Accepting Payments Online: Merchant Accounts vs. Third Party
If you want to sell online, you need to be able to accept
credit card payments. The traditional way is to open a
merchant account. However, opening a merchant account is
expensive, especially for small businesses who are just starting.
In the last few years, however, a number of companies have entered the
market with a new concept: third party credit card
processing services (for example, Paypal). This option offers small
businesses a quick and easy way to accept cretit card payments. It
by-passes the need to open a merchant account, plus, the sign-up process
is much easier and faster: you can literally sign-up, be approved and
start accepting payments online in minutes.
Traditional merchant accounts are expensive primarily because they
charge fixed fees that you will have to pay even if you don't sell
For example, depending on the case, a merchant account
will require that you pay:
An application fee (whether you are approved or
A set-up fee (once your application has been
The discount rate: usually between 2% and 3% of
A per transaction fee.
A monthly minimum fee (if the dollar amount of
the discount rate falls below the amount of the fee).
Statement, gateway and connection fixed fees.
Third party credit card services usually just charge
a percentage of sales and, in some cases, a
per-transaction fee, so you only pay when you sell something.
If your sales volume is not very high, a third party service can save
For example, lets assume that you make 10 sales a month at $25 per sale,
to compare the merchant account option vs. the third party
If a merchant account charges you a $25 montly minimum fee, $50 in
gateway and connection fees, a discount rate of 2.0% of sales, and a fee
of $0.30 per transaction (for simplicity's sake we're not factoring in
any application fee or set-up fee), the charges you would have to pay
your merchant account provider amount to $83.00.
If you use a third party service that, like Paypal, charges you 2.9% of
sales plus $0.30 per transaction, it would only cost you $10.25.
However, the advantages of using a third party service start to
diminish as your sales start growing. In
other words, since the discount rate charged by traditional merchant
account providers is lower than the percentage of sales charged by third
parties, the higher your sales the more the fixed fees of the merchant
account will be offset by its lower discount rate.
For example, let's assume that instead of making 10 sales per month, you
make 1000 sales, at the same $25 dollars per sale (total sales per
month: $25,000). You will then have to pay your merchant account
provider $850.00 (the $25 minimum will be waived because the dollar
amount of the discount rate will be greater than $25).
If you use the third party service, you will pay $1025 for the same
$25,000 in sales.
Your break even point in this example would be 222
transactions (sales) of $25 dollars each: if you make 222 sales or less,
you would be better off with a third party service. If you make 223
sales or more, your best bet would be a merchant account.
In summary, the more you sell the more you should consider opening your
own merchant account. However, if you are a small business just
beginning to market your products on the net, or if you want to start
quickly and don't expect huge sales in the near future, you may want to
go the third party route.
The two best known third party credit card services among web marketers
PayPal began in 1999 as a tool for transferring money
for payment in eBay auctions and is currently the most popular
online payment system of its kind, with over 35 million accounts at the
time of this writing (December 2003), and a fee structure of 2.2% - 2.9%
of sales plus $0.30 per transaction.
Clickbank specializes in serving web marketers that
sell digital products, which are directly downloaded
from the Internet. These products are offered through Clickbank's
extensive network of over 100,000 affiliate sites.
Merchants of digital products simply place a sales link on their site
and Clickbank handles the credit card processing. At the time of this
writing, Clickbank charged a one time $49.95 set-up fee, a processing
fee of 7.5% of sales and a $1 fee per transaction.
In summary, check all your options first and choose the
one that is most likely to fit your needs in the long run. Remember that
cost is only one of the variables you should consider
in your analysis. Spending some time visiting the websites of merchant
account providers and third party credit card service providers, and
doing your due diligence early, can save you thousands of dollars in the
|About The Author
Mario Sanchez is a Miami based
freelance writer who focuses on Internet marketing and web design
topics. He publishes The Internet Digest (
), a growing collection of web design and Internet marketing
articles, tips and resources. You can freely reprint his weekly
articles in your website, ezine, or ebook.