Accepting Credit cards directly vs. Payment systems like PayPal

Merchant Accounts

Business models have been radically changed by the Internet and other related technologies. No one can attest to this more than those businesses which sell their products and services online. Due to different nature of such businesses, they also need to adjust various aspects of their operations. One of the key aspects which has to be changed is the payment system.

In order to transact business online, one has to have a way to accept credit card payments. One of the most common ways to do this is to open a merchant account. A merchant account is basically a bank account meant to be used for commercial purposes. More so, this type of account allows the seller, or the merchant, to process credit card payments online. More than credit cards, however, merchant accounts give the seller other options when it comes to online payment. Other cards such as gift cards and debit cards can also be processed, depending on the nature of the merchant account.

How does one apply for a merchant account? A business has to apply for an account in a merchant bank or a Merchant Service Provider (MSP). A business has to have relatively good credit in order for the application to be approved. Merchant accounts do not come free of charge. In fact, there are a variety of fees involved, depending on the business and the nature of the account applied for.

Alternative Payment Systems

Merchant accounts are not the only means of accepting credit card payments online. There are other alternative payment systems available today, one of the most popular is Paypal. How do these alternative payment systems differ from merchant accounts?

The basic idea is the same – for the business to be able to accept credit cards as a payment option. However, third party credit card processing systems, as these alternative modes of payment are also called, bypasses the requirements of opening a merchant account. Instead, a business can actually sign up with the third party processor, such as Paypal, and be approved to accept payments within minutes. More so, with third party processors, they do not charge high signing up fees and if they do, they are relatively low. So how do they earn money off the business? They normally charge a percentage of your sales which they transact.

Though Paypal is perhaps the most popular alternative payment system, there are other third party processors which operate across many countries. Some of the best known and reliable include iBill, ClickBank, Verza, and Web-Accept. These third party processors either provide free set up or charge no more than $50. They also do not charge monthly fees but charge a fee for each transaction instead.

A Comparison of Merchant Accounts and Alternative Payment Systems

Knowing the basic differences between merchant accounts and alternative payment systems, which one would be better for your business? The answer is not so clear cut as it really depends on your needs and your capabilities. Each method has its own pros and cons.

Merchant accounts are more direct – doing without the middle man which is the third party processor. However, they do cost a considerable amount of money due to monthly fees and other charges. This is a deterrent for small business which may not have large amounts of sales each month. For merchant accounts, a business would have to pay a minimum fee even if sales amount to zero in a month. However, if the business is large enough and has big sales each month, merchant accounts are much better. The fees would then be offset by the amount of sales made.

Alternative payment systems, on the other hand, are perfect for small businesses as they do not have a fixed fee so you only have to pay in proportion to your sales. However, as sales continue to increase, the percentage that you have to pay third party processors will also increase, maybe to a point which is not cost effective anymore. At this point, you may want to consider opening a merchant account.

The bottom line is to know your options and your needs. Once you are clear with regard to these, then you should be able to make an informed decision.