The Difference Between Merchant Accounts and PayPal

PayPal works similarly to a merchant account, allowing businesses to take payments from customers who are not using cash.

However, PayPal isn’t a merchant account in the traditional sense, it’s an aggregated merchant service. We’ll go over exactly what that difference means when it comes to taking payments with PayPal versus traditional merchant accounts. We’ll also highlight what you should consider when choosing a payment system for your venture.

What Is the Difference Between a Merchant Account and PayPal?

A merchant account is a type of business account that acts as a buffer zone for your card transactions, holding your inbound payments while the operation is being processed.

When using a merchant account to take payments, merchants are issued a unique merchant ID, which acts sort of like an address for the business, and directs funds to the merchant.

PayPal, on the other hand, is a merchant aggregator, or aggregated merchant service. This means that all businesses that take payments using PayPal for Business share the same ID. It processes transactions through its single PayPal master account and deposits them in each business’s PayPal account.

Either way, the end result is the same, since both merchant accounts and PayPal are services for taking and processing cashless transactions.

There are a few other differences. PayPal’s transaction fees are fixed instead of customised, as is typical with traditional merchant accounts, so you might end up paying higher transaction fees with PayPal higher than the average merchant account. On the other hand, setting up a PayPal account requires less documentation and scrutiny than setting up a merchant account, which makes it a simpler, faster process.

How Does Taking Payments with PayPal Work?

To take payments with PayPal, you need to be using its PayPal for Business service.

Once you have a PayPal for Business account set up, you can connect one (or several) bank accounts to it and use it to send and receive money. The money you receive from customers will be held in your PayPal for Business account until you choose to transfer it to your bank account.

Besides its own PayPal digital payments, it accepts most major payment methods, from cards to crypto. Because of this, it can be used as a payment processor – a system that actions card transactions. It uses its own payment processor to move funds between accounts.

The different ways to take payments with PayPal

PayPal offers businesses a variety of ways to take payments:

In-person: PayPal’s Zettle by PayPal solution can be used for taking in-person payments since PayPal offers a card machine and an EPOS system.
Online: PayPal also offers a payment gateway that can be integrated into your online store, either as a primary way to accept payments or even alongside a traditional merchant account’s payment gateway.

Zettle by PayPal

With Zettle by PayPal, merchants can take in-person payments using the Zettle tap to pay on smartphone app, or the Zettle Card Reader. Either way, in-person fees are 1.75% per transaction (in line with the industry average).

There’s also a Zettle EPOS system, which is one of the best free EPOS software systems on the market. Zettle also has EPOS hardware kits, ranging from £169 to £347, which include registers, cash drawers, and receipt printers.

With a Zettle account, merchants can also create and send invoices to customers, or get paid through payment links sent via text message, WhatsApp, social media or email. Transaction fees are higher, set at 2.5%, as is typical for card-not-present transactions.

For our full assessment, see our Zettle review, and for a breakdown of costs, see our guide to Zettle pricing.

[Pictured: the Zettle Card Reader] Zettle is an in-person payment service offered by PayPal. It's a great option for new businesses who aren't accepted by traditional merchant accounts. Source: Expert Market

PayPal Checkout

For online payments, merchants can use PayPal checkout, which is a payment gateway you can integrate into your online store.

PayPal has ready-made plugins with popular e-commerce platforms, including Wix, Shopify, and WooCommerce, or you can also use API or JavaScript code to integrate PayPal’s payment gateway into your online store.

One advantage of using PayPal for online payments is that it can be used alongside other payment gateways, giving your customers more options at checkout. This means you can use both a traditional merchant account and PayPal to accept online payments.

Transaction fees for online purchases are the same as for invoices or payment links, set at 2.5%.

A PayPal Personal account is designed for personal use only and acts as a money transfer service. It can be used to send and receive money to friends and family, as well as make online purchases. Personal PayPal account users aren’t charged for transfers unless they’re international.

When it comes to a PayPal Business account, you can’t use it for personal transactions, but it does allow you to receive payments from customers and organisations. This change means you can use them to sell as a business, but you will be charged transaction fees.

How Does Taking Payments With a Merchant Account Work?

To reiterate, a merchant account is a type of business account that acts as a buffer zone for your card transactions, holding your inbound payments while the operation is being processed.

Merchant service providers also typically offer card machines, full point of sale (POS) systems, online payment gateways, and even invoicing and payment link tools. All of this makes for a comprehensive payment service for businesses.

Merchant accounts give merchants a unique merchant ID that’s used for processing transactions. They operate using a payment gateway and a payment processor – either their own or a third party of your choice – to send your customer’s data to and from their bank to authorise the transaction. After the authorisation, it stores your payment until it reaches your bank account.

Since, unlike PayPal, merchant account providers assign each business a unique ID and unique merchant account, they can be a more secure way to take payments. They also transfer money from your merchant account to your bank account automatically, which PayPal doesn’t.

You can compare merchant accounts, and find the best one for your business in our guide.

PayPal: Pros and Cons

PayPal’s key asset is its easy setup and fixed-rate pricing. It charges in-person transaction fees of 1.75% and online or card-not-present fees of 2.5%. Plus, there are no monthly account fees or any other hidden charges.

It can be easily integrated into popular ecommerce platforms via plugins and requires minimal paperwork to set up since it’s a contract-free solution.

