Pros & Cons of PayPal vs Merchant Account

PayPal offers a number of benefits, but it should never be used in place of a traditional merchant account—especially if you run a growing or established business. In order to understand why, you have to recognise:

How PayPal differs from traditional merchant accounts
The limitations of using PayPal to accept payments
The potential risks of using PayPal as a primary processor
The unique benefits of establishing your own merchant account

PayPal can work well as a supplementary payment option for your customers, but there are numerous reasons why you should invest in complete merchant services.

Is PayPal Considered a Merchant Account?

PayPal is not a merchant account in the traditional sense. It’s a merchant aggregator, meaning that all of its members share a single merchant ID rather than being issued their own unique IDs. When you buy or sell on PayPal, you’re using the same ID shared by millions of other members.

PayPal is able to do this because they’re extremely diligent about mitigating their risk. Ethical businesses remain in good standing while problematic businesses are quickly frozen, investigated, and in some cases banned.

What Is the Difference Between Transactions With a Merchant Account and Transactions on PayPal?

When a customer completes a PayPal transaction, PayPal acts as a middleman. You have no connection to the processing bank whatsoever. PayPal completes the transaction using its own payment gateway, and the funds are stored in your PayPal account until you decide to re-allocate them or transfer them to your bank account (a process that can take up to a week).

A merchant account works very similarly, but with some important distinctions. As with PayPal, your transactions are processed through a secure payment gateway and stored in your merchant account before being transferred to your bank account (usually within 2 business days).

But with a merchant account:

You have your own unique merchant ID that’s exclusive to your business.
You have a direct line to the processing bank, and you are accountable for following the bank’s guidelines and stipulations.
You have the ability to accept credit cards on your website and under your own name; your customers don’t have to log in to a separate account or visit a separate payment processing site to complete their purchase.
You have complete control over your customers’ checkout experience.
Your account isn’t automatically frozen because of fraud or suspicious activity; if you’re a merchant in good standing, you can appeal and mitigate fraud and take steps to secure your store without any risk to your existing funds.

Why Merchants Choose PayPal

For hobbyists who sell goods on the side, it’s easy to see why PayPal is a preferred choice. They don’t have the funds or the infrastructure to justify their own merchant account. They don’t need multi-currency capabilities or a customised checkout process. They just need a simple way to collect funds.

PayPal appeals to small-scale businesses in particular because:

It’s free to set up
There’s no approval or vetting process
There are no monthly fees (only transaction fees)
Anyone can use it
It’s all-inclusive (the merchant services, payment processing, and payment gateway are all bundled together)

This all sounds fantastic, and it is if you’re just selling the occasional homemade craft or listing the occasional eBay auction. But the bigger your business gets, the more of a disadvantage PayPal becomes. Even small businesses need to exercise extreme caution with this payment processor.

Why PayPal Is a Bad Choice for Serious Merchants

The features that make PayPal a winner among hobbyists are the same features that can sink serious businesses. For instance:

The cost

PayPal bills itself as a low-cost merchant solution, and it is if you’re just selling the occasional item on the side. But full-time businesses can score much better rates with their own merchant account.

Consider that PayPal charges 2.90% + a fixed fee (depending on the currency) for commercial transactions. Some merchant providers, on the other hand, have rates as low as 1%. So if you sell full-time, you can save a fortune by switching to your own merchant account.

The risk

As a merchant aggregator, PayPal assumes all of the risk associated with extending merchant services to unvetted merchants. As a result, they take a strict zero-tolerance approach to suspicious behaviour. If they detect any hint of problematic activity, your account may be frozen without warning—along with all of the funds in that account. With your own merchant ID, you don’t have to worry about that.

For example, let’s say that a customer initiates a chargeback (requests a refund directly from their bank). This is extremely common and largely unavoidable. If you have a PayPal account, PayPal may interpret the chargeback as potential fraud and freeze your account. If you have your own merchant ID, you’ll receive a notification of the chargeback along with the opportunity to appeal. Too many chargebacks may jeopardise your account, but you never have to worry about your funds being frozen—especially over isolated incidents.

Your obligations as a merchant

Once your business achieves a certain level of success, you’ll have no choice but to switch from PayPal to a traditional merchant account. Major credit card companies like Visa and Mastercard require all high-volume merchants to establish their own unique merchant ID. So if your business has already surpassed or is close to surpassing £100,000 in sales, you’ll need to get your own ID.

Note that the credit card companies consistently monitor merchant aggregators like Stripe and PayPal, so if you’re processing a lot of revenue, they’ll find you sooner or later. And you don’t want your PayPal account to be suddenly frozen because you’re in violation of Visa’s guidelines.

The Benefits of Establishing a Merchant Account

The following are just some of the benefits of having your own merchant ID and account:

Legitimacy. When customers are able to check out entirely on your website without any third-party payment processors, it lends trust and legitimacy to your business. It’s also far more convenient for customers.
A safety net. Most merchant providers look at your credit score and your business model to assess your level of risk and customise your merchant services accordingly. Because of this, you don’t have to worry about being shut down because of a few suspicious transactions. Your merchant provider will work with you to help you remain in good standing.
Merchant tools. PayPal’s merchant tools are limited at best. But a reputable merchant services provider like Unicorn Payments will equip you with analytics tools, fraud prevention tools, chargeback mitigation tools, and much more.
Total customisation freedom. With your own merchant account, you can optimise your checkout process, build streamlined integrations with your accounting and CRM software, and bundle your payment processing with other valuable services like e-wallet tools. It’s completely tailored to your needs.
More payment options. While PayPal is now able to process payments from the major credit card companies, your options are still extremely limited. With an established merchant provider, you can accept dozens of currencies worldwide and also equip your website for alternative payment methods.
Total compliance. If you process a large amount of revenue, having your own merchant account isn’t just a good idea; it’s required. When you establish your own ID, you’re one step closer to remaining in good standing with the credit card companies.

Should You Use PayPal or a Merchant Account?

Ultimately, choosing the right solution is about assessing the needs of your business.

PayPal may be ideal if:

You’re collecting revenue for a hobby or a brand-new small business that isn’t fully fleshed out yet
Your business involves online gaming
You’re looking to supplement an existing merchant account in order to provide your customers with more payment options

A merchant account is ideal if:

You’re establishing or managing an ecommerce business
You need to process daily transactions from customers
Customers are abandoning their carts because your checkout process isn’t user-friendly
You’re ready to scale your business or you anticipate growth

For serious businesses, the choice is simple. While PayPal can make an excellent supplementary payment service, it should never be your primary merchant provider. Make sure to establish your own merchant ID so that you can take advantage of all the benefits.