When to Use PayPal vs. Merchant Account | Hacker News Reader

When to Use PayPal vs. Merchant Account

feefighters.com

136 pointsrunako82 comments

I used to recommend PayPal Website Payments Pro until they screwed me recently. I assumed the people that were abused by PayPal were few and far between until it also happened to me. Now I tell everyone to get a real merchant account. It's just not worth gambling with your ability to process transactions.

Do get back to us in about 6 months to let us know how your merchant account is performing in regard to chargebacks. In my experience, we never win with our merchant bank, yet almost always win with PayPal.

What sort of business are you in that you're fighting with your customers over chargebacks? Couldn't you interpret this as something being horribly broken with the way you handle refunds?

If you're selling software, there's no reason you should ever have a chargeback happen against you. Just make sure your policy is to refund anybody for any reason at any time. I remember reading a JoelOnSoftware article where he talked about running 4 years straight with zero chargebacks using a policy like that.

It's all about where the customer enters the process. If they are using the software and say, "Hey I think this sucks" then they will likely go to your site and request a refund. If, however, they look at their credit card statement and think, "I didn't like that program, I meant to cancel it" or "Hey I don't remember buying anything from ABC Software" (because the name of your product is "Really Cool Thing Pro") then they are likely to find it easier to dispute the charge.

That's one of the "broken process" things I had in mind when I wrote the above. The text that appears on your customers' credit card statement should clearly identify:

  - what they actually bought
  - how to contact you

The quickest way is to have your domain name appear there, complete with .com so they know they can simply type it into a browser and get to the bottom of things. Of course, on that page you'll need to have a link they can use to figure out what they've bought from you and get a refund if necessary.

There are a dozen little things you can do to reinforce the message that "we don't want your money unless you're amazingly happy". If your customer wants his money back, he'll get it one way or another. If you make it easy to simply reverse the transaction through you, they won't ever need to get their bank involved.

"If you're selling software, there's no reason you should ever have a chargeback happen against you. Just make sure your policy is to refund anybody for any reason at any time. I remember reading a JoelOnSoftware article where he talked about running 4 years straight with zero chargebacks using a policy like that."

This is a fairy story.

We have a no questions asked 60 day full refund policy. We have at least one chargeback a week due to stolen credit cards. We, of course, don't have any reason to fight them over it, so we just accept the chargeback when that happens. But, we definitely get chargebacks.

I do occasionally get phone calls from people who don't know who we are. I answer their questions, and if the description doesn't ring a bell (sometimes they'll say, "Oh, I need to ask our system administrator if he bought that." and I never hear from them again), I process a refund immediately.

But, software companies definitely get chargebacks. There's no way to completely avoid fraud without refusing lots of legitimate customers (AVS, for instance, doesn't work for most non-US card holders, and we do half of our business outside the US, so we can't reject orders with an AVS mismatch).

I've had 4000 sales now (crikey), and precisely one chargeback. You can make your own guesses about FC's volume over the interval at issue, but I find "no chargebacks in four years" entirely credible.

This may be an aspect of the audience more than the product category (software). Your audience is teachers, correct?

My audience is highly technical, and the particular segment is rife with piracy. Even though our product is 95+% Open Source (and so there is a free version that people can use to do nearly everything the commercial version does), we still have people who use stolen credit cards to order our products.

And, it may also be a factor of product pricing. Your products are under $100, right? Ours run from $149-$999.

Sounds like our sales volume is actually about the same as yours. Looking over the actual numbers, chargebacks are less than my initial estimate. More like once every 2-3 weeks, and sometimes we'll go a whole month or two between; but some months we'll see a rash of them. It averages out to a couple a month.

But, it's definitely something we deal with regularly. Are you doing anything in particular to prevent fraudulent orders, or is it just the nature of your customer base that it simply doesn't use stolen credit cards to buy software?

Also, how much of your business is international? We've found that 95% of our fraudulent orders are from overseas (but 50% of our legitimate orders are also from overseas, so we're not willing to make it difficult for those folks to buy from us).

