When to use merchant account instead of PayPal?


I wonder when it makes more sense to open a merchant account and use a payment gateway instead of old plain PayPal option? This should depend on the revenue processed, because merchant account has higher setup costs, but lower operating costs. What is the breakeven figure for revenue? Are there any other factors to consider?


asked Oct 18 '09 at 15:41
Oleg Kokorin
459 points
  • Just as an additional thought, although I agree with @dlynton 100% (we are currently doing just what he is suggesting), merchant accounts (in the UK at least) have a non-percentage fee of like £0.30 for a debit card transaction (as opposed to a % fee for credit cards). This is ridiculously cheap if you are selling high value items and is worth considering as well. – Nikolay Piryankov 13 years ago

11 Answers


Unless I missed something, no one here has mentioned PayPal Pro. It's just like a merchant account - you get a virtual terminal and API to charge cards as your company name. Customers never know PayPal is involved. It costs $30/month and the transaction fees range from 1.9% to 2.9% + $0.30 USD. See https://www.paypal.com/cgi-bin/webscr?cmd=_wp-pro-overview-outside.

In my experience, PayPal Pro is the most cost-effective option for a merchant account, unless you're charging high volumes and can negotiate low fees with your merchant provider.

Most merchant companies will force you into a 2-3 year contract with high cancellation fees. You might pay as much as 5-6% on business cards. Monthly fees could exceed $70. Cardservice Int'l, the company I was using, charged $20/month just for a "customer service" fee.

My opinion, don't get a merchant account until you're making a lot of money, or unless you have problems with PayPal holding funds (I've never had that problem). And in some cases, PayPal Pro won't accept you. I think you need to collect your funds somewhere on your website (in a store or some other payment form). It's definitely the best value.

answered Nov 3 '09 at 15:05
1,057 points
  • +1 -- having gone both ways... – Jason 14 years ago
  • For the purpose of negotiating a better rate with a merchant account vs PayPal, what would you say qualifies as "a lot of money"? – Oleg Barshay 13 years ago


Generally speaking, if your customers are going to be paying with personal finances, I recommend sticking with PayPal. People are more apt to trust putting their credit card info into PayPal than your startup, and it's a pretty familiar process for many.

However, if you're targeting businesses, then I would highly recommend just going with a merchant account. Businesses where more than one person has purchasing power usually have multiple credit cards, but rarely have a good solution for sharing PayPal accounts. Paying from a PayPal balance can be a hassle from an accounting perspective as well. Businesses still have to trust you, but if it's a business-oriented product you probably already have to build their trust for them to rely on you for part of business operation (versus something consumer-oriented like a game).

This was a few years ago, but when I launched FormSpring, it was PayPal-only, and I received frequent complaints from businesses about the hassles of paying via PayPal. We switched completely to credit billing via merchant account, and it's been extremely rare that someone's wanted to pay via PayPal (almost all were individuals outside the US).

answered Oct 19 '09 at 00:45
Ade Olonoh
416 points
  • We sell tangible goods online and accept checks, credit cards, and PayPal. Thirty-eight percent of all orders use PayPal. I know we would lose customers if I dropped any of my payment options; I've asked customers. In fact, I want to add Google Checkout and Bill Me Later. – Clint 14 years ago
  • Ade is correct that without PayPal *Pro* -- just PayPal -- many business customers cannot use it. – Jason 14 years ago


Here's another factor to consider:

After you open a merchant account, you should keep PayPal as a payment option. Many people are familiar with PayPal and are comfortable having PayPal as intermediary. I often use PayPal even when a credit card is an option because I don't like to give out my credit card number if I can avoid it. Part of making it easy for your customers to do business with you is offering multiple methods of payment, so your customer can choose what fits their preferences. Consider, even though most credit cards insulate customers from fraudulent charges, many customers still like to guard their credit card numbers when going online. For that reason alone, PayPal remains a useful option.

answered Oct 18 '09 at 23:43
Chris W. Rea
688 points


The thing I like the most about handing the customer off to PayPal for payment is that if they are not an existing PayPal member, the default option is for a credit card payment with an option to create a PayPal account. The page they land on has the full credit card payment form right there.

If it were the opposite and they had to click through a PayPal solicitation in order to get to the CC form, I think that would be a deal-breaker for me.

Other factors:

  • The fact that I don't have to take their CC on my site is a win in my particular case. PCI compliance on a site I am responsible for is one of those things that would keep me awake at night.
  • The (relative) simplicity of dealing with one entity for payment processing.

Disclaimer: We haven't actually launched our shop yet (going live within a month or so), so take my words with a large grain of salt. If PayPal Standard turns out to be the wrong choice for some reason, I will absolutely switch us over to a traditional merchant account & payment gateway solution.

answered Oct 21 '09 at 03:40
2 Ghosts
71 points


The other advantage of using Paypal in online payment processing is that you don't need to worry about developing and adding a secure HTTP payment page to your application. Paypal has it, and if the customer CC number get stolen or there is any other security-related issue - Paypal is liable, not your application.

