’t apply if yours is considered a high-risk business, as PayPal’s Acceptable Use Policy prohibits high-risk business activity. In this case, you’ll need to look for a high-risk merchant account provider.

How Does A PayPal Business Account Work?

PayPal started out providing a digital wallet for consumers and simple payment buttons for online sellers, but has since greatly expanded its business products and services to include just about every type of merchant service under the sun. And what PayPal doesn’t offer itself, you can likely integrate into your account, given PayPal’s integrations with numerous eCommerce, POS, and accounting platforms.

How Does A Merchant Account Work?

Merchant accounts differ from payment service providers like PayPal and Stripe in a number of ways, but the main difference is that your business is more heavily scrutinized before you can get approved for an account. You’ll have to provide a lot of paperwork, perhaps undergo a credit check, and you’ll be waiting much longer to get approved than you will with PayPal. Sounds like a hassle, right?

The upside of this is that having undergone extensive underwriting before you start taking payments, your individual transactions are scrutinized much less heavily than they are with PayPal/Stripe/Square/etc.

This means that with a merchant account, your funds are much less likely to be held, and your account is much less likely to be frozen over any real or perceived issues with a single transaction.

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.

Another thing to keep in mind is that with PayPal, every merchant who signs up gets the same feature lineup at the same prices. With merchant accounts, this may not be the case, as many providers offer varying fee schedules, contract terms, and processing rates, with the details subject to negotiation. You can’t really negotiate a better deal with PayPal unless your business is very large indeed.

Traditionally, merchant account providers didn’t publicly disclose any pricing or contract information, relying entirely on a quote-based system. Thankfully, that’s changing. Our current top-rated providers now disclose their processing plans, pricing, and contract terms on their websites. The providers that don’t do this tend to operate in the high-risk processing industry, where contract terms, pricing, etc. can vary due to various factors unique to that space.

PayPal Merchant Services VS Merchant Account Pricing: Which Is Cheaper?

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. Our PayPal pricing guide has the complete rundown.

On the other hand, merchant account pricing varies considerably. The less-reputable processors (and some high-risk specialists, out of necessity) 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.

I should note that while PayPal now offers merchants that are approved for the Advanced checkout plan (which requires more underwriting than a standard PayPal business account) the option of an interchange-plus pricing plan, PayPal’s interchange plus rate (interchange + 0.49% + $0.39 per transaction) is still higher than that of many of our preferred merchant account providers, some of whom also offer volume discounts.

Generally, PayPal and other PSPs are more cost-effective for merchants processing less than $5,000/month, while those processing more than that can save money with a merchant account. However, this $5K/month “tipping point” can vary depending on your monthly processing volume, average ticket size, and other factors. Our e-book, Don’t Overpay For Credit Card Processing, can help you estimate your costs with PayPal vs. a competing merchant account provider.

PayPal Vs Merchant Accounts: Which Is Best For Small Businesses?

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. Remember, making the right choice isn’t just about cost. It’s also about the features you need, the hardware and software options available, and the quality of customer support.

Choose PayPal If…

Despite its drawbacks, PayPal is easy to sign up for and use, offers a huge range of services under one umbrella, and won’t soak you with PCI fees, monthly minimums, and the like. You can also use PayPal as a supplementary payment method if you already use another online payment processor, which, considering the hundreds of millions of PayPal account holders worldwide, can absolutely boost your sales. Do this, and you can actually use both PayPal and a merchant account together, so it’s not always an either-or proposition.

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.

Consider PayPal in the following circumstances:

Choose A Merchant Account If…

Many businesses will find that a merchant account suits them better than PayPal, either because they can save on the cost of processing, they want more account stability, or they literally cannot use PayPal due to the nature of their business. Consider a merchant account if any of the following apply:

One caveat: If you don’t think PayPal is right for your business, a merchant account isn’t your only alternative. Other PSPs like Square and Stripe offer PayPal-like all-in-one merchant services platforms, but their pricing and feature lineups differ in some key respects and may better suit your business than PayPal. Our Square vs PayPal comparison details some key differences, as does our Stripe vs PayPal comparison.

PayPal VS Merchant Account: 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. When it comes to payment processing, just as with other business services, no single solution is best for everyone.

Online sellers will find a definite advantage to PayPal: its eCommerce suite is very difficult to beat, though some premium features will cost you more. PayPal 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 an account hold or termination. Plus, 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. Plus, if you have a high-risk business, you may have no choice. However, everything depends on the merchant account provider you choose, as not all merchant service providers are created equal.

To get the most out of a merchant account, you’ll likely need an established processing history and be earning at least $5,000 per month ($10K/month is often 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.

FAQs: PayPal VS Merchant Accounts