by Ben Dwyer If you’ve ever bought or sold anything online, you’ve come across PayPal. It’s often the first payment processor that small ecommerce businesses turn to due to its ease of setup and customer trust.
But as your ecommerce business grows, the features that once made PayPal a no-brainer may begin to hold you back or cost you more. How do you know if it’s time to switch your payment processor for your online business? In this article, I’ll dig into the pros and cons of using PayPal for online payment acceptance and signs that it may be time for a dedicated merchant account.
Background on PayPal
When small business owners start out, they often look for the lowest barriers to entry for different services. That includes credit card processing. With so many decisions to make, getting started quickly with a solution like PayPal is a no-brainer. It’s a household name that customers trust, which can increase consumer confidence. That’s especially important for online businesses that are just starting out. Additionally, it’s easy to set up, especially if you’re using it in conjunction with an ecommerce shopping platform.
Perhaps most importantly, PayPal has an easy-to-understand pricing model (known as flat rate pricing) so business owners don’t have to become experts in credit card processing to take cards.
However, as I’ve written about in other articles, simple pricing and low-cost pricing are not the same thing. The same simple pricing that starts off as a benefit can cost you more as you grow.
The Cost of Simplicity
I’ve covered flat rate vs. interchange plus pricing at length, so I won’t go into that in depth here. Suffice to say, flat rate pricing is a great option in some cases, but the simplicity comes at a cost. You’ll simply pay one “flat rate” per transaction, but behind the scenes, costs for transactions vary. With flat rate, you pay the same no matter how much the transaction costs the banks and credit card companies to process. That means when your transactions cost less, your flat rate processor (in this case, PayPal) makes more money. With other pricing models, such as interchange plus, you would enjoy lower costs on the transactions that cost less to process.
Online transactions using PayPal will cost you between 2.99% – 3.49% per transaction, depending on the acceptance method and other factors. It’s not the worst pricing, but businesses processing ~$15,000 or more per month are typically able to find lower-cost processing than PayPal’s flat rates. When you’re starting out, $15,000 per month might seem far away. As your business grows, though, it’s important to consider whether the services that you started out with (like PayPal) are still the right fit.
PayPal’s Benefits
There are several benefits to using PayPal. It’s easy to set up and has no upfront costs, making it ideal for new businesses that aren’t looking to pay a lot. Additionally, it’s widely known, offering a level of trust to customers.
Lastly, its flat rate pricing is easy to understand, making it an attractive option for business owners that are new to the world of credit card processing and its complex fee structure.
PayPal’s Drawbacks
Some perceived negatives for PayPal are not limited to them, but rather possible issues with any payment processor. For example, PayPal is known for “buyer-friendly” policies, making it easy for consumers to dispute purchases. However, that’s not specific to PayPal, as consumers can dispute any transactions made with credit and debit cards. Some users suggest that PayPal sides with buyers more often in disputed transactions, but that is anecdotal and your experience may vary.
Another area is merchant account holds or freezes. Again this is not specific to PayPal, as any processor can implement holds for a variety of reasons, including suspicion of fraud. However, PayPal and Square are known for being particularly skittish about “unusual” processing behavior, which can include simple things like an increase in sales. Some processors are less risk-averse and may not have the same concerns that lead to account freezes PayPal implements.
Lastly, some users complain that PayPal customer support is difficult to reach or non-existent. For businesses that put a premium on being able to reach their merchant services provider when needed, that can be a big drawback. There’s nothing more frustrating than experiencing an account hold or other processing issue and not being able to reach your processor for help resolving the issue. Especially for ecommerce businesses, not being able to take cards leads to lost sales. It’s even worse than when machines are down at a retail store, since customers have the option to use cash in person.
Signs that it’s Time to Find a New Processor
It’s tricky to know if you should switch from PayPal, and when. Here are some signs that you’ve outgrown PayPal:
- Your monthly credit card sales consistently reach at least $10,000 – $15,000.
If you’re starting to consistently have processing volume in that range, flat rate pricing is going to start eating into your bottom line. Once you hit $10,000 per month, it’s worth checking out your options and seeing what pricing you’re eligible for. You can sign up for a free CardFellow account to compare quotes from processors specific to your business. It’s completely private and there’s no obligation. Try it now! - PayPal freezes your account with little or no warning, but your processing volume is steady.
If you have consistent processing volume and low chargebacks but you’re still experiencing account freezes, it’s time to take a look at other options. - You’re looking for more advanced reporting capabilities. Many businesses aren’t interested in detailed reporting when they’re just starting out. But once their businesses have grown and they’re looking to make smart, data-driven decisions, advanced reporting becomes a higher priority. Traditional merchant account providers typically offer much more robust analytics and reporting to help you make informed decisions for your business.
Alternatives
If you decide that you’ve outgrown PayPal as your primary credit card processing solution, there are two main things you can do:
Change Processors
You can eliminate PayPal completely by getting a dedicated merchant account from another credit card processing company. A merchant account with a payment gateway can offer lower fees and better analytics.
Add a Processor
If you aren’t ready to get rid of PayPal entirely, or just want to continue to offer it as an option for customers who prefer PayPal, you can keep it AND still use another processor, giving you the best of both worlds. Many businesses do exactly that, keeping PayPal as one of the payment options alongside a traditional checkout page with a dedicated merchant account.
It’s true that PayPal can be a great option for an online business just starting out, or as a secondary option for ecommerce sites that want to give customers a choice. But it may not be the best as a primary solution as you grow. If sales are picking up and you’re looking to reduce your fees, get better reporting, or have access to dedicated customer service, it might be time to explore other options.