Here's a link to the fairy story in question:

http://www.joelonsoftware.com/articles/customerservice.html

Thanks for the posting the link. Fog Creek is fanatical about customer service and it shows in their chargeback rate. As alluded to, 0% is entirely possible, and it comes from being fanatical about offering refunds.

We actually can back that up - Fog Creek is a FeeFighters customer!

This is not a customer support issue. It's a fraud management issue. No amount of fanatical customer support can stop people from using stolen credit cards to order your software. It is a digital good, delivered instantly over the Internet.

Most people, when noticing their card has been stolen, will simply request chargebacks of every unrecognized item on their bill. The vendor never hears about it, and has no idea it has happened, until after the chargeback has taken place.

You're either very lucky, haven't actually sold software/intangibles at volume before, or whatever you were selling had no value to the mass market. Other than those circumstances, you WILL be targeted by fraudsters, using stolen credit cards to purchase your wares. It's near impossible to detect them reliably up front, which is why most of PayPal's competitors went out of business a decade ago. The chargebacks are from fraud, not unhappy customers, and your refund policy is irrelevant to reducing them.

Or consider a service. Suppose you're ODesk or eLance--do you offer a money back guarantee months later after you've paid a contractor for their work?

We're not fighting with customers, we fight with banks, and it's not like it's a daily occurrence. And perhaps it's because we don't sell software. You might want to get that "contempt prior to investigation" thing you have checked out, as you have no idea what our return policy is, or what our customer base is like.

Anyway, I am just sharing about the differing experiences we have had with PayPal and with our merchant bank.

I didn't mean any hostility in my post. Sorry if it came across that way.

But regardless of who you're technically fighting with, it's still a matter of you trying to keep money from people who want it back. I can't come up with very many reasons you, as a business, would ever want to do that. All you'll accomplish is making those customers angry enough to tell the world how much they dislike your business, and they'll still get their money back through the chargeback.

Seems like a losing proposition.

That's an interesting point. I'll have to keep an eye on it and see if there's a difference, although our precent of chargebacks is so low, I'm not sure we'll have enough data in 6 months.

We switched from a merchant account to PayPal because of fraud and a dramatic increase in fees during the time we used the account. By the time we moved we were paying over 4%, plus flat fees! We were also dealing with several fraudulent orders a week, and the process for dealing with them required faxing documents back and forth, which is just idiotic.

The fraud protection stuff at PayPal is better, though not great (too many false positives to call it great), and our rates are much lower.

I do have a fear that someday they'll just decide to screw us and close our account, since it has happened to so many people. That'd be a bad day, for sure. But, in the meantime, I'm spending less money and have a dramatically better UI for managing things like chargebacks and refunds.

SwellJoe - you were paying way too much for your merchant account...

Unfortunately, that's sort of standard practice for credit card processors, even ones that we've seen people recommend on HN. We've got it in our contracts with http://FeeFighters.com processors that they can NEVER raise pricing, don't have any hidden fees, and we have reviews on them so you can see how other people have liked them.

I don't know enough about fraud protection at PayPal, but we've heard a lot of horror stories when people come over to merchant accounts.

"you were paying way too much for your merchant account..."

Yeah, I know. That's why we switched to PayPal.

The rates started out great (I think it was 2.1% when we started). Then they climbed every few months to being ridiculously expensive; they'd labeled our business "high risk", or something, somewhere along the way (despite the fact that all of the problems were because their fraud protection mechanisms were nonexistent). Doing anything about it required sending faxes back and forth with the provider, and waiting on the phone for half an hour to talk to a human, who would fax us forms, and then ignore them when we faxed them back.

Anyway, at this point, I have a strict No Fax policy. If a company requires me to fax them something, or requires me to accept faxes from them, I won't do business with them, under any circumstance. The merchant services thing was the last straw on that front, and it seems the majority of merchant services companies still want to do business via fax (even BrainTree, last time I checked, who are reportedly a great company to work with...but if I have to fax them, even once, I'm not going to ever be their customer).

Basically, discussing merchant services with me is like poking a hornets nest with a stick. I hate those people. I've dealt with a number of merchant services companies over the past dozen years I've run businesses, and I've hated every single one of them with a fiery passion. There may be good ones, but I've never met one I liked.

