I recently found it necessary to explore options for processing credit card payments for my business. There are many options out there, and I quickly found my head spinning with information about fees, rates, monthly minimums, etc. So I took all of the information, consolidated it down to some averages, and did some comparisons. I was able to narrow it down to two distinct options: PayPal and everybody else. I present the final comparison for you here.

To start off, I talked to a number of traditional merchant account providers that cater to online transactions. They all offer the same services essentially: the ability to take credit card payments over the internet through a gateway. Most of these companies have monthly fees for maintaining the account and a monthly minimum of transaction fees.

The account maintenance fees will be called a “statement fee” (this provides a paper account statement) which averaged $10, and a gateway fee (which is the charge for the “gateway” to the actual system that runs the card) which averaged $15. So, right off the bat, it costs $25 per month on average just to have the account.

Then you have the actual per transaction fees. Merchant account providers will call that the “discount rate”. The best I could find for internet processors was 2.1% plus $0.25 per transaction. The average was 2.5% plus $0.25. And this rate could go as high as 4.9% depending upon the merchant account provider’s “risk assessment” of your particular business model.

Add to that the monthly minimum transaction fees the provider expects (which averaged $25 per month), and the end result is it will cost you $50 per month minimum to have a merchant account, and that will be charged whether or not you process any credit card transactions that month.

Then I took a look at PayPal. They have a number of different services for individuals to process credit card payments. Their discount rate is at worst 2.9% + $0.30 and at best 2.1% + $0.30. Now that is higher than the average merchant account, but there are no monthly fees.

So I set about to comparing these rates to see which is cheaper given monthly revenue and average transaction amount. These comparisons are based upon a discount rate of 2.9% + $0.30 for PayPal and 2.5% + $0.25 with a $25 monthly account fee and a minimum transaction fee total of $25 for a Merchant Account.

If you did just one transaction a month, it would have to be $6237.50 for PayPal to be more expensive. But few people are going to have just one transaction in that dollar range per month, particularly people selling $25 ebooks and monthly memberships of $49.99.

So, below are some charts which assume an average sale of $5, $25, and $100. The blue line is the total PayPal fee and the red is for the merchant account:

Paypal vs Merchant Account $5 Average Sale

PayPal vs Merchant Account $5 Average Sale

Paypal vs Merchant Account $25 Dollar Average Sale

PayPal vs Merchant Account $25 Average Sale

Paypal vs Merchant Account $100 Average Sale

PayPal vs Merchant Account $100 Average Sale

As seen above, assuming your average sale is $5, you must be doing at least $2000 of credit card transactions per month for PayPal to be more expensive than a merchant account. And as your average sale amount goes up, so does the monthly volume necessary for PayPal’s fees to exceed those of a traditional merchant account.

But an interesting thing to note is that in all three examples, PayPal becomes more expensive once the total transaction fees get in the $150 to $200 range.

I have included the PayPal vs Merchant Account Fee Comparison spreadsheet I used to make these calculations. Just put in the discount rate, per transaction fee, and monthly account fee quoted to you and watch the graphs change to reflect your quote.

I wish you the best in your business.

Please leave a comment. I love a good discussion!

Tagged with: • • •

Filed under: Financial Resources

Like this post? Subscribe to my RSS feed and get loads more!