Fraud Prevention

Payment Processing: Choose the System that Fits

One of the most critical decisions business owners have to make is how they are going to process payments from their website. Entrepreneurs frequently find themselves asking if a merchant account is what they need or if they need a private payment system (a “PPS”) such as PayPal or the upcoming system from Google.

“The bottom line is that a small merchant has a lot of tough decisions to make in getting a business online,” said John Waldron, vice president for ecommerce sales for e-onlinedata, a merchant account provider specializing in ecommerce processing. “The most critical decision is payments. If you’re not going to get paid for your efforts, you might as well not do it in the first place. It comes down to getting paid; that’s why you’re doing it.”

Merchants may think that fees associated with merchant accounts and PayPal–type systems would be the most distinguishing characteristic. But while fees charged by the companies are important to consider, issues such as the payment process, the privacy of transaction data, dispute resolution, fraud protection and general credibility are equally important for any merchant to consider. There are several differences between what can be offered by a merchant account and the PayPal-type of system.


PayPal, for example, typically doesn’t charge certain fees that you might have with a merchant account, like setup fees, monthly fees or gateway fees. That alone might be attractive enough for an individual to opt for PayPal over a merchant account. However, PayPal’s new Virtual Terminal is an option that brings the two accounts much more in line from a monthly fee perspective.

Both PayPal and merchant accounts charge transaction fees, which include a percentage of the sale plus a flat fee per transaction. It’s important that merchants carefully review these fees for each payment option to ensure that they are keeping as much money as possible from each transaction.

As noted above, fees alone shouldn’t be the sole determining factor when choosing a payment option. However, if you are a very small merchant and you do very few transactions per month, a PayPal-type account may be the way for you to go.

Sloane Bouchever, President of e-onlinedata, agreed that individuals or micro merchants might find PayPal’s fee structure advantageous. “Any individual dealing with micro payment or accepting payments within an auction environment might see PayPal as an option in terms of dollars and cents,” Bouchever said. “For larger businesses, a merchant account and payment gateway is more viable.”

“It’s imperative that a merchant take the time to understand not only the benefits of different payment vehicles, but the costs involved as well.” said John Bodine, Vice President for sales and marketing at Authorize.Net, a credit card payment gateway. “Once a merchant understands the value each solution brings, then it’s not a decision based solely on price.”

The Payment Process

When using a merchant account, businesses are involved in a FDIC-insured process of transferring funds from a consumer to a business. The merchant has the confidence of knowing that the trustworthiness of the banking system is behind each transaction made on its website. With a merchant account, the process of money moving to the right account is automatic and happens in about two business days. The money is deposited directly into your checking account which you control and it’s protected by federal banking regulations.

A PPS account operates differently. Your money is deposited into, for example, a PayPal account, which PayPal controls. Since PayPal is not a bank, it is not required to follow federal banking regulations. To get your money, PayPal requires the merchant to initiate the transfer to retrieve business funds and, within a few days, the money will arrive. But, PayPal can arbitrarily, and under their own discretion, hold your funds for extended periods of time if a dispute arises, and the Internet is full of horror stories of individuals and micro merchants who have been on the bad side of a frozen PayPal account.


In the age of data protection, a merchant must realize there are distinctions between a merchant account and private payment system such as PayPal.

For example, PayPal notes on its website that “we may disclose the information we collect … to companies that perform marketing services on our behalf. We may also disclose the information we collect (but not your bank account or credit card information) to other financial institutions with whom we have joint marketing agreements, in order to determine whether you are pre-approved for the products that PayPal is jointly marketing with the third party. …” PayPal also notes in its privacy statement that it shares data with its parent (eBay, Inc.), subsidiaries and joint venture partners.

“Merchant account providers do not share customers’ or merchants’ data and PayPal clearly can,” said Bouchever. “Why would you as a PayPal customer allow them to share your or your customers’ data to a third party? It’s a different mindset than how we and companies like Authorize.Net do business. We see it as a huge privacy issue.”

Dispute Resolution

PayPal represents both sides of the dispute – the buyer and the seller. This could be an issue making fair representation difficult for either side. With a merchant account, the business owner is represented by your acquiring bank, independent of the consumer and the issuing bank.

Advanced Fraud Protection

Most PPS systems do not include front-end fraud protection tools. PayPal, for example, automatically declines transactions that result in AVS/CCV mismatch, which takes control of that possible mismatch away from the merchant. A merchant account (coupled with a payment gateway such as Authorize.Net) has numerous customizable fraud filters that identify and track suspicious transactions and place them on hold for the business owner to accept or decline. The key here is who has the control.

“We think it’s important for the merchant to have the ability to control his or her fraud settings and not lose a potentially good transaction,” Bouchever said. “PayPal has 100 percent control on sales. With our systems, a merchant has the ability to control and salvage transactions. We think it’s very important.”

Many international transactions can also be blocked by PayPal.

“It’s up to each business to make their own decision to sell to a certain country,” Waldron said. “We’re not going to sit here and tell you can’t do business with a certain person because they live in a certain region.”

Benefits of Private Payment Systems

To be certain, private payment systems such as PayPal have their place. Large auction sites like eBay couldn’t have grown without first having established a mechanism for individuals to exchange money quickly and efficiently. For these individuals and micro merchants, obtaining a PayPal account is easy and uncomplicated. But, many experts agree, businesses have needs that go beyond merely transferring money.

General Credibility

Credibility is perhaps the most important factor, but it’s difficult to quantify when making a distinction between PayPal and a merchant account/payment gateway combination.

Merchants trying to convey themselves as established businesses might think twice before aligning themselves with private payment systems since those systems aren’t typically used in the brick-and-mortar world. The credit card processing system has been around for over 40 years. Electronic payment processing has been around since 1970 when it was first introduced. The processing networks and backbone systems have evolved over four decades and have proven to be a highly reliable platform responsible for moving several billions of dollars of payment volume. Tremendous credibility, trust and confidence has been placed upon this system. Merchant accounts and payment gateways leverage this proven and reliable system of payment processing.

“Most people think of PayPal as an auction payment system.” Waldron said. “PayPal is thought of as a solution to exchange personal money after an auction. How legitimate is a site using PayPal? That’s hard to quantify.”

Bodine also agreed that since traditional main street businesses utilize merchant accounts, online businesses need to take on the same characteristics if they are going to be seen as traditional merchants.

“If you consider yourself a real online business and a real transacting merchant, the real key is the merchant account and payment gateway,” Bodine said. “It represents the knowledge of how business is done – retail, online, etc. – and it’s done with a bank to make sure the transaction is secure. Doing real business means offering real business services. That’s what the merchant account and payment gateway does. Like it happens in the retail world, it’s the same in the virtual world.”

Bodine added that catering to what the online shopper is expecting is important.

“If I am a true business person, people expect me to do these certain things. Your website is your entire sales engine. You’re not an auction environment bidding one against the other. PayPal is a niche for an auction environment – individual to individual. However, they lack credibility dealing with customers in a business environment and they lack the trust that comes from the banking infrastructure that a person gets with a merchant account.”

If you’re interested in establishing a merchant account, be sure to do your homework. There are differences between the types of accounts available, the types of fees charged and various value-added features you can add for a fee.

PEC Staff
PEC Staff
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