December 19, 2003
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 anything.
For example, depending on the case, a merchant account
will require that you pay:
An application fee (whether you are approved or not)
A set-up fee (once your application has been approved)
The discount rate: usually between 2% and 3% of every sale.
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 you money.
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 option:
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
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 are Paypal and Clickbank.
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
You can freely reprint this article provided that
you include the following resource box:
Mario Sanchez is a Miami based freelance writer who
focuses on Internet marketing and web design topics. He publishes
The Internet Digest (
http://www.theinternetdigest.net ), a growing collection of
web design and Internet marketing articles, tips and resources.
You can freely reprint his weekly articles in your website, ezine,