Merchant account forums

This article compares makes a comparison between having your merchant account and payment gateway, to using a third party processor. The aim of the comparison is to identify the differences in cost and functionality between these two options to illustrate the significance of choosing one merchant service provider over another.

Your Own Merchant Account
Here you own the merchant account and the payment gateway (the license and the technology). Both are necessary to process online credit card transactions. This merchant service can be tailored to the individuals needs. While the merchant is largely responsible for the functionality of the account, merchants have the ability to customise the way in which their consumers interact with their service.

The Third Party Service
Third party processors do not supply merchant accounts they simply process your transactions for you through their merchant account. These are companies such as Paypal, Worldpay and 2Checkout, to mention a few, that offer their own standardised processing facilities. Unlike the true merchant service third party processors do not facilitate business specific solutions and or the ability to customise. Essentially they offer a processing facility, generally speaking, nothing more and nothing less.

We are going to compare a fictitious merchant account and gateway to two third party processors, Paypal and Worldpay. The price structures are as follows:

Merchant Setup Fee: $50.00
Account: Discount Rate: 2.15%
Transaction Fee: $0.30
Monthly Fee: $15.00
Gateway Setup Fee: $90.00
Gateway Monthly Fee: $15.00

Worldpay: Setup Fee: $299.00
Discount Rate: 2.90%
Transaction Fee: $0.35
Monthly Fee: $35.00

Paypal: Note: Paypal uses different fee structures depending on monthly sales volume. However the only fluctuating cost is the discount rate. The discount rates are divided up here into 4 tiers (a – d). The higher the monthly sales volume the lower the discount rate: (a) 0 – $3,000 (b) $3,000 – $10,000 (c) $10,000 – $100,000 and (d) $100,000 plus.

Setup Fee: $0.00
Discount Rate: 2.90% (a) 2.50% (b) 2.20% (c) 1.90% (d)
Transaction Fee: $0.30
Monthly Fee: $0.00

The comparison

Start up costs: Merchant
Account Paypal Worldpay
$170.00 $0.00 $299.00

Third party processors are usually an attractive option when it comes to the application process because they generally do not charge much if anything, to get going. Here, after the first month, Worlpay contradicts this theory and in-fact charges $129 more than the Merchant Account. Paypal costs nothing, which is a bonus, but the extra $170 for the Merchant Account is a small price to pay to be fully in control of you service, development and image.

Fees: Merchant
Account Paypal Worldpay
Discount Rate 2.15% 2.90% 2.95%
Transaction Fee $0.30 $0.30 $0.35

The fees depend entirely on the sales volume; the more transactions that are processed the more fees you pay. However, Paypal reduces the discount rate paid on each transaction as your sales volume grows. The 2.90% (above) is for a sales volume less than $3000.00. Although Paypal will reduce this percentage if you make enough sales you would have to be bringing in between $10,000-$100,000 a month before the discount rate drops (2.20%) to rival the Merchant Account.

Ticket Price and Sales Volume
High average ticket prices ($200-250) and a high level of transactions (400) per month would see Worldpay as a less attractive proposition. It has the highest transaction fee and discount rate not to mention a monthly fee. If you’re going to pay a monthly fee then find out what your getting for it because third party processors, as mentioned above, do not typically cater for individual requirements. In that respect your may as well pay the monthly fee towards your own merchant account and forget about restrictions and standardisation. If you’re making a lot of expensive sales then your better off attaining your own merchant account or using a service such as Paypal.

Businesses with average ticket prices ($40-60) and an average amount of monthly transactions (200) have a less obvious choice. Paypal is likely to be your cheapest option with no monthly fee. Over time the Merchant account will out-do Worldpay because of its low discount rate.

Small businesses with low average tickets (10-20) and a low amount of average sales will find Paypal or third party processors with similar fee structures i.e. no monthly costs, the most accommodating option. Generally speaking third party processors are better suited to those with small turnovers, as they require less maintenance and consequential running costs.

Conclusions
The examples I have used are based on a lot of generalisations. Businesses and merchant service providers are far more varied than I have accounted for here. On the other hand this article should give you an idea of the differences between having your own merchant account and using someone else’s (third party processors).

Across the board Paypal is the cheapest option and companies with low average tickets and low sales volumes, may find investing in a proper merchant account unnecessarily expensive. However it is important to be aware of more than just the price of the service and to fully understand what you will get for that amount of money. Spending a bit more money on your own merchant account, having full control over your web store and subsequent customer interactions, puts you in control.

Paypal and other third party processors are perhaps better suited to smaller businesses who make less and smaller sales. Regardless, you must ask yourself how you would feel if you were re-directed to another website to by a product you found elsewhere. If company image is important then you will need your own merchant account to facilitate a unique, professional look and feel.