PayPal versus Merchant Credit Card Processors

If you have a business and you want to be able to take charge cards, you usually need something called a Credit Card Merchant Account. They're offered by everybody and their brother, or so it seems, and the terms vary widely.

There are a few key parameters you need to focus on:

1) the "discount rate" and "transaction fee"
2) the "monthly minimum"
3) the "monthly processing fee"
4) what cards you can accept
5) other up-front fees

The Discount rate you pay on your merchant account is somewhat of a misnomer. Basically, it's how much they "discount" the amount they deposit into your account for each charge.

That is, if your discount rate is 5% and someone purchases something for $100, they'll deposit $95 into your account -- $100 minus a 5% discount.

The "Transaction Fee" is how much they'll charge you on a "per transaction" basis.

I've seen this is anywhere from $0.10 to $1.00, but it's often around a quarter.

The monthly minimum is how much they'll charge you every month for the privilege of keeping your merchant account open.

They subtract your other fees from it, and if you don't exceed this amount, they charge you the difference.

I've seen these vary from $10 to over $100.

The monthly processing fee is what they charge you to send you a bill every month.

I've seen them vary from "free" to $50.

Everybody lets you accept VISA and MASTERCARD branded cards.

If you want to accept American Express, Discover, Carte Blanche, Diner's Club, and others, they usually require a separate application. They often have their own independent terms and fees that will apply.

Most Merchant Credit Card Processing outfits will require you to purchase some kind of "terminal" or "gateway".

If you're a retail merchant, they'll usually require you to purchase a Zon terminal, or whatever other equipment they're offering. These things cost anywhere from $500 to $1500. You can get 'em really cheap or free on eBay, garage sales, business auctions, and elsewhere. However, these leeches will charge you an additional fee to "reprogram" a "used" terminal that's usually about the same as what a new terminal will cost you.

If you're doing business online or via phone, they'll want you to purchase a piece of software that runs on your computer and emulates a Zon terminal. The cost is about the same as the terminal, and it usually uses your modem and requires a separate phone line. There's nothing convenient about it. Again, you can find this software around, but they charge a fee to "reprogram" it, whatever that means.

If you're doing business exclusively on the web, then you'll need a "gateway" script. Guess what? They'll charge you a few hundred bucks just for that! They'll insist you MUST buy it through THEIR VENDOR.

In other words, they've got you coming and going. If you can sign up for a merchant account for under $1000 out-of-pocket, consider yourself lucky!

The "benefits" someone might enjoy from their particular merchant account might have been limited to one bank in one part of one city during one particular promotion. They may have been negotiated by you through a friend. Maybe they're part of a special offer from your Chamber of Commerce. Or AARP. Or some other mechanism that is not easily accesible to others.

I talked to a guy recently who bragged to me that he has a merchant account with 0.8% discount, $10 monthly minimum, and $0.25/transaction -- for unlimited phone or online sales. That's an INCREDIBLE deal! I called his merchant guys and found out it was a special promo deal he got just before his bank was bought out by a larger bank, and his terms would be ending in a few months (he didn't even know that!).

I was at a presentation once where they were offering a deal for two years of hosting and web support for an "eCommerce site", for only $4000. Oh, and you needed a merchant credit card account to take payments. They conveniently were also offering a deal for only $85/mo on a 2-year contract, with no application fee, guaranteed acceptance, and no "gateway script fee" if you signed up for it along with your $4000 eCommerce site. YIKES!

What most people don't understand is that the terms on merchant charge accounts are completely unregulated and vary often by the hour, the sales person, the merchant, the bank, and sometimes even the weather.

Several years ago I shopped around and was specifically looking for a merchant account that did not have an annual service contract. It took a while, but I finally found one. Six months after getting it, guess what? I got a notice in the mail saying my account was being converted to an annual contract. A few months later, I got a notice saying my discount rate was doubling, as well as my per-transaction fees. And the fees for phone and online orders were limited to $500/week.

These are the kinds of games merchant processors play -- ALL THE TIME! Most high-volume retailers just ignore them, figuring their just another cost of doing business.

So while it's nice that somebody SPECIFICALLY might have gotten some really great terms and has a happy relationship with their merchant credit card processor, in general, PayPal will beat the terms and flexibility of the average merchant processor over 80% of the time.

For example:

* PayPal does NOT require a credit check to establish an account
* PayPal does NOT require any kind of long-term service contract
* PayPal does NOT charge a non-refundable "application fee"
* PayPal does NOT pay commissions to resellers for setting up accounts
* PayPal does NOT require you to have any kind of "terminal" or "gateway". Email, web, or web-phone is fine.
* PayPal does NOT require you to have a separate business account, although it's highly recommended (Merchant processors DO require it)
* PayPal does NOT base your discount rate in any way on your credit score or financial condition
* PayPal does NOT change their discount rate arbitrarily
* PayPal does NOT charge a differential based on whether people pay in person, on the phone, or online
* PayPal does NOT have weird policies that let them arbitrarily change the terms of one merchant or a small group of merchants -- their policies affect ALL PayPal users uniformly

PayPal DOES give you a Debit card to access the funds in your account.
PayPal DOES let you access your account easily from anywhere in the world.
PayPal DOES let you set up any number of addresses, bank accounts, and credit cards that you want to attach to your account.

Finally, virtually ANYBODY can get a PayPal account and be taking payments online, over the phone, or via several other channels, within minutes (varies with country of residence). There's no setup cost, and the per-transaction fees are around 3% -- less than MOST merchant processors charge for online and phone transactions.

If you want to be able to manage affiliate payments, and you do NOT want to use PayPal on your site, but prefer to use your merchant credit card account for payment processing, then you'll have to:

1) collect all of the payments;
2) disburse them out to your affiliates (via checks?) in a few weeks or months.

You'll also have to get SSNs from all of your affiliates and send out 1099's at the end of the year.

And if you happen to get a surge of sales or a few charge-backs, your merchant processor might well freeze up your account, preventing you from accessing your funds for 180 days.

OTOH, using a script like Rapid Action Profits (RAP) for affiliate sales with PayPal, then ...

* the funds deposited into your account are 100% YOUR FUNDS.
* your affiliates get paid IMMEDIATELY and DIRECTLY to their own PayPal accounts
* affiliates do not have to wait to get paid
* people can NOT buy through their own affiliate links, like with Clickbank
* you do NOT have to get SSNs for your affiliates.
* you do NOT have to send out 1099s.
* you do NOT have to risk affiliate funds being locked if your PayPal account is frozen for some reason; and
* you do NOT have to worry about your "discount rate" increasing if your credit score drops for some reason -- or just because the bank needs to increase their profits.

Finaly, PayPal DOES accept ALL major credit cards and brands from your customers without requiring separate applications or credit checks.

Personally, for an extra 1% cost, the flexibility of PayPal and reduced risk it offers over a regular merchant charge account is just a no-brainer in my book.

But hey, that's just my own personal opinion. If saving 1% is worth the additional risk and aggravation to use a regular merchant account, then who am I to say there's something wrong with that.

For people who already have a Merchant Credit Card Processor with great terms, Good Luck!

For everybody else ... there's PayPal and Rapid Action Profits (RAP).