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PayPal vs. Merchant Account: What’s the Difference?

Jennifer Dublino
Jennifer Dublino

Learn about PayPal and how it is different from a merchant account to choose the best credit card processing solution for your business.

If you want to expand the types of payment your business accepts, you have options. You can get a merchant account from a credit card processor or you can use a credit card facilitator like PayPal. The characteristics and needs of your business will determine which one you choose. Keep reading to learn more about PayPal and how it differs from a merchant account.

Did You Know?

PayPal credit card processing is done by a single company, while merchant accounts are available from different providers. The application process is more involved for merchant accounts, but they are usually more scalable and work well for established companies that are growing.

Merchant accounts

Merchant accounts, the traditional way of accepting credit cards, are a service provided by credit card processors. There are many highly rated credit card processors, offering various rates, acceptance criteria, and levels of service. 

Editor’s note: Looking for the right credit card processor for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is a merchant account? 

The best merchant account services provide the basic building block of accepting credit card and other payment transactions. To sign up for a merchant account, you will have to go through an application process. Not all companies will be approved. If your business meets these criteria, however, you have a good chance of obtaining a merchant account: 

  • Good business and personal credit rating
  • At least three years in business
  • Existing bank account for the company
  • Good record with a previous merchant account

All merchant accounts charge transaction rates, which are a percentage of the purchase amount and sometimes also a flat per-transaction amount. These rates are 0.5% to 5% of the transaction amount, plus 20 to 30 cents per transaction. 

Some credit card processors charge a monthly fee for customer service and statements. They may charge additional fees for services like PCI compliance – a required security feature – and a payment gateway if you are completing e-commerce sales. There will also be incidental fees that are incurred when certain events, like chargebacks, take place.

When you obtain a merchant account, the credit card processor will provide a dashboard where you can see all of your transactions and create reports. It will usually include a virtual terminal to manually input customers’ card information for phone or mail sales, or if the consumer’s chip or magnetic stripe is not working. This software is free. 


If your business accepts in-person transactions, you will likely need to purchase card processing hardware. Options include wired card readers for fixed locations, mobile card readers, and point-of-sale (POS) systems for fixed retail and restaurants.

How does it work?

When a transaction is initiated by a customer, your business accepts the credit card. Behind the scenes, the credit card processing software takes the transaction information and sends it to the credit card processor. The processor sends it to the customer’s card-issuing bank, which approves or declines the transaction. If it is approved, the issuing bank transfers the funds to the merchant account where it is held temporarily. The credit card processor then combines all of your transactions in batches and deposits them into your company’s bank account. 

Merchant account pros and cons

When considering whether to acquire a merchant account, consider the benefits and downfalls. Here are some pros:

  • It has lower transaction rates.
  • It’s good for high sales volumes.
  • It has lower fees for chargebacks.
  • It has a lower incidence of holds and freezes on accounts.
  • You have more control over your customers’ online shopping cart data.

These are some cons of obtaining a merchant account:

  • It has a more complex and longer application process.
  • New companies or those with low credit scores are less likely to get approved.
  • It has added expenses.
  • It has higher costs for PCI compliance.

PCI compliance fees vary by processor, but they usually range from $79 to $120 per year.


PayPal is a payment platform that has been around since 1998, and started out as the first channel for individuals to send money using a mobile phone app. Since then, it has grown to around 392 million active users, and processes an average of 41 million transactions a day – including 22% of all online transactions in the United States. PayPal began offering merchant services a few years ago and is now up to over 29 million active merchant accounts. 

How does it work?

PayPal is a credit card facilitator, also called a payment aggregator. PayPal uses one master merchant account, and each individual merchant is a submerchant on that account. It then contracts with a third-party credit card processor to communicate with the issuing bank, and transfer funds into its master merchant account.

Once your money gets to PayPal’s merchant account, it credits your business PayPal account.  You can then choose to either keep the money in your PayPal account to pay your business expenses or transfer it to your bank account. Unlike with a merchant account, this last step is not automatic.

Since PayPal uses one merchant account for everyone, it’s sensitive to potential fraud. If your company has several chargebacks within a short period, it may freeze your account. To lower your risk of this occurring, plus paying chargeback fees, you can opt for PayPal chargeback and seller protection services for an extra cost. [Read related article: What You Should Know About PayPal Credit Card Fees]

What is PayPal Zettle? 

