What is a merchant account and how is it different than PayPal?

The following is a guest blog from Alexia Marcous, co-founder and chief optimistic officer at Dharma Merchant Services. Frequently, our clients ask us what the differences are between a merchant account and setting up donations or online payments through PayPal. Here, Alexia explains these differences and points out some of the most common misconceptions:

What is a merchant account?

A merchant account is an unsecured line of credit. When a donation is made on a credit card, the donor has as much time as they’d like to pay off their credit card. However, you as the non-profit would like your funds right away! So the funds for the donation come out of what’s called a merchant account at a specialized bank, and are deposited into your checking account, typically two business days after the initial transaction is made.

To obtain a merchant account, you’ll need to work with a Merchant Service Provider (MSP). The MSP sets the rates and fees that you will pay on your merchant account. All MSPs have the same costs to cover, because they are set by Visa and MasterCard, so the smallest MSP can be as cost effective as the largest. The fee structures will vary, but will always contain a rate, a per-item charge and monthly fees.  An MSP can also charge an application fee, a monthly minimum fee, an annual fee and a cancellation fee, with these fees varying widely between MSPs.



Other support for online donations and payments

Additionally, when you take donations online, you’ll need a payment gateway. The payment gateway serves the same purpose as a credit card terminal in a store: it captures the credit card data, encrypts it, sends it out over the national payment network and returns an approval or decline response. Typically, your merchant service provider will set this up for you, and will establish the pricing for this service as well. The pricing usually consists of a setup fee, a per-item charge and a monthly fee.

So how is PayPal different?

PayPal is an all-in-one solution, providing both the merchant account and gateway account services tied together. Rather than having a choice of providers, there is only one PayPal, with no resellers of their service.

There is also a difference in pricing. The merchant account fee structure is tied to the type of credit or debit card that is used to make the donation. In contrast, PayPal has a one-rate-fits-all model. Typically, the rates on a merchant account are lower than the PayPal rate. However with the basic PayPal program, there is only a rate component, and no monthly fees. This is only true for the basic PayPal program. Any additional needs above the basic service, such as automated recurring billing, the ability to key in a transaction for a donor, the desire to stay on your website rather than be redirected to PayPal’s site, requires moving off the basic PayPal program to their Payments Pro solution. Payments Pro includes monthly fees that are comparable to gateway fees.

How do I know what is right for my organization?

While PayPal rates are typically higher than a merchant account, lower processing volumes makes PayPal a more cost-effective choice if the basic PayPal service is sufficient. There are a few things to consider before choosing PayPal over a traditional merchant account/payment gateway service.

You’ll want to think about:

1. The level of customer service that you need (merchant services providers offer direct contact and in-person support whereas PayPal does not)
2. The ability to take automated recurring donations (if you want donors to be able to give online again and again, this can significantly increase fees and prolong donations if using PayPal)
3. The need to key in transactions obtained from donor cards 
4. The receptivity of donors to using PayPal versus staying on your website when making their donation (think about your brand; keeping donations right on your site can be very beneficial to your brand message and visual identity).

Fortunately, you can request an MSP to perform a cost comparison with a full-disclosure fee list so you can determine whether you are better off with a merchant account or a PayPal account. Once you consider the results of that comparison and the list of factors above, you’ll be able to decide what is the best solution for you.

4aGoodCause partners with Dharma Merchant Services as its merchant account vendor. To learn more about Dharma, follow them on Twitter or check them out on Facebook.