Believe it or not, there are times when I recommend using PayPal. It’s a good option for some companies. Allow me to explain.
The way to know whether you should use PayPal or not can be found by following the $3,000 Rule.
What is the $3,000 Rule?
The $3,000 rule is pretty simple. It’s a benchmark dollar amount that I created just by using a simple calculation comparing the costs of PayPal versus that of a merchant account solution. These are averages, of course.
With PayPal, you’re going to pay the 2.90% plus 30-cent transaction fee or whatever it is for your account. Merchant accounts are typically 10 to 15 dollars per month for the platform and the gateway fees. The rates are typically going to be lower. On average the fees are just under 2% up to maybe 2.5%.
There’s a 40-50 basis point, or a half of a percentage point difference between PayPal, which is a higher rate, and merchant accounts, which is a lower rate.
The $3,000 Benchmark
Very simply, how this works for most people that I talk to is that if we use $3,000 as a central benchmark for business, it’s okay to use PayPal.
If you process less than $3,000 a month or you only have periodic transactions, or you’re a seasonal business or simply, a hobby business. If you’re not doing a ton of volume, for example, if you only have one transaction a month or have a business that’s not very consistent. In those scenarios, t’s okay to use PayPal.
I actually recommend that people use PayPal, or at least some other solution like PayPal, because there’s no holding cost, and there are no setup costs. It is also fairly easy to set up and to get started.
You can have a PayPal account set up with your email account within a couple of minutes. You can quickly send out an invoice or a payment link to your customer to collect payment via credit card — and you’re in business!
It makes sense to use PayPal for those periodic transactions, low transactions, infrequent volume, and so forth. That’s when I recommend PayPal.
Utilizing a Merchant Account vs. PayPal
The $3,000 rule is, as I mentioned the rates and the cost for the two earlier, what makes the scales start to tip toward utilizing a merchant account. This is where it actually makes more sense from a cost standpoint.
You get all the other benefits that you’ll get with most merchant accounts these days:
- Platform access to online reporting
- Virtual terminals
- API integrations
You’ll receive a lot more with a merchant account solution, and those rates will end up being less when you’re processing $5,000 to $100,000 per month.
Two percent is going to be a whole lot less than 2.9% when you’re talking about the merchant account rates and fees. That’s what the $3,000 rule is — very simply stated.
It started as just a cost comparison, and over the years, as the merchant services industry and the payments industry have evolved and changed, especially in the online world, the separation for that has really gotten quite a bit bigger.
It’s really a night and day difference between the two.
Use a Merchant Account if You Don’t Fit the $3,000 Rule Threshold
There are a lot of instances where I don’t recommend PayPal, and there are other videos on my channel that outline when to stay away from it and when not to use it. In certain cases, it is an acceptable solution to use if your business falls into those parameters that I shared earlier.
Feel free to comment if you’re currently using PayPal, if you’re just on that threshold of 3,4, or 5,000 dollars a month and you’re in that position where you’re going to be looking at a merchant account option because your business is picking up volume and momentum. Let me know what your thoughts are.
If there are any questions that I’ve missed that I can address, let me know in the comments because other people probably have those questions too.
If you’re new here, and you haven’t seen any of my other videos, feel free to check out some of the playlists that I have linked below the video.
I cover all things payments related, merchant account topics, online order forms, payment pages, invoicing… all things that touch the electronic payment, in particular, the credit and debit card processing, ACH payments, and so forth.
If that is information that you want to learn about, you want to get a system perhaps set up in your business, or you’re just looking around to educate yourself more on what’s available and what you need for your business, feel free to check out the playlists and other videos on the channel.