I don't like how much PayPal charges, either, but they've yet to screw me over, so far. And, the rates are close enough to merchant providers that I wouldn't be willing to send a single fax to change it (and if history is any indicator, I'd have to send/receive dozens of faxes a year, if I switched back to a regular merchant account).

We (Braintree) don't require fax usage. It's an option but not a requirement.

Someone, maybe you, mentioned in a prior conversation here at HN that fax or mail was required during setup. Has that changed?

Ok, so I go to the site and the default settings have $20K per month in sales with $440 for Paypal and $478.90. The difference is $38.90. Or 0.2%.

If your going to choose a credit card processor exclusively based on saving 0.2%, then I don't know how the hell you got to $20K in monthly sales.

> Ok, so I go to the site and the default settings have $20K per month in sales with $440 for Paypal and $478.90. The difference is $38.90. Or 0.2%.

I believe that default was chosen to illustrate the 'inflection point'.

Also there is no mention about Adaptive Payments which supports micro payments.

Micropayments - 5% + $0.05 Regular - 2.9% + $0.30

According to this PayPal becomes more economical somewhere between the $15 and $30 mark. However, I am not sure my comfort level with PayPal increases with larger transactions. If I am dealing with larger sums of money I want access to live customer service people and the regulations that banks have to follow. I do not want random email support, weeks of poor communication, a company that has a history of complaints when dealing with high dollar and high monthly volume transactions, and a company that acts like a bank but is not held accountable to banking regulations.

EDIT: For that added peace of mind I will pay the extra couple hundred a month.

If you have a PayPal Business Account (which doesn't cost anything), you get the business support phone number. It's answered on the first ring by a real person.

I get payments daily from as little as $1.95 to as much as $3000, with volume in tens of thousands a month. I've never had my account frozen/limited/whatever or had any trouble getting in touch with support.

PayPal is also registered in all 50 states as various types of money transfer agent, and in several countries operates as a registered bank.

They're not perfect, but I don't find them worse than your typical bank, which has the same rules as PayPal for freezing accounts, holding funds after an account is closed, etc.

If you find you "must" use PayPal, be sure to keep as little balance in there as possible at all times.

Also, close the original bank account you tied to the PayPal account ASAP, because they can and will withdraw reversed charges and fees without notice, at any time on their whim.

There's a way for PayPal to deposit money into your bank account every night at midnight. I forget how I stumbled upon this, but we use it at Carbonmade now.

The problem with that logic is they can also withdraw from it.

Use their debit card (or snail mail check) to withdraw, close your bank account tied to PayPal if possible, they will overdraft you someday and cause you as much hassle as closing the account now.

Turn off overdrafting on your bank account. Transfer the money out of that account as soon as paypal sends it in.

It's called Autosweep and you need to call up to enable it as far as I'm aware. It's not possible to activate on the site alone. I'm not sure if it also authorizes them withdrawing from your account or not.

I think that was a comment on your blog ! I bookmarked the comment as it was the first time I heard about this too. It was here : http://spencerfry.com/whats-a-non-programmer-to-do

I like the site and think its helpful.

I have to say it isn't for my case though. I'm using Paypal's website payments pro for my current app, and that comes with a monthly fee not factored here.

Also when I looked at using a real merchant account, these fees vary greatly and no one I was looking at was as cheap as 1.8. All the merchants I looked at were more expensive than Paypal percentage wise. I also feel like this doesn't account for some batch fees I saw.

Not to mention that many times with merchant accounts you are paying a merchant fee and a gateway fee.

I think the point of the calculator is to get you to request a quote for another merchant provider from FeeFighters if your rates aren't as low as those in the calculator.

Check out the gear thingy under the total volume slider that says "More options? We have some, try the comparison with Paypal Pro..." ;)

Apparently, when you were looking for a merchant account, you weren't using FeeFighters to bid down your fees ;) or you would've gotten a better rate.

Try us out!

Have you guys got the ability to support non-American businesses yet?

Sadly, it would be really hard to do this around the world, as each country has it's own completely different setups when it comes to credit card processing.

