Paypal is a valid option for many small business owners - especially e-commerce. For an actual storefront that performs face-to-face transactions, the only reason to use this type of service would be if the merchant in question does very, very, very few transactions or is unable to receive approval (for credit history reasons) to have their own merchant account.
Like any other aspect of your business, though, it needs to be reviewed on a case by case basis. For a very small business, the difference in the one time costs of setting up a personal merchant processing solution when compared to PayPal's free setup can be the single most important factor. For businesses that don't have issues with capital and are able to build for the long haul, a merchant account is quite often the better option. Factors such as rates, fees, annual transaction amount, average transaction amount, services, support, security, etc., must be considered for every merchant. It is important to note that no single processor is the best choice for every business, but every business has a processor who is its best choice.
Visa and MasterCard, the card associations, receive the majority of the fees that merchants pay for their processing services. The remainder of the fees, or the margin, is what the merchant processor receives. The card associations have designated over 240 different card categories that each merchant processor must recognize and process. Every merchant processor, no matter how big or small, is charged the same rates and fees by the card associations and every merchant processor differentiates each card category utilizing exactly the same card category name as designated by the card associations.
The card categories are designated in the following manner:
1.) Industry – Retail, Restaurant, Hotel, Government, Utility, Service Industry, Gas Station, Supermarket, etc.
2.) Type of Card – Personal Visa or MasterCard, Visa or MasterCard Debit, Visa Rewards, MasterCard World, Commercial Visa, Corporate MasterCard, etc.
3.) Method of Processing – Face-to-Face (swipe), Mail Order/Telephone Order, Key Entered, E-Commerce, etc.
4.) Processing Efficiency – Address Verification, Authorization/Settle Match, Timeliness of Settlement, etc.
These categories are as diverse as they seem. If a cardholder uses the same card to buy something from a retail establishment, lunch at a restaurant and pay their electric bill, all three of these transactions will be designated as a separate card and rate category. If a retail establishment accepts two different types of cards (ex. - a Visa Debit Card and a Visa Rewards Card) for a purchase of the exact same amount, both of these transactions will be designated as a separate card and rate category. The same is true for a Face-to-Face transaction as opposed to a telephone order. Furthermore, if a merchant does take a telephone order and doesn’t enter the required cardholder information, the transaction will be downgraded to a higher priced card and rate category than a properly executed telephone order.
So what does all of this mean to merchants?
For many merchants, the hardest thing to do is accept the fact that the merchant processing system, to some extent, simply is what it is. There really are that many card categories. There really are that many different rates and fees. Your merchant processor deals with and manages this system – they do not have the power to change it. Any merchant processor who claims to be dealing with a better, cheaper or more advantageous system than other processors isn’t being honest.
Sure, some merchant processors offer a simplified statement format with bundled categories, but only to keep from disclosing individual rates. The simpler the statement format the less a merchant knows about what their true credit card processing costs are or should be. A simple statement also makes it very difficult to perform an accurate comparison to other programs. For many merchant processors, their most successful customer retention tool is their customer’s complete inability to understand their services.
Every merchant should insist that their merchant processor identify and define the rate category of every type of card they receive so that there is a better understanding of what fees are being paid, why the fees are paid, whether their processing can be done more efficiently and if their processor offers truly competitive services. Any processor that will not assist a merchant in achieving these goals either has something to hide or is not able to offer the services that any customer has the right to expect.
So what does this have to do with PayPal?
PayPal offers a single rate to its customers that may or may not be competitive depending on your processing criteria. Although they have the same rate and fee considerations to contend with as any merchant processor does, they do not distinguish between these categories when they pass these fees along to their customers. Obviously, they decide on rates that will allow them to profit. They're a business, they're out to make a profit and there's nothing wrong with that. What it means, though, is that the rates they assess their customers may or may not be competitive depending on the specific circumstances of each business. What it also means is that each PayPal customer is unable to fairly compare the full scope of their processing costs using PayPal's statement information because the information is not detailed to the extent it needs to be to do a fair comparison.
One example of how difficult it is to perform an accurate comparison comes from PayPal's own website. At https://www.paypal.com/cgi-bin/websc...fee-calculator
, Paypal offers a simplified price comparison tool for prospective customers. This tool uses two specific rate categories to compare Visa and MasterCard transactions, "Discount Rate" and "Rate for Interchange Downgrade Transactions". The "Rate for Interchange Downgrade Transactions" is autopopulated at 0.6% higher than the "Discount rate" - an extremely uncompetitive assumption. If this rate is changed to a more reasonable difference the rate is automatically changed back to the 0.6% difference when the user presses the calculate option. Also, lower priced debit cards are not factored into the equation. Basically, an uninformed user is comparing PayPal costs to what PAYPAL SAYS the competitors will charge for similar services.
Lastly, Paypal takes on some of the responsibilities and revokes some of the rights that a merchant would have with their own merchant account. A good example of this is a quote from the article that Linda referred to earlier in this posting:
"Though, PayPal has loss rate of less than 0.5% which is remarkably down when compared with Master Card or Visa, PayPal has good number of critics as well. Major reason for the grouse is that with PayPal you lose your rights under consumer protection laws. PayPal would not allow you to issue charge back in case any unauthorized activity happens from your credit card or PayPal account. They also complain that PayPal has inserted a term to take funds form your bank account to ensure a recovery against you.
Worst charge against it is that if someone pays you with a stolen credit card, your account is immediately flagged as being "criminal behavior" and any money in that account is confiscated!
In fact in a lengthy public trial, PayPal opted to settle out of court and pay $9.25 million and walk away from the entire allegation as it feared that judgment may force it to change its questionable practices."
What information like this means to any individual merchant depends on the characteristics of each merchant. There are dozens, maybe hundreds, of things to consider when deciding how to process transactions. Be sure not to make your decision on what works for someone else, but on what you find will work the best for you and your business.