Do I Need a Merchant Account to use Paypal?

PayPal was the first to offer an alternative payment method for online sales back in 1998. Because users did not need a credit card to make purchases, it quickly became the favorite way to buy and sell for online auctions. eBay users drove its popularity in the early days and things just took off from there.

Opening a basic PayPal account is still free and that rocketed its usage amongst consumers too.

But how about small business owners? Do they need a merchant account to use it?

How PayPal works

PayPal is not a bank. It claims to offer merchant accounts for businesses but what it gives you is not a true merchant bank account.

What’s the difference?

Services like PayPal, stripe and Square are what’s called payment facilitators (PayFacs) or payment aggregators. They have a master merchant account and charge their customers also called sub merchants a fee to use it.

Only a bank can offer you a merchant bank account, which is usually called just a merchant account.

However, PayPal works absolutely fine for sole traders and many small businesses especially in the startup phase. It has gained a good reputation and has improved a lot over the years.

Unlike banks, who investigate every application for a financial service before granting it, PayFacs allow businesses to sign up and start using the payment services immediately.

It’s only later that they look at a business and perhaps freeze its account if it does not not meet their initial criteria or if it is operating in any risky or even illegal manner.

Why you don’t need a true merchant bank account to use PayPal

PayPal is technically a merchant account. When you use a service like PayPal, you are utilizing their merchant account as part of the deal. Perfect for shopping carts, online invoicing and online payments.

Why does PayPal seem to offer a “merchant account”?

Any business can become a PayPal merchant for payment processing. And therefore PayPal considers that those businesses have a “PayPal merchant account”.

That’s not a problem as long as you are aware of what a true merchant bank account is.

PayPal is developing several services that appear similar to banking, such as PayPal Credit, for example. However, it is not yet a bank and only a bank can offer a merchant bank account.

What is a real merchant bank account?

We explain in full detail in another article What is a Merchant Bank Account but here is a quick summary of the main points:

• A merchant account is a bank account with a difference
• It is a legal requirement for accepting debit and credit card payments
• Card payments must initially be paid into a merchant account by a payment processor, never directly into your regular business bank account
• Funds can then be transferred via ach from your merchant account into your business bank account
• A US business can legally open and operate a merchant account with a bank in many foreign countries
• Most businesses of any size will have their own merchant account

Merchant accounts are simply part of doing business. A business using PayPal typically switches to a regular merchant account when revenues grow beyond about $100,000.00 annually.

Do I Need a Merchant Account to use PayPal for my business?

If you want to use a PayFac for your business payment processing, then you do not need a regular merchant account. Simply complete PayPal’s application process for a business account.

The same applies if you want to use Stripe, Square, Skrill, Shopify or any of the 100+ payment facilitators that offer payment solutions in the US. There are PayFacs in most major countries.

Benefits of a real merchant bank account Vs PayPal

Providers of merchant accounts don’t just process your card payments. They are full service providers with features and benefits such as:

• Deal with a credit card processor that understands your industry and the challenges it faces.
• You can call on a dedicated account manager when issues arise.
• Professional and prompt customer support, which PayFacs cannot always provide because of their vast number of users.
• Lower transaction fees and/or charges as sales volumes grow. All merchant account providers and third party payment processors charge fees. These can be a combination of fixed monthly fees, percentage rates and or charges for specific services as well as a transaction fee. While PayPal does not charge a monthly service fee for their standard account, their percentage rates and transaction fees are far higher.
• Business analytics and customer buying information that gives a growing business invaluable insights for driving sales strategies.

What you need in order to apply for a merchant account (not PayPal)

Banks approach and underwrite applications in a similar way to loan requests. They check out the business and the person making the application to assess any potential risks.

Even start-ups must have these things in place first:

• A business bank account
• A working website
• A business license in most cases
• Cashflow projections that show expected sales volume
• Your EIN from the IRS
• Government issued ID such as your driver’s license

If your business has been trading for some time already, then you need to supply:

• P&L and Balance Sheet
• Payments processing history if you already have or had a merchant account

Underwriters may ask for more paperwork, especially if your expected sales volumes are high. The process is usually straightforward but it’s a good idea to think ahead and have everything ready to avoid delays.

Accepting credit cards – Low risk Vs high risk merchant accounts

Acquiring banks and credit card processors operate a system of risk assessments on every application for merchant services. That is simply a sound business model to help avoid losses.

They look at the industry your business operates in and its proven payments processing risk profile.

Then they categorize industries by the level of risk they possess. At one end of the spectrum are low risk industries such as restaurants, retail stores stores selling kids’ toys or or any basic brick and mortar style business establishment. These bricks and mortar businesses are where the cardholder is present, in person for the credit card transaction. Transaction values can also tend to be relatively low.

They also experience far less fraud and chargebacks than online e-commerce companies where Cardholder Not Present (CNP) transactions are normal. This immediately opens a higher risk of fraud.

Certain industries such as nutraceuticals and crypto currencies are obviously high risk. You may be surprised to learn that so are kitchen and home furniture retail businesses. That’s because they are high ticket sales transactions. That could potentially mean big value refunds and chargebacks if things go wrong.

Find out more in our guide about High Risk Industries for Merchant Accounts.

Why it pays to engage the specialist to get your merchant account

We at SecureGlobalPay are long established providers of full service merchant accounts. Our specialty is partnering with specialist banks and card processing companies. Our network of contacts in the payments industry means we can provide a payment solution for any legal business. Even those that have been declined by US banks.

Especially for high risk industries, it’s highly recommended to go with a service provider who specializes in your sector. It means they have taken time to understand it and its unique complexities. Usually the services are then tailored for that industry’s card payments profile.

Our payment processing experts will match your business to an ideal credit card processing company. Then they guide you through the application process.

We will also supply a payment gateway for online sales that is configured to work with the chosen payment service provider.

Start now – get your merchant account here

Click here to take the first step to your merchant account. We aim to get back to you with an update on your application within 1-2 days.

If you need more information or simply want to talk things through, then call us on 1-800-419-1772. We have a team of experts in the field of credit card and mobile payment processing. They will be only too pleased to answer your questions.