It seems like you're in China, which would be a really hard market for us to enter. We are expanding though, and will be in Canada in the very near future.

We're actually BVI, although I'm Canadian. Looking forward.

Looks like I kinda missed the point.

Although I'm not planning on leaving paypal any time soon. Their fees are just simple. Merchant Accounts have so many different fees you have to keep track of, and on top of that you have gateway fees.

You have many more rights with a merchant account. What is that worth?

Amazon Payments is often overlooked as a fine alternative to Paypal, for those who have had issues with Paypal's... inethical business practices. Moxie Marlinspike uses it to accept donations for example.

As do Kickstarter. They're the only reason I'm aware of Amazon Payments's existence.

Another awesome thing about Amazon payments is that they don't charge you anything to send an invoice and accept payment with a personal account. I think paypal takes something like 3%.

Is Google Checkout any good?

Hmm... So if I want to have $0.99 payments, it will cost me 32% to go with paypal or 26% to go with setting up my own merchant account, and both are only for domestic payments.

Suddenly Apple's 30% for payments from ~100 countries sounds like a bargain.

That's true for $0.99 app purchases. Apple has a lot of power in that they can pool the transactions and actually charge your credit card not for $0.99, but for all your purchases over a certain time period. This is something an individual app maker couldn't do and makes perfect sense for Apple to do.

Where I think Apple is egregious is in their subscription pricing... for example, 30% is a lot to take on a $15 kindle book or $8 netflix subscription

PayPal has micropayments. 5%+$.05 fee, so it'd be ten cents to process your .99 example.

I haven't figured out how to actually get these rates yet, but I've just started looking into micropayments options, and PayPal looks like one of the best.

Those are only domestic. If you want international, though still not as many countries as Apple, it would be 3.9% + $0.30 or thirty-four cents on the .99 example.

According to the PayPal website:

"PayPal offers support for Micropayments to merchants for US to US, GB to GB, AU to AU, and EU to EU transactions for Business and Premier accounts. This feature is offered at a special rate of 5% + $0.05 per transaction."

Then, there is a currency conversion fee of 2.5% and a cross-border fee of 1% for payments from outside your country and currency. So, total for a foreign currency payment would be 8.5%+.05, if I'm reading it right.

Dramatically cheaper than Apple.

You can see all that here:

https://micropayments.paypal-labs.com/

Though the popups and menus don't work in Chrome, making it impossible to see all this information. Firefox 4 works fine, though.

Anyway, it appears impossible to revert to the standard rates/fees structure with PayPal micropayments.

This website is wrong, do not buy into it.

Paypal has a micro-payments model that makes it so that it is SIGNIFICANTLY cheaper to use paypal for transactions under <$12 as opposed to a traditional merchant processor.

https://www.x.com/community/ppx/xspaces/digital_goods

Yeah, the website also does not take into account monthly fees if you have PayPal Premium (or whatever it is called) account, which I would assume most larger volume merchants are paying.

It actually does take that into account... click on "more options"

Didn't see the "More Options" link, so sorry I offended you. My statement is still correct in that if you add a Pro account to PayPal, the merchant account becomes the cheaper option in most cases. Also, I would be willing to bet that most merchants who process high transaction size and high volume with PayPal are using Pro accounts.

That's totally correct, no offense taken, just wanted to make sure you saw that we'd included it!

You are totally correct that for merchants that process decent volumes, a merchant account is usually the better bet.

Charlesju, that is an entirely different service offered by PayPal, that does not make the website wrong! This is comparing to a standard PayPal account, which is by far the bulk of what people use.

Furthermore, it's inaccurate that PayPal's digital goods would be cheaper if you're doing <$12 transactions. They charge 5%+$0.05, so thats $0.55 on a $10 transaction. With a decent processor like one you'd find on FeeFighters, you'd pay ~2% + $0.23, or $0.43 on that same transaction.

That being said, it makes sense for digital goods companies with <$5 transactions.

To the average developer without any prior knowledge to payment processing your chart is incredibly misleading.

They left out the 'Paypal might hold all your funds and make it a pain to get them back' fee.

