Merchant Account vs. PayPal
I was doing some research recently for a non-profit that I’ve built a site for as to whether they should use a merchant account or PayPal for the donation and event registrations on their site. Which also has led me to let go of my Merchant Account, that I’ve had since 1996, and switch to PayPal Pro and PayPal Express.
I’ll save money!
Want to save money? I think we all do!
So I’d like to share with you my findings – then you can decide – should you drop your Merchant Account and go PayPal, or if you’re a newbie should you just use PayPal? – My answer for the latter is a big YES!
Let’s take a look at what just “some” of the fees that Merchant Accounts charge when you are selling online (note some fees will be different for you depending on your Merchant Account and Gateway):
The above is an example of the things you need to ask and calculate when using a Merchant Account on the Internet.
The Gateway MUST be capable with the cart and plugins you are using – the most popular gateway is Authorize.net
For some definitions and explanation of some of these fees I found this great site: http://www.merchant-account-services.org (Lots more on their site from what I’m quoting here)
Here are a few I’d like to quote for you from their site regarding Merchant Accounts:
The qualified rate is the lowest rate a merchant can pay for any transaction. To “qualify” for this rate the merchant must meet a set of criteria. The criteria will vary by style of account and type of business. For retail businesses, typically the merchant must swipe the credit card through their credit card terminal or POS system and answer all terminal prompts. For an Internet merchant this may mean capturing and verifying AVS and CVV. If a merchant fails to qualify their transaction they may pay a higher rate (see the section titled “Surcharges” below for more information).
The qualified rate is the fee most likely to be charged to the merchant and thus is the rate advertised by merchant account providers. Once again, this isn’t the only rate you may pay. It is just the most common.
Here’s an example of a qualified rate being applied to a transaction:
Transaction dollar amount: $35.00 Qualified rate: 1.69% + 25¢
(First calculate the percentage) 35 x 1.69% = 59¢
(Then add the transaction fee) 59¢ + 25¢ = 84¢
In the above example a merchant with a ticket of $35 would and qualified rate of 1.69% + 25¢ would pay 84¢ for that transaction. But what if their sale was for $65? Let’s see:
Transaction dollar amount: $65.00 Qualified rate: 1.69% + 25¢
(First calculate the percentage) 35 x 1.69% = $1.10
(Then add the transaction fee) $1.10 + 25¢ = $1.35
As you can see the cost for that transaction is larger than the transaction for only $35. This is due to the percentage rate (1.69%). As the transaction grows larger so does the amount of that transaction dedicated to their qualified rate. If their transaction was smaller than $35 their overall costs would be smaller as well.
A transaction fee is a flat fee charged each time a successful transaction is processed. This mean the transaction fee is not charged if a transaction is declined. Only an approved transaction will incur this fee. In the above examples the transaction fee was 25¢
An authorization fee is very similar to a transaction fee except this fee is charged with every transaction regardless of the results of the transaction. This includes declined transactions. Essentially each time your credit card terminal, POS software, or payment gateway communicates with your processing bank this fee is charged.
Transaction Fee vs Authorization Fee
So which fee am I being quoted? Good question. This will vary by merchant account provider so you need to ask which fee you are being quoted before you begin the application process.
One of the complexities in accepting credit cards is when a transaction does not qualify for the Qualified Rate. The rates and fees you pay can vary depending on not only the situation under which the transaction occurred, but the type of credit card plays a role as well. Some transactions, possibly through no fault of your own, may incur higher fees for various reasons. Why this happens can vary from provider-to-provider so we cannot provide you with a complete explanation. But you should learn enough below to ask the right questions and intelligently review and acquire a merchant account.
Monthly and Annual Fees
Besides the fees incurred directly for processing credit cards there are other fees associated with establishing and running a merchant account. These fees occur on a regularly scheduled basis and may be indirectly related to the merchant’s processing levels.
The statement fee covers the cost for creating a statement for the merchant each month that details the processing history for the previous month as well as a breakdown of the fees incurred from that month’s processing. It also typically includes the costs for customer service and technical support as well. However, some merchant account providers will separate their monthly fees for statements and customer service and tech support.
Most providers will not waive this fee even if you decline a paper statement being mailed to your business. This is because they still aggregate that data even if you don’t elect to receive it. Plus it also includes your customer service and tech support costs for the month.
Monthly Minimum Fee
The monthly minimum fee is a fee which guarantees the merchant will be paying a minimum amount each month in processing fees. If a merchant’s discount fees do not equal their monthly minimum fee they will be charged the difference between the two in addition to their discount fees.
A merchant has a discount rate of 2.50%, a monthly minimum of $25, and a monthly volume of $600. The discount fees for the month will be $15.00 (.025 x $600). Because their discount fees are less than their minimum fee ($15.00 < $25.00) they will be charged an additional $10.00 as a monthly minimum fee ($25.00 – $15.00).
So, what is the purpose of this fee? Merchant account providers and their sales agents make their money by taking a very small percentage of every sale a merchant processes. Naturally this can be very lucrative. But, if a merchant is very small, they won’t make very much money from them. So, to make up for this, they charge this monthly minimum fee. Then, when the merchant has a slow month, this fee is incurred and the merchant account provider still makes their profit from this merchant.
This fee is not required by Visa and MasterCard to have an account with them. Many processing companies offer merchant account with excellent rates without the monthly minimum fee. 2
Annual fees are exactly what their name implies. They are charged each year that the merchant has their merchant account through their current provider. Some merchant account providers charge this fee on the anniversary that the merchant account was established while others charge this fee on a set date each year. There are several different types of annual fee including membership fee and merchant club fees. Regardless of the name they all serve the same purpose. This is not a standard or common fee for establishing a merchant account.
Also remember if you want to add Discover and American Express – well they have their own fees too!
Mind blowing – uh?
These are a lot of fees for a start-up, non-profit, and yes, even for those that have been in business for awhile.
Now let’s look at PayPal:
While PayPal fees vary, depending on what “package” you choose for your business, there sure our a lot “less” of them!
PayPal also offers discounts for 501 3(c) organizations – you must prove this by providing them with your paperwork.
PayPal also offers a swipe to attach to a Smart Phone so you can process CC at live events. – And the Card Reader is FREE!
How to know which to choose?
Well first you could do the math!
However, I have a contact at PayPal, Jennifer Crain, Account Executive, that will, for free, do a cost comparison for you!
Did I mention for FREE!
If you are just starting out and/or wanting to save more money each month I highly recommend you phone Jennifer – directly – and she can do the comparison and “might” be able to give you a better % then what is advertised on the PayPal pages – I do not receive ANY compensation for referring her; however you might!
Here is Jennifer’s direct number, which is in AZ: 480-496-3268 – and please tell her Janet Hall sent you – as that “might” benefit YOU! Or email Jen
Oh and more and more people are using and trusting PayPal -I believe it is the #2 merchant processor; however if you’d like to see some statistics about PayPal check this out: http://www.statisticbrain.com/paypal-statistics/