Paypal invested millions into providing secure payment infrustructure, and it's fair for them charging asking additional processing fees for this.

answered Oct 18 '09 at 22:52
Yakov Fain
221 points


PayPal is too closely associated with ebay in most consumers' minds. It makes a site seem amateur. It is appropriate for friendly companies selling $1.99 applications to add colorful frames around family photos. If you want to seem more professional than that, get a real merchant account.

answered Nov 1 '09 at 03:08
Joel Spolsky
13,482 points
  • But keep PayPal too. :-) – Chris W. Rea 14 years ago
  • Joel, you've been working at Fogbugz too long; you're mind is a bit foggy. Like I already mentioned, we accept checks, credit cards, and PayPal. Thirty-eight percent of all orders are PayPal (2% are checks). Our average order is $95.93. Our cart abandonment rate is less than 5%. When randomly asking PayPal customers in a follow-up email if they would have purchased if PayPal was not an option, I got a resounding NO from everyone. Ditching PayPal is bad for business. – Clint 14 years ago


All of the other answers give some points to consider, but why not just use both? Personally, I can't stand PayPal and avoid using it whenever possible. Honestly... I will spend more on a competing product/service just to avoid it. I would much rather give you, an unknown merchant, my credit card number (zero liability, etc).

A merchant account isn't that expensive, especially if you have the volume. I think our minimum fee is $15 and Authorize.Net charges like $12 or something. I suggest getting a few quotes, and then seeing if you can swallow the monthy fees.

answered Oct 19 '09 at 03:01
Alex Papadimoulis
5,901 points
  • Definitely go with Both options, as I am the complete opposite. If PayPal isn't an option, I probably won't pay or subscribe. – Ben Mc 14 years ago
  • Mathematically, there's an excellent argument for considering ditching one or the other, since you get a "bulk discount" for using either one more. However, Clint's comments should make such a practice a careful one to consider. – Casey 14 years ago


Like you say, it will depend on the fixed and operating costs (which will differ depending on your operating costs). Should be fairly easy to model in Excel.

Don't forget about the extra time and hassle involved in setting up a merchant account too. You'll also need a separate merchant account for Amex. Depending on how much history you've got, your bank might want some sort of deposit or personal guarantee.

answered Oct 18 '09 at 18:57
Neil Davidson
1,839 points


I would echo the advice of Ade/BasicallyMoney above.

There's been good description of the technical implications of using your own Merchant account and processor vs. PayPal, but the cost in bureaucratic paperwork and hoop-jumping has been largely overlooked.

I saw the establishment of a Merchant account with a bank as a small web startup turn into a laborious and long delayed process that ended up taking almost 2 months.

Also, although PayPal charges higher fees, it's a much more simple fee structure than the complex or convoluted rules you may encounter with a traditional merchant account across all of the different credit card account types. If accurately predicting/tracking fees is important, this can be a complex process.

answered Oct 21 '09 at 03:41
211 points


All the answers here have some merit. However I am a Merchant Services provider for small to medium sized businesses. I am also an entreprenuer with other business enterprises so I see both sides of the coin. Fact is a Merchant account is relatively inexpensive compared to paypal. Our company MCCS can set you up with a Virtual Terminal fully encripted and PCI Compliant for about $50.00. Monthly charges are about $20.00 including gateway like Authorize.net. Per transaction charges are 2.29% + $0.35. Paypal has $0 set up but its $30.00 per month and 3.10% +$0.45. So by going with paypal you could spend more in the first 2-3 months than it would cost to go with a merchant account. All systems MUST be PCI -DSS (Payment Card Industry - Data Security Standards)compliant by February 2010. No processing company is setting up anything that is not compliant, so no worries with security. But the fact still remains, if a hacker wants in they will find a way no matter if your paypal or anyone. just ask Heartland Payment Systems they got hacked in 2008 millions of cards were compromised.
The other thing is YOU DO NOT have to go through your bank for a merchant account. You can set that up with any company you want. Banks get a cut of the profits so you can save money by going with an independent ISO for a processing company such as myself (little plug!). Never sign a contract locking you into a 2-3 year term, nor any termination fee. Over 40% of your Gross Revenue will come by way of credit card and the fee expense is a direct hit to your profit margin. Set up with a good reputable merchant account you will be much more efficient and profitable. Email me at [email protected] and I will be glad to help you out!

answered Oct 19 '09 at 03:52
Rick Montgomery
12 points
  • -1 borderline spam. It would be worth mentioning that your 2.29% rate is for "qualified" cards, which basically no on uses. People like their bonus miles and cashback ("non-qualified" cards), and VISA/MC charge *you* in the upper 2's / lower 3's. So... are you eating that, or just trying to reel us in with your qual rate? – Alex Papadimoulis 14 years ago
  • And no corporate email account? – Jeff O 14 years ago
  • Alex makes a good point. I almost got screwed on this. I am in a 3-tier structure: qualified cards, mid-qual, and non-qual. The qualified discount rate is what is advertised and is usually very amazing, but most cards don't fit the bill and fall into mid-qual, which puts you around 3%, +/-1%. Non-qual transactions are usually 1% more than mid-qual and include AMEX, cards with limited verification (address mis-match, no CVV2, etc.), and some special rewards and business cards. – Clint 14 years ago


Your decision should be very customer driven and less cost or security driven. If you are a brand new business, customers may be more comfortable paying with PayPal but if you are more established, PayPal may make you look less professional. PayPal is the best for multi-currency. There's not going to be a major cost difference, especially if you start out with only Visa/MC on a merchant account.

answered Nov 1 '09 at 02:25
379 points
  • I highly disagree with this answer. Just two personal examples: I shop at GoDaddy and NewEgg often and I checkout with PayPal exclusively. These two companies are obviously well established. – Clint 14 years ago

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