This is true even if you have your own Merchant Account. Though, if you have your own merchant account, your rep is probably more accessible.

While people like to blast PayPal, they all to often forget that merchant accounts are controlled by banks who can be even more uncaring.

Banks are regulated. PayPal isn't. Presumably that's worth something.

Not entirely true, Paypal is treated as a bank in Europe and is regulated as such. I believe the only place it isn't is America.

Only so much, and depending on the region you are in. Not all banking regulations are the same. Think outside the US.

It looks like for many businesses (including mine), the fee difference between PayPal and a merchant account is fairly small. Given that, what I really want is a service with:

1. a good API

2. good customer service

neither of which PayPal has in my opinion (we've used PayPal for over a year). PayPal's API works fine most of the time, but occasionally it returns a 500 HTTP error on a successful charge. This has caused several customer problems for us, and we've taken the ridiculous step of considering a 500 error a success and manually following up in those cases. We've pretty much given up on trying to work with their customer support, and are looking for alternatives. Anyone have recommendations on service with a great customer support?

As always gotta love the feefighters design and graphics.

But I would have just preferred to see a 2D plot with average transaction and monthly volume along the X and Y and regions shaded as blue/red for paypal/merchant account.

it gets to be a little complicated, especially with the advanced options.

interestingly, it looks cheaper to use paypapl if you have a really low monthly throughput (not surprising), or a really high one (kinda surprising). but never by that much.

The design's beautiful, but I can't help wondering why they didn't stick a PayPal affiliate link below the PayPal fees table and a "sign up to compare merchants" link below the merchant fees table

Working on it... we actually didn't post this to HN or expect the traffic bump, or we would've done that before. It takes a while to get approved.

The main thing we're interested is drawing traffic to http://feefighters.com for people to run auctions and get the best rates on their credit card processing, but it would be nice to pick up some affiliate revenues as well.

This doesn't take your market into account. For example, my Dutch debit card isn't compatible with international credit-card numbers. My paypal-account is directly connected to my bank account (direct debit), so it practically works like a credit card, but I can only use it online. This means that I'll only order stuff at websites which support Paypal.

Fee differences are such a small piece of the puzzle. There are so many other differences between PayPal and merchant accounts that can make or break your business. And good luck escaping once you're locked in one way or another.

I cover it a little here: http://peachshake.com/2010/06/15/saas-subscription-billing-o...

It's staggering to me that these companies are clipping the ticket for 2-3% for ALL credit card based commerce in the world. That's a lot of money.

True... There are actually a number of players involved. I should've linked to this earlier - we have an ebook that explains in detail how this works: http://feefighters.com/ebooks/what-is-credit-card-processing...

Great little tool I've used in the past to make recommendations to clients. Looks like it's been reskinned (lighter)?

It seems odd to me that charging business credit cards would cost you more with a merchant than charging normal consumer credit cards. Are businesses really more likely to incur chargebacks or generally be problematic than consumers?

Did anyone notice the relationship changes as you scale both options. The slider almost always shows paypal winning for transactions under $100 except at the $5,000 level and the million level. I'd love to see this in graph form.

If your revenue is $1M per month, you will almost certainly get to negotiate with them in person for a better rate.

Very true

So it looks like high monthly volume and low transaction price is good for merchant accounts, otherwise PayPal gets the edge.

Square. Square. Square...

Did I mention Square?

http://www.sqaureup.com

My life is much easier for sure. No Paypal Bulls*it.

Dude that site looks like a click fraud scam.

Because the link is actually http://www.squareup.com/

If I ran a brick and mortar business, I could see how Square would be useful. But the source link and every discussion thread here are discussing e-commerce solutions, not Paypal's virtual terminal [1].

[1]: https://www.paypal.com/vtswipe

Have you seen http://feefighters.com/square-calculator ?

Square works great for some people (if you are swiping a card), it's pretty expensive, but really cool to not need a merchant account.

We're working on a new version of the square calculator, will post it on HN when we're done.

Also, the link is http://squareup.com (you have a small typo)

Paypal works for most of the world.

No US Only Bulls*it.

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