However, PayPal can be more expensive to use for merchants with a high transaction volume, since unlike traditional merchant accounts it doesn’t offer lower transaction fees for businesses that sell a lot. Plus, because it makes its users share a master merchant account, the service has its share of security issues and it’s common for users to have their account suspended or terminated.

Merchant Account: Pros and Cons

Merchant accounts are robust, comprehensive payment systems that offer a more personalised service than PayPal, since they offer merchants a unique merchant account.

Despite some providers charging account fees, merchant accounts are, overall, considerably cheaper than PayPal. The account fees providers charge are usually between £10 and £75 + VAT per month, while transaction fees vary between 0.4 and 1.75%.

Merchant accounts also offer more flexibility than PayPal, allowing users to work with hardware and payment processors that fit the needs of the business, instead of imposing their proprietary hardware on vendors, the way Zettle by PayPal does.

However, the setup process can be long and rigorous with merchant accounts, with plenty of documentation required. If you’re a startup, you may be unable to fulfil some of the requirements needed by the providers, which is a major blocker when getting your venture off the ground.

Many providers also only operate with fixed-term contracts, which is a blow to seasonal sellers or business owners who want flexibility. Also, when it comes to pricing structure, despite being cheaper than PayPal, it is less transparent. This makes it harder to calculate the exact amount you’ll pay in transaction fees.

PayPal vs Merchant Accounts: Which Is Better for Your Business?

Because of their peculiarities, PayPal and merchant accounts are poised to serve some businesses better than others. To know which is the best pick for your venture, check the table below:

Business type	Best pick	Main reason
Freelancer	PayPal	Flexibility with PayPal’s zero-contract service
Occasional seller	PayPal	Flexibility with PayPal’s zero-contract service
Startup	PayPal	Easier setup process
Small, established business	Merchant account	Better scalability
Medium-to-large business	Merchant account	Lower transaction fees
Business with low sales volume	Merchant account	Lower transaction fees
High with high sales volume	Merchant account	Negotiable custom fees
Street vendor	Merchant account	More flexible system
Online businesses	Merchant account	Lower transaction fees

PayPal is also a good option for businesses that are considered ‘high-risk’, as an alternative to a traditional high-risk merchant account, since PayPal’s eligibility criteria is less strict.

Tips to Consider When Choosing a Merchant Account Provider

With plenty of choice in the merchant account market, choosing one that is the best fit for your business can be tricky. To help you out, below are our top tips to consider when choosing your provider:

Hardware cost

Shop around for merchant accounts that offer hardware (such as card readers and POS systems) that suit your needs, but be mindful of the cost-benefit involved. A costly hardware expense can be offset in the long run if the provider offers low transaction fees, for example.

Fees

There are two main types of merchant account fees: account fees and transaction fees. Account fees have a fixed cost, and are normally paid every month. Not every provider charges account fees, so if you’re a seasonal or occasional seller, it’s a good idea to look for one that doesn’t charge these.

Transaction fees are charged every time you make a sale. If you have a high sales volume, it’s worth considering providers that charge account fees because they tend to offer the lowest transaction fees on the market.

If you rent card machines with a merchant account provider, it’s also a good idea to check how to end a card machine contract – especially the provider’s termination fees.

Ease of use

If you’re just starting your business or are new to taking card payments, we recommend looking for merchant accounts that offer intuitive hardware and a system that’s easy to use. The same applies if you run a larger business that has a high staff turnover (like a large restaurant, for instance), as this will reduce the amount of resources spent on training.

Scalability

Scalability is crucial for an expanding business because you’ll need to know if your merchant account will be able to keep up with your growth. If you have a high revenue stream, look for providers that allow for negotiable transaction fees and that will offer you deals when you purchase additional hardware.

Features

Merchant account features will vary greatly, so it’s definitely worth paying attention to the ones that are the most useful to your businesses. For example, webstore owners should look for features that offer ecommerce integration, while businesses that sell internationally should favour providers that accept payments from multiple currencies.

Verdict

Both PayPal and merchant accounts will allow your business to take payments. However, there are different types of payment systems and their offerings vary.

Price-wise, PayPal only charges transaction fees while merchant accounts can charge both monthly account fees and transaction fees.

That said, PayPal’s high starting transaction fees (1.75%) make it a pricier option when compared with most merchant accounts, which can charge transaction fees that can be as low as 0.4%. Granted, the providers that offer the lowest transaction fees tend to charge account fees, but for businesses with high sales volume, they’re still a good deal, since that means they’ll pay less for each transaction.

Also, PayPal’s payment system isn’t as comprehensive or as secure as the ones offered by most merchant accounts. Overall, for budding, expanding businesses, merchant accounts will provide more scalability and associated services that can foster growth, like POS systems. However, if you’re a freelancer or an occasional seller, PayPal’s simplicity and lack of transaction fees on its Personal account will suit your needs.

Frequently Asked Questions

Do I need a merchant account to use PayPal?

You don’t need a merchant account to use PayPal. If you use it by itself, PayPal will already act as a payment-taking service. If you sell online, you can also use PayPal solely as an additional payment gateway alongside a third-party merchant account.

What’s the difference between merchant and normal accounts?

A merchant account is a type of business account that acts as a buffer zone for your card transactions while they’re being processed. Like business bank accounts, they can be used for a fee. However, you don’t have access to the funds in your merchant account. Instead, it’s fully operated by your provider as a means of sending money to you.