I get a lot of calls from people who are really new and ask about if they need a merchant account (usually you don