|Many people ask us how we compare to PayPal. The short answer is – we don’t! We are a Merchant Services Provider (MSP) that provides Merchant Accounts. PayPal is not a merchant services provider. They are a third-party processor known as a Payment Service Provider (PSP) or also known as a “merchant aggregator” that places all merchants into one large merchant account. This common practice is also used by other PSPs such as Square and Stripe. In a basic explanation, your payment processing is lumped in with the other millions of PayPal merchants. A merchant account involves a detailed underwriting of your business before you are set up with a true merchant account and a Unique Merchant Identification number. While account aggregation is completely legal, working with a PSP instead of a MSP tends to lead to a higher risk for merchants who might see their funds held/delayed or even terminated.
Why PayPal Merchants Are At Risk Of Held Funds
PayPal doesn’t spend much time vetting merchant applications. You merely supply some basic information to verify your business ownership. There is no assessment of your business history or even a background check of the owners. Instead, PayPal scrutinizes your transactions when you begin accepting payments by using machine learning and complex algorithms that will flag any transaction that could be fraudulent based upon past history of other merchant transactions. Since the decisions are made by computers instead of humans, PayPal’s system doesn’t completely stop fraud and sometimes will flag a legitimate transaction as suspicious which will cause a delay in receiving the funds. In the very worst-case scenario, PayPal may terminate a merchant’s account without any notice for transactions it deems fraudulent or potentially fraudulent. Funds can be held for up to 6 months.
Additional PayPal Risks
Many merchants have switched to Chosen Payments simply because they have trouble getting answers from PayPal about why a specific transaction has been held because the decision to hold is made by computers (machine learning artificial intelligence) rather than humans.
What Is A Merchant Account?
A merchant account is unique to your business. A merchant application goes through an intense underwriting review that looks at your industry, your previous processing history, personal credit, business creditworthiness and other factors. In theory, having a merchant account translates into higher stability. The processing rates, contract terms and the quality of customer support varies by processor but will almost always be better than an aggregator can or will provide. The best support we offer at Chosen Payments is a dedicated account representative who is your single point of contact.
How PayPal Compares To MSP’s
Let’s compare services offered by PayPal with the services offered by Merchant Service Providers:
With a true merchant account, you might get an integrated eCommerce package with a low monthly fee. To accept online payments, you need a payment gateway along with a shopping cart or eCommerce plugin. Gateways vary in compatibility. Authorize.net is a well-known, recognizable, gateway that is compatible with almost everything and fairly affordable. PayPal offers its own gateway called PayFlow, which comes bundled with a PayPal Business account. In fact, you can also use PayFlow as your gateway even if you’re not using PayPal as your payment processor. Online transactions are considered “card not present” and PayPal charges 2.9% + $0.30 per transaction. With a true MSP, your rates will vary according to the type of card used for payment.
Point of Sale systems and software may very well affect your choice of credit card processors.
PayPal does offer a great mobile processing option called PayPal Here. While it lacks many full-featured options on the market, it’s is effective for mobile transactions and has a simple fee of 2.7% per swipe with no additional fees. By comparison, Chosen Payments uses a mobile solution called Clover Go. Using Clover Go offers rates more comparable to your standard rates which can be as low as 1.510%.
PayPal Merchant Fees vs. MSP Fees
The number one question we hear is, “what are your rates”. This is a question that we can’t answer because it is dependent upon the credit card presented by your customer. However, for PayPal, the rates are very clear. Online transactions cost 2.9% + $0.30, Swiped transactions are 2.7%, manually keyed transactions are 3.5% + $0.15 and invoices are 2.9% + $0.30.
Let’s compare those fees to a true MSP like Chosen Payments. Let’s say a customer is paying $500 and the transaction is done in person using a Visa Retail CPS card:
PayPal Fee Chosen Payments Fee
Transaction Amount $500 $13.50 $7.55
You can see that it costs nearly $6 more to process this transaction with PayPal.
The Interchange-plus method that Chosen Payments uses is the gold standard for processing rates because it’s very transparent. An MSP that uses the interchange-plus method charges the interchange fee assessed by the card brands (it is the exact same for ALL credit card processors) and then add a markup fee that might be based on a percentage of the transaction or sometimes a flat per-transaction fee. Interchange plus is the easiest pricing schedule to compare.