PayPal vs. Merchant Account

When you’re just starting a business, or switch from cash-only to also accepting credit cards, you need to consider your payment processor. There’s no shortage of options available, but your short list will probably include a merchant account and the juggernaut of commerce, PayPal (see our review).

Surely they’re not all that different, are they? Isn’t PayPal just another merchant account provider?

Actually… no. PayPal isn’t a merchant account provider. It’s a third-party processor, and it aggregates all of its seller accounts into one large merchant account. This is a fairly common practice, and one that’s used by Square and Stripe (which powers solutions such as Shopify Payments). While it’s all completely above-board, aggregating does tend to lead to a higher amount of risk for merchants.

PayPal doesn’t spend as much time vetting applicants as a merchant account provider does. That means it’s more likely to terminate your account later, when the risk department flags something as high-risk or notes a suspicious transaction. It’s this practice (along with PayPal’s status as the default eBay payment option) that tend to leave a lot of users very unhappy.

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.

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While in theory a merchant account will translate into higher stability, 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 you get — will vary pretty significantly.

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.

It’s time to dive into the many differences you’ll encounter in the 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.

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

PayPal vs. Merchant Account: Cost

The first thing many merchants think about credit card processing (and indeed most services) is, “how much is this going to cost me?” — which is a wholly reasonable and very important question to ask.

PayPal has built its reputation (at least among merchants) 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 and volume discounts for pricing, 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

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 usually). Interchange plus is the easiest pricing scheme to make direct comparisons for.

It is also worth noting that some merchant account providers will also assess monthly fees, PCI compliance fees, statement fees, and other charges that add up over time and add 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 tools)
• CDG Commerce

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

• Payment Depot
• Fattmerchant

Want to learn more about credit card processing rates? Check out our articles, How Much Should You Pay for Credit Card Processing?

Value-Added Services

Here’s where considering cost can get tricky when looking at PayPal vs. 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.

One thing you absolutely want to consider is the value of customer service. It’s no secret that PayPal’s service is, well, spotty at best. And in theory, a reputable merchant account provider will often assign you a dedicated representative to be your point of contact, meaning you’ll get personalized attention.

Reliability

Merchant accounts are unique to your business, and the contract terms are based on your circumstances and financial history. That means, if you choose a reputable processor, you’re going to experience a high degree of reliability. Unfortunately, it doesn’t mean that you’re totally immune to a hold or termination if their risk department suspects something odd.

In addition, not all merchant account providers may approve your application. Your approval depends on your processing history, your business’ creditworthiness, and your industry or product line. Some might approve it on the condition of implementing a reserve fund.

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 often 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.

In addition, if you fall into the “high risk” category, you’re likely going to have to obtain a high-risk merchant account. These include industries such as multi-level marketing (MLM), estate sales and antiques, and a variety of financial services, for starters. You’re going to get a more stable account, but pay higher processing rates as a result.

By comparison, PayPal is an aggregator, which means there’s an inherent, unavoidable lack of stability. Some merchants will, regrettably, have their accounts terminated or encounter holds or even a reserve account. The user agreement explicitly says that you agree to these terms when you sign up, by the way.

This won’t happen to every merchant. I know plenty of merchants that use PayPal and have no problems; PayPal says that its merchant user base is more than 8 million — which is four times Square’s user base. That’s not an insignificant number of merchants.

Often what triggers an account hold is an unusually large transaction or a much-higher-than-average monthly volume, a large number of chargebacks (especially in a short time frame) or a very suspicious transaction. You obviously also want to make sure your company and your business model don’t violate PayPal’s terms of use, and remember that it is not a good choice for high-risk businesses.

Learn know how to minimize chargebacks, account holds and freezes.

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.

Many POS systems are set up to work with specific processors. 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 a many, many options.

PayPal has also chosen to take the direct integration approach via partnerships with Lavu and TouchBistro for restaurants, and Vend and Erply for retail. That’s a small pool, but one filled with industry-leading names that should serve you well.

Honestly, 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).

Mobile Support

One of the biggest advantages to 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 it’ll cost you more, obviously).

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 Vantiv Mobile, 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.

eCommerce Support

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 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, very recognizable, compatible with almost everything, and fairly affordable.

With PayPal, the gateway is included. However, unless you opt for the more expensive pro plan, PayPal directs your customers to the PayPal website to complete the purchase. And you’ll still need your own website and to 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 also has the kind of ubiquity and consumer recognition few other payments 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 ad 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 check out our list of the best online credit card processors here.

Final Verdict: PayPal vs. Merchant Account

As much as I like to give clear answers, there’s simplye no definitive response to the PayPal vs. Merchant account debate. The best choice is always the one that meets your needs.

PayPal, like ANY third-party processor, is inherently unstable. That doesn’t mean your account will be terminated, but there is a chance it could be. Red flags such as an unusually busy month or an extremely large and unprecedented purchase could mean that PayPal will place a hold. The next step is to request additional verification (usually in the form of invoices, bank statements, etc.). This tends to make merchants understandably unhappy.

That’s not an insignificant consideration, but it shouldn’t be your only one. Many merchants do use PayPal as their processor (especially through PayPal Here or Vend or one of the other POS partnerships). It’s convenient and it’s easy to get started. You can have a low processing volume to start and build your business over time.

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.

Not only that, but some processors will lock you into multi-year contracts with high fees associated. Less-than-reputable merchant account providers can make it very difficult to get out of those contracts even within the cancellation windows. A high-quality merchant provider will have more flexible terms, including month-to-month options. PayPal is entirely pay-as-you-go, with no hidden fees or contract terms.

But once you get past all of that, you need to ask yourself how you plan to process transactions. You should also assess what your software/technology needs, are because that will be the deciding factor. As a merchant, you should be considering your plan for POS equipment, an mPOS system, and eCommerce. Will you use one of them? Two? All three? Compare features and your capabilities, and compare costs to make sure you’re getting the best deal.

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. 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.

I do feel comfortable recommending PayPal as an option, even though it isn’t a merchant account provider. It is by no means a perfect solution — but few credit card processors of its kind are. I’d go so far as to say none are perfect, in fact. Nevertheless, PayPal is a respectable choice,  especially for online sellers or those who primarily need an mPOS.

If you prefer the stability of a merchant account and have a high monthly volume, please do your research before you apply. Start by checking out our top-rated processors, all of whom have earned their rankings for transparent pricing, quality service, and exceptional reliability. Make sure that you compare the features and benefits, not just the price, in your evaluation.

Still want to learn more about payment processing? Check out our ebook, “The Beginner’s Guide to Payment Processing.” If you need help or have additional questions, please don’t hesitate to reach out! We are always here to help!