Merchant Account or Paypal?

September 7, 2006

Anybody looking to collect payments off their website finds themselves getting into the field of payment processors. Understand that I am referring to this in the general sense of simply processing credit cards; those who know how this process works know that the credit processor is only one stage of processing a credit card. One of the big considerations here that people end up considering is whether they should go with a more traditional merchant account or can they get away with a private payment system like Paypal.

The transaction fees charged end up being the most primary consideration many merchants consider, however there is a lot more to this decision than that. Merchants need to consider information security, dispute resolution and fraud protection. Not only that, merchants need to consider the overall reputation of their business. After all, some customers might balk at the idea of Paypal being the only payment method available.

The Costs

The most common method of being charged is a flat rate per transaction plus a percentage of sale. So, for example, let’s say I am paying 30 cents per transaction plus 2.2%. If I process a transaction of $100, I end up giving up $2.50 and collecting $97.50. The fees differ from processor to processor, so you need to take a look at the fees and shop around. Obviously, you want to keep as much as your money as you can.

A solution like Paypal can save you money because it does not charge things like setup fees, gateway fees or any monthly fees. Use of their payment gateway is free, and many of the typical fees are not applied simply because, with Paypal, you do not really have a merchant account. In effect, you are using their merchant account.

Typically, if your website is not going to be running many transactions, Paypal can save you some money. You only pay for what you collect and the ease of setup is attractive.

Getting Your Money

All merchants want to have access to their money as quickly as possible. They also want to know what the process of getting that money from the customer to them is solid and secure. With this in mind, the merchant account is really the best way to go. By having a merchant account, you are making use of a well-established system which is backed by the FDIC. There is a whole banking process behind the scenes which gets the funds transferred from the customer and ultimately directly into the merchant’s bank account. This process is automatic and usually the merchant has direct access to the funds within 2-3 business days. Merchant accounts basically collect funds from credit accounts then make daily settlements. A settlement is the process of transferring the credited funds to the merchant bank account. It usually happens on business days only, so typically any sales which occur on Fridays or over a weekend will not be settled until Monday.

Paypal works completely differently. With Paypal, you have an account with Paypal. When a customer buys something, you have immediate access to the funds in your Paypal account. Since Paypal is not a bank but a private company, it is not required to follow federal banking regulations. To get your money into your checking account, you need to manually transfer the money to your bank from Paypal. Paypal does have additional services like Paypal debit cards, but a Paypal account is not a checking account. The transfer process usually takes about the same amount of time as a settlement, but it is not automatic.

There are horror stories on the internet of people losing their entire Paypal accounts because of Paypal simply cutting off access. Usually this is because Paypal, for some reason, suspects the merchant of fraud. However, they don’t always get it right. Similar to Ebay itself, sometimes merchants are flagged and there is no reason for it to be flagged. I think these types of incidents are pretty rare, however the fact that Paypal has this power to freeze funds is definitely something to bear in mind when considering your options.

Privacy

Customer data is not distributed to any third parties when processing a credit card using a merchant account and traditional processor. The security of their information between your website and the payment gateway is, of course, your responsibility. However, the information is secure through the approval process. Paypal, on the other hand, does provide secure processing. However, Paypal is a private company and they openly state that they may share customer data to third-party marketing research companies. They will also share information with their parent company, eBay. Paypal will not share your bank account or credit card information, however everything else is essentially fair game.

Fraud Protection

When merchants set up a merchant account and select a payment gateway, usually they have access to a whole range of customizable solutions for fraud protection. The merchant, in this case, has control over the settings used for fraud detection. They can set up very stringent settings or they can be a little more loose about it. When using Paypal, Paypal has total control over the fraud detection. For example, Paypal will automatically decline any transaction which results in an AVS/CCV mismatch. Sometimes Paypal will decline a transaction because it is international. Paypal does not offer a range of fraud settings for the merchant to control. They take control over it. This is understandable being that it is their merchant account on the line.

Reputation

Reputation is important on the internet. Since customers are not in person when they are about to buy something, it takes perception of trust to get them to whip out the card and type in the number. It is very important, then, to consider how your business will look to your users depending on the payment solution you employ.

The credit processing system has been around for more than 40 years. It is tried and true and people are totally used to it. From the merchant perspective, it is a very reliable system. Having a traditional payment gateway and merchant account means you are taking advantage of this trusted system.

Paypal is very popular on the internet and many people have accounts with Paypal. However, it is a private company who makes their own rules on how payments are processed. This is not a bad thing, however a merchant needs to decide whether they want to play in that arena. Paypal is chiefly thought of as an auction payment system, mainly due to its popularity on eBay. It is sometimes thought of as a medium for people to exchange money in small, personal transactions. It simply does not have the solid reputation of a merchant account.

Having a payment gateway and a merchant account means you are doing business in the same way as solid, trusted businesses throughout the world. Your website can directly accept credit cards and you won’t have the potential distractions of sending a customer through Paypal.

So, What’s The Decision?

In my e-commerce ventures, I usually accept both options and I give the choice to the customer. There are a lot of internet users who keep funds in their Paypal accounts. For them, having the option to use those funds easily to buy something online is a real convenience. There have been a few times that I, as a customer, have moved forward with a sale because they accepted Paypal and it kept me from having to get up and find my credit card. If I like it from time to time, others will, too. However, when I first got a merchant account and a payment gateway for my websites, my web-based sales skyrocketed. There is simply no replacement for a traditional credit card processing account if you are serious about doing business on the internet. I certainly would accept Paypal, but NOT as your only payment option.

E-commerce