With all of the negative comments floating around out there about PayPal, you might be lead to believe that PayPal is a bad choice for credit card processor for your business.
However, many of these complaints are based on myths that have no actual bearing in reality. By buying into these myths as truth, you may be unnecessarily eliminating an option for your business can could allow you to offer credit cards easily and affordably.
In this article, I’ll explore some of the more common myths about PayPal and determine which are true and which are not.
Myth: Buyers Must Have a PayPal Account
While it is easier to use PayPal if you have an account, it is not required.
On PayPal’s checkout page, buyers are given a choice to pay using their PayPal account, or by entering a credit card directly.
If your buyers don’t see this option, it is likely because you are using a personal PayPal account, rather than a business one. All business accounts will display the option for direct payment via a credit card, even the free business account option.
Myth: PayPal isn’t Professional
Five years ago, you might have been able to make this argument. However, as PayPal has led the way in modernizing online payments, it has gone much more mainstream. Where you used to only see amateurs using PayPal, now major retails are accepting PayPal in their online stores. Brands like: Best Buy, Barnes and Noble, Calving Klein, Columbia Sportswear, Fandango, GoDaddy, Netflix, Sears, Starbucks, Ralph Lauren, Petco, Office Max, Neiman Marcus, Nike, Land’s End, plus hundreds more. Many big box retailers — Office Depot and Home Depot, for example — now accept PayPal at the registers in their stores as well.
Myth: PayPal Always Finds in Favor of the Consumer in Disputes
PayPal offers buyers protection when you use your PayPal account to purchase items. If you are dissatisfied with your purchase and can’t reach a resolution with the merchant, you can file a complaint directly with PayPal.
While it is true that most of these complaints will be resolved in the favor of the consumer, there is a reason that isn’t due to PayPal’s bias.
Common causes for disputes include:
- Unauthorized Transaction: money is paid to you, but the owner of the account claims that he or she did not authorize the payment.
- Item Not Received: a buyer pays for an item but claims he or she did not receive it.
- Unresolved Customer Service Issues: other issues experienced by a buyer and taken to the merchant, but not resolved. These include things like software that doesn’t work or services that weren’t completed.
In all cases, it is up to the merchant to provide proof that the transaction was valid, the product or service was delivered as advertised, and a reasonable attempt was made to resolve any issues.
If the merchant cannot provide this proof, the case will be found in favor of the consumer.
This may seem unfair when you are the merchant in question, but consider what would happen if your credit card was stolen and used without your knowledge. You’d have no proof that you didn’t purchase that big screen TV that appeared on your statement, which is why the burden of proof falls on the merchant.
Merchants can take steps to improve their position in dispute resolutions:
Stay in touch with your buyers. If you can’t deliver on a particular order, email the customer and let them know. Additionally, the Resolution Center allows you to enter messages that all your buyers will see before they can open a dispute. For example, if you post a message that says, “All shipments out of Buffalo are currently delayed due to the blizzard,” you give your buyer an opportunity to understand the situation before filing a dispute.
Make your PayPal business name easy to recognize. Credit card statements don’t provide a wealth of information about transactions, so customers sometimes don’t recognize legitimate transactions. Make sure the name displayed in PayPal transactions is recognizable as originating from your website or business.
Keep good records. Just saying, “Hey, we tried to fix the problem” doesn’t have nearly as much weight as the trail of email from your customer service department outlining your good-faith attempts to resolve the issue with the customer.
If you sell physical goods, make sure you qualify for PayPal’s Seller Protection. If your sale meets certain criteria, you are protected from complaints of undeliverable goods AND unauthorized transactions.
Verdict: Partially True.
Myth: PayPal is Expensive
Financial institutions that offer merchant accounts, including PayPal, don’t actually process credit card transactions directly; they are only the middleman between your business and the card issuer. As a result, they pay a fee for each transaction that they process on your behalf.