PayPal started out as a powerhouse of online payment processing, and it still enables merchants to accept online payments. But under its PayPal Zettle brand, the company provides POS hardware and software for mobile transactions.

PayPal started offering merchant services through a service called PayPal Here, which primarily focused on mobile payments. Recently, however, it has converted all new in-person merchant services to the PayPal Zettle service. Zettle allows your business to accept a range of payment types – including credit and debit cards, PayPal, Venmo, and Buy Now, Pay Later (PayPal Credit). 

Did You Know?

A 2018 PayPal study by Ipsos found that customers are 54% more likely to make a purchase when an online store accepts PayPal.

PayPal pros and cons

Consider the pros and cons when evaluating PayPal for your payment processing. Here are some advantages of using PayPal:

  • It’s easy to sign up and get approved.
  • It’s suitable for international companies.
  • It’s an ideal payment form for PayPal customers.
  • It complies with PCI DSS.
  • It has no transaction volume requirement. 
  • It easily integrates with other online platforms, including GoDaddy, Wix and Shopify.
  • It’s the only payment platform to offer on-the-spot credit with its Buy Now, Pay Later option.

These are some of the disadvantages of using PayPal for processing payments:

  • With its tight regulations, it’s a bad choice for high-risk industries.
  • Any suspected fraud will freeze your funds.
  • It has mediocre to poor customer service.
  • It has high chargeback fees.

Choosing between PayPal and a merchant account

Both PayPal and merchant accounts allow you to accept multiple forms of payment, and provide you with payment processing software and hardware, but their ideal users are different. Here are some different use cases and which solution is best for each.

Best forMerchant accountPayPal
Startups and very small businessesN/AX
Established businessesXN/A
Low-transaction businessesN/AX
High-transaction businessesXN/A
High-risk businessesXN/A
International salesN/AX
Shopping cart data controlXN/A

They also have different transaction rates and fees.

FeatureMerchant accountPayPal
Transaction rateVaries, but generally 0.5% to 5% of the transaction amount + $0.20 to $0.30 per transaction
  • Online: 2.9% + $0.30
  • In person: 2.29% + $0.09
  • Virtual terminal: 3.49% + $0.09
  • PayPal or Venmo QR code: 1.9% + $0.10
Monthly fee$10 to $35None

Alternatives to PayPal

PayPal is not the only payment aggregator available. There are others that compete with the same business model.


Stripe works best with e-commerce, mobile commerce and subscription-based businesses. Stripe does not require a long-term contract, and its rates are similar to PayPal’s: Online transactions are 2.9% plus 30 cents per transaction. International charges incur an upcharge to process, but the $15 chargeback fee is refunded if a chargeback is resolved in your favor. Learn more in our review of Stripe.


Square was the pioneer in mobile credit card payments. There is no monthly fee for the basic version of Square, but if you want the retail or restaurant version, there is a fee of $60 per month, per location. Transaction rates are 2.6% and 10 cents per transaction. The basic plan has limited inventory capabilities; if you need that feature, consider the retail version. Square’s restaurant version has industry-specific tools, including menus by daypart, order entry and floor plans. Learn more in our review of Square.


Shopify’s basic plan costs $29 per month, plus 2.9% and 30 cents per transaction for online sales. The advanced plan cost $299 per month plus 2.4% and 30 cents per transaction. It includes an SSL certificate, abandoned cart recovery (one of PayPal’s weak points) and fraud prevention. Shopify plans include full inventory management, so they are geared toward companies that sell products. 

Square and Shopify focus more on in-person sales, although they also support e-commerce transactions. Both platforms allow you to accept credit cards, contactless payments from mobile wallets and ACH payments. They both also have a suite of available POS systems, accessories and card readers. If you have Square’s card processing hardware, you must use Square as your payment processor. Shopify allows you to use other card processors with its hardware, but those transactions incur a surcharge of 2%. See a side-by-side comparison of Square and Shopify for more information.

Image Credit: cyano66 / Getty Images
Jennifer Dublino
Jennifer Dublino
Contributing Writer
Jennifer Dublino is a prolific researcher, writer, and editor, specializing in topical, engaging, and informative content. She has written numerous e-books, slideshows, websites, landing pages, sales pages, email campaigns, blog posts, press releases and thought leadership articles. Topics include consumer financial services, home buying and finance, general business topics, health and wellness, neuroscience and neuromarketing, and B2B industrial products.