Should I get my own merchant account or should I just use PayPal for my business?  I obviously get asked this question a lot working in the merchant services industry so I figure I should write an article to help you determine which way to go.  If you are a home based business that involves taking credit cards, chances are you have probably asked yourself this question.  I’ve done some extra research recently about the subject.  Let me show you what I’ve found.

PayPal has done a good job of making it easy to accept credit card payments online.  And yes, if you are only taking payments through your website, you will have no underlying monthly fees and you can get set up in about 2o minutes.  In my experience talking with business owners, most of the business owners who end up using PayPal have never had their own merchant account and have nothing to compare it to.  When PayPal is telling you on their website that their rates are affordable, why wouldn’t you believe them?

Let me show you the pricing PayPal shows you at first:

If you’ve never seen the pricing for your own merchant account, these rates look pretty good.  But what type of transactions are they for?  What are they compared to?  This pricing is only to accept payments online without the ability to process anything manually.  The slightly more diligent people will notice the “virtual terminal” link below it and will see this:

These rates are for the use of a “virtual terminal” which will allow you to process credit card transactions manually online.  The “small fees” that PayPal charge are more expensive than most other gateway providers out there; even those that outsource and white label their gateway.  For example,  I will never charge more than $15.00/month for access to my PCI compliant gateway platform versus PayPal who charge $30.00/month for their gateway.

Keep in mind, if you have any opportunity to see your customers face-to-face, regardless of frequency, you should definitely use a physical terminal.  That’s of course considering you want to pay lower rates. You will ALWAYS pay less when you swipe vs. keying in your transaction.

—

Here are a couple things that affect the rates that you pay:

1. Security of the transaction: For example, pin-based debit transactions are the most secure because the customer is present, you are able to swipe their card and the customer is punching in a four digit security code that only they should know.  It is the only type of transaction in which it’s impossible for a customer to “charge back” a transaction and therefore it is the most secure.  A more secure transaction means there is less risk for everyone involved and that translates into a lower rate.

2. How you choose to process the transaction: This has a direct correlation with #1 because the way in which the way you choose to process your transactions have a direct effect on the risks associated.   This is the reason why MOTO (Mail Order/Telephone order) and keyed-in rates are ALWAYS higher.  The customer is never present, the card is not present to swipe and there is no verification that you are doing business with the actual card holder.  Have you ever signed for a transaction using your debit card?  Those merchants are basically asking to pay a higher rate by not putting the pin pad into your hands to enter your four digit code.

—

When using PayPal, you are ALWAYS paying a flat MOTO/keyed-in rate of 2.9% if you process less than $3,000 per month.  When you have your own merchant account, base costs on MOTO rates start at 1.75% up to 2.95% based on the type of card your customer chooses to use.

Keep in mind, the pricing that you have is usually controlled by your sales representative.  You’ll want to make sure you are working with someone reputable and someone you can trust.  I am probably stating the obvious here but I just want you to be careful.  These days you can use social media (to a certain extent) to do research and keep tabs on your merchant services account manager.

Here are a few points that I’ve found in my research online about the good and bad of using PayPal over having your own merchant account.

The Good:

1. No credit check.  Having your own merchant account will require you to be subject to a credit check.

2. You can set up an account to be set up and processing within 20 minutes vs. 24-48hrs when setting your own merchant account.

3. No monthly gateway access fees if you are taking payments online through your website.

4. No cancellation fees which can possibly cost you hundreds of dollars if you need to cancel out of an existing contract with a merchant service provider.

The Bad:

1. PayPal is not a bank and they do not need to follow federal banking regulations.

2. Your funds are not directly deposited into your business checking account (which you control) and are instead deposited to a PayPal account (which they control)

3. Your account can be frozen for any reason and the money can be held for months on end with not much you can do.

4. PayPal charges a high flat rate percentage.  You’re basically paying for a Non-Qualified transaction regardless of the card type your customers use.  (e.g. You’ll be charged 2.9% for accepting a debit card through PayPal)

5. Loss of direct sales for those consumers who are not comfortable using PayPal or signing up for a PayPal account for the sole purpose of purchasing your product or service.

You can read all kinds of horror stories using PayPal along with a few good ones online. Google it!

So is having your own merchant account better than using PayPal?  I would have to say a resounding YES!  Having your own merchant account is a knock-out win for your business.  If you’re planning to still be operating 12 months from now, the commitment of the one year contract to have your own merchant account is very minimal.  If you operate a small business as a side project or don’t plan to process credit cards regularly, then OK, maybe PayPal is the answer for you.

But other than that, you will always pay lower rates, have more control of your money and (hopefully) have an account manager you can count on with your own merchant account.  The small underlying monthly costs of maintaining your own merchant account will pay you back tenfold in the saving you will see.  Just make sure you are working with someone who knows their stuff.

Please feel free to leave comments or ask questions!

Tags | Credit Card Processing, eCommerce, Merchant Account, Merchant Services, MerchantJuice.com, Orange County, PayPal, paypal vs. merchant account, small business, Social Media, virtual gateway