The Visa USA Consumer Credit Interchange Reimbursement Fees schedule below outlines what financial institutions pay to process credit cards issued by Visa (each card issuer has it’s own schedule). These are the fees the institution pays, not you the merchant.
On the front of the Fees document, it states:
Merchants do not pay interchange reimbursement fees; merchants pay “merchant discount” to their financial institution. This is an important distinction, because merchants buy a variety of processing services from financial institutions; all these services may be included in their merchant discount rate, which is typically a percentage rate per transaction
I’ve highlighted the fee programs that are most likely to apply to businesses that would also consider PayPal as an option. Notice that the fees charged range from 1.51 to 2.4% plus 10 cents per transaction, depending on the type of VISA card used in the transaction.
Since PayPal charges 2.9% plus 30 cents per transaction, that leaves them with 0.05 to 1.39 % plus 20 cents of profit per transaction. That’s a pretty slim profit margin with which to provide all of the services PayPal offers its users.
What about merchant accounts providers who offer lower discount rates?
What PayPal charges for credit card processing is about what it costs to deliver the service. Therefore, when you find providers out there offering significantly lower discount fees, you need to read the fine print of your agreement because they are making up for that shortfall somewhere.
Fees that could be charged to you include, but are in no way limited to:
- Inactivity fees
- Chargeback fees
- Monthly fees
- Bank routing fees
- Statement fees
- Early termination fees
- Return fees
Contrast this to PayPal, where there are no extra fees.
The reality is that it is expensive to accept credit cards, no matter which card processor you choose. If you find PayPal’s fees difficult to afford, then maybe your business shouldn’t accept credit cards.
Verdict: False. PayPal is no more expensive than any other merchant account.
Myth: PayPal will Freeze Your Money
Correct, PayPal will freeze your money if your account shows unusual behavior, in particular, if the average dollar amount per transaction rises, or if the total number of transactions rises.
This is to protect consumers as well as credit card issuers from fraud. The policy is not in place to inconvenience or annoy business owners.
Think this won’t happen if you use a regular merchant account? You’d be dead wrong.
The paragraph below was taken direct from a merchant account agreement posted online. I did not edit it in any way.
Approved Monthly Sales Processing Volume Limit.
Bank, at its own discretion, may determine the Approved Monthly Sales Processing Volume Limit. If the Approved Monthly Sales Processing Volume Limit is different from the amount indicated in the Merchant Application, Bank will notify Merchant of the amount of the revised Approved Monthly Sales Processing Volume Limit. If the Monthly Sales Volume Limit is exceeded, Bank in its sole discretion, without limitation to its other rights, may: (a) Charge an over-limit fee; (b) Suspend processing Services; (c) Divert all funds from the over-limit processed Transactions into the Reserve Account; (d) Charge the applicable higher Discount Fee; and/or (e) Terminate this Agreement. If the Approved Monthly Sales Processing Volume Limit is exceeded it may also cause a new underwriting review of the approved terms. Bank on ten (10) days prior written notice, may in its sole discretion, reduce the Approved Monthly Sales Processing Volume Limit.
What is your “monthly sales processing volume”?
When you fill out your application for a merchant account, you will be asked to estimate your monthly sales volume and what percentage is composed of credit card transactions. This amount is then assigned to your account as your “monthly sales processing volume.”
I’d like to draw your attention to the section that describes what happens if you exceed this pre-set limit (see underlined section above). The bank can, just like PayPal, freeze your money (that’s option C). however, notice that it can also, at its sole discretion and without prior notice to you, choose to charge you a higher discount rate, charge you an over limit fee, or terminate your account. All for just going over your limit!
When you make the decision to accept credit cards, you take the risk that your money could, at some point, be frozen. This is true no matter which financial institution processes your transactions.
You can take steps to limit the possibility that your money will get frozen:
- If you use PayPal, establish a transaction history free of complaints before you do a big launch.
- If you use a standard merchant account, choose a company with which you can develop a relationship. Being able to call up your merchant account provider and give them a heads up about your upcoming launch — including dates, expected per ticket amount, and total number of transactions — can make a big difference.
