Do I need Paypal or a Merchant Account?

The Paypal vs Merchant Account is a frequent conversation I have with clients, especially those who are new to owning their own business.

The conversations I had with clients 5-10 years ago are significantly different than conversations I have with clients today.  While even three years ago, the gap between using Paypal and a traditional merchant account to collect money from customers were vast. 

I used to advise clients that if they ONLY wanted to collect money from clients via the web, then Paypal was the way to go.  However, if they wanted to be able to process credit card transactions offline, then a merchant account was the way to go.  However, Paypal has changed and now offers a Virtual Terminal for clients and that changes EVERYTHING for merchants.

Here are the basics:

You need either a merchant’s account OR a Paypal business account to accept payments via credit card.  

According to Wikipedia: 

"A merchant account allows a business to accept credit cards, debit cards, gift cards and other forms of payment cards. This is also widely known as payment processing or credit card processing.

Merchants, or business owners who receive credit card payment for their goods or services, must first apply for a merchant account typically through a merchant bank or MSP (Merchant Service Provider). The merchant account will typically be established based on several factors. Merchants who own businesses with poor or no credit may find it difficult to establish a merchant account through traditional routes. 

WIth a traditional Merchant Account, you pay a monthly fee in addition to paying a % of each transaction.  The percentage paid is dependent upon a variety of factors, including the type of transaction AND your business’ credit score.

Paypal CAN act as your merchant account.

Paypal’s fees are constant.  Your personal credit history does not factor into the equation with Paypal.  It’s also not only free to sign up, but you only pay a fee when someone sends you money via Paypal.  Unlike a traditional Merchant Account, you only pay for Paypal’s services when someone sends you money via Paypal. Combine this with the fact that people tend to spend their Paypal account balances more freely than other sources, and you may find that Paypal is a GREAT option for your business.

In the past, if you used Paypal you had to rely upon the end user to start and complete the transaction.  The only way to collect money via Paypal was via the web.  That meant creating and picking up code and inserting it into a web page.  If you do most of your business via the web, then Paypal is a WONDERFUL way to accept payment via the web.

Another reason to use Paypal is customers feel more secure.  See, when someone pays you via Paypal, their personal payment information is never revealed to you, the merchant.  PayPal allows anyone to pay in any way they prefer, including through credit cards, bank accounts, buyer credit or account balances, without sharing financial information.

However, one of the BIGGEST drawbacks to Paypal (prior to their introduction of the Virtual Terminal) was that the BEST way to use Paypal was to embedd a button into a web page.  Oops!  That usually meant either contacting your web developer OR learning to insert the bit of code into your web pages on your own.


With the Paypal Virtual Terminal:

  1. Customer orders by phone, fax, or mail with credit card.
  2. You enter order into Virtual Terminal.
  3. PayPal processes the transaction and you get paid.

If you want to do business via the web, then learning to use Paypal is an essential skill.  I’m currently developing video tutorials to walk you through the process.  Contact me if you want to be notified of when these videos will be available.


  1. H Hendrson says:

    Regardless which one you are using, you need to be aware that you can get into trouble if you have too many customers that chargeback payments. It is one of the ares that seems to be neglected by the merchant account processors when instructing a new client. Once an account has been flagged it is rough to get things back on track.
    You bring out some good points about the use of both systems for card transactions. Keep up the good work.

  2. Mark Ostrye, Pilot (Ret) says:

    Great PayPal help here. Thanks. Just a note of caution about online transactions. Be careful these days as I took a “free trial” of a physical product to get a free software program I needed. I missed the VERY fine print that after 15 days I’d be charged over $300. I offered to mail the product back but the company refused and a credit card charge-back/refund was not available because I CLICKED the link (with the associated pages of fine print) that said “I agree…”

  3. Mark,

    Sorry to hear you got “bitten” by the fine print. I personally HATE the whole “gotcha” mentality of sales/marketing and I think the state of social media is making the practice of “gotcha” marketing more dangerous than ever. There was a time when such trickery might be tolerated – but that time has passed. Today there are WAY too many ways for your to warn others quickly and easily online.

  4. Paypal is ONLY ideal for amazon.

    Paypal is an oversimplified version of a merchants account. Everyone knows that, whenever you have something oversimplified you pay for it! It’s like filing out your tax returns on your own. Knowing that you can hire, a professional, someone who knows all about taxes to fill them out for you. Essentially gaining you more money.

    Paypal’s only consistency is high rates and fees. It would be smart to have a merchants account that will get you the lowest rates possible.

  5. Compare and Contrast.
    It would be wise to check the reputation of different processors.
    See what they thrive on, what they are weak at, and how that compares to Paypal. I’m sure most of you would be in for a shocking surprise.