There comes a time when you need to decide if you will go with PayPal for all of your online payment needs or a merchant account. Here’s some things to think about, based on our experiences at Tekro.

When starting out, PayPal has much lower startup costs and is much easier to setup than a merchant account.  You can be up and running with PayPal as little as a couple days or whatever time it takes to verify your PayPal account, if you don’t already have one.  Then, its a matter of plugging your PayPal account information into your shopping cart software and off you go.

But PayPal doesn’t always come off as “professional” for an e-commerce site.  Customers are used to plugging in their credit card information directly in the shopping cart and may not appreciate or trust the experience of being sent over to PayPal to enter their payment information. Also, PayPal takes a hefty percentage of each transaction.

The alternative is a merchant account.  The merchant account advantage is the customer never leaves your site.  It provides additional trust to your customer that your website means business and their business is secure and safe, making it more likely to complete the transaction.

The Merchant account benefit is they take a lower percentage of each transaction for the fee, but the merchant account has higher up front costs.  There usually is a “setup” fee and probably an “application fee” and when all is said and done, it may be about $300 or $400 dollars, just for the merchant account.  Plus you have to setup a payment gateway.  They have their own setup fees, which likely would be in the $25 or so range.  Then you have the SSL certificate and dedicated IP address you would need.  The SSL certificate can be as low as $25 a year and the dedicated IP address another couple dollars.  Add to that fees for PCI compliance monitoring, which can be in the $100 range per year.

So there are some steep initial costs involved with a merchant account.  But with that merchant account, you like will get a per transaction fee between 1 and 2 percent of each transaction while PayPal will take almost 5%.  So which one do you go with?

For Tekro, we calculated roughly how many transactions we thought we would do in a month and a year.  Then we calculated out all our fees we would have to pay for PayPal and with the merchant account and then worked backwards to find the break even point.  For us, it was about 20 to 30 transactions a month.  Anything below this, PayPal was the better way to go.  Anything above it, and the merchant account was better.

If PayPal will fit your e-commerce needs, it might be the perfect fit for starting up.  Once you get some income, upgrading to a merchant account will make sense when the time is right.

If money is not an issue, I highly recommend starting out with the merchant account.  It costs more to get setup and requires more effort.  But once setup, it just works and provides plenty of room to grow and save money in fees in the long run.  Every business is different and you will have to judge which service is the better fit.

Also to keep in mind, PayPal may not be the only game in town.  There are other services cropping up such as Google Checkout.  If you are serious about PayPal, check PayPal’s competitors out.  You may find a better deal.  And if you do, let us know!