- In all communications with your provider, remember their primary job is protection of the consumer. Any information that they request is with this primary objective in mind so make sure you respond promptly.
Verdict: True. But so will every other merchant account.
Myth: All of the Complaints About PayPal Mean it’s Not a Good Option
While it is true that there are a lot of people complaining about PayPal online, this doesn’t mean that it is worse than any other payment processor or offers sub-par service.
All this means is that PayPal has more users than any other payment processor and therefore more people who voice their opinions online.
PayPal has 137 million active accounts and commands nearly 90% of the market in online payments. That leaves a paltry 10% of the market to be divvied up among all of the other payment processors.
Even if the payment processor that you are considering had half of its customers complain online, those complaints simply get lost in the sea of comments about PayPal.
In researching this article, I did come across one complaint about the merchant account provider offered by Costco to it’s Executive Members. It’s pretty scathing and points out the problems you might encounter with payment processors who offer discount rates below those listed in the Reimbursement Fee schedule. However, this is just one complaint posted on a blog — you would have to be searching specifically for an article like this in order to find it online.
A Couple More Points About Merchant Accounts
I know this article is about PayPal, but I want you to have the entire picture so you can make the decision that is right for your business.
To that end, here are a couple of points about traditional merchant accounts:
- To open a merchant account with a bank, you must submit an application, and most of the time, you’ll pay an application fee for the privilege. Once you’ve applied, the bank or other financial institution will look at your credit record and your website. If you don’t meet their requirements, your application will be denied.
- In order to process credit card payments online, you need what is called a payment gateway in addition to a merchant account. I describe payment gateways as the “armored cars of the online world” because they are only responsible for transporting financial data across the internet and don’t do any processing, just like the armored cars transport money for banks. Some merchant accounts provide their own payment gateway, but many do not. They contract with gateways like Authorize.net, which is the largest such company. These payment gateways often have their own fee structure that you will pay in addition to your merchant account. These can include monthly fees as well as discount fees on each transaction.
- When you accept credit cards, you also accept the responsibility for making sure the cardmember’s (your customer) data is kept secure. Online, this means that the page where the customer enters their information must be secure (it will start with the https:// protocol if it is). If your merchant account solution requires you to host the checkout page on your website — and many do — you’ll need to set up a SSL certificate on your site. This can vary in price from free to $100 a year, and will also require a static IP address, which may have another monthly or yearly fee.
None of these issues apply with PayPal. There’s no application process; anyone can sign up. You don’t need a separate payment gateway because PayPal handles that for you as well. And since you never actually see the customer’s credit card information, you can’t be held liable in the event of a security breach (By the way, if you are hacked like Target was recently, you can be levied with up to $100,000 in fines per incident).
When you are comparing payment processors, make sure you include ALL costs associated with offering credit cards into your calculations and not just the advertised discount rate.
Which Should Payment Processor Should You Choose?
You can see from the other myths that we’d addressed in this article that many of the complaints that are levied at PayPal could also be levied at any merchant account provider as PayPal’s policies aren’t much different than any other merchant account.
Which payment processor you choose for your business should be based on all of the facts and a careful consideration of your options and their costs.
If you are just starting out, PayPal is one of the few options that doesn’t come with a monthly fee (great when you don’t have reliable cash flow yet). But even for more established businesses, offering PayPal as an option in addition to your regular merchant account allows you to take advantage of those 137 million PayPal users by making it easier for them to buy from you (Personally, I love being able to use my PayPal account since it doesn’t require me to find my credit card, so if you want my business, make sure you offer both).
However, if you’ve learned just one thing from this article, I hope it’s this: READ THE AGREEMENT governing your merchant account before you sign it. It’s a legal document and you will be held to its contents even if you don’t read it, so take the time to read the fine print (although boring and hard to read, you may be glad you did). Once you know, and understand, what is contained in these agreements, you may discover that PayPal is actually a competitive option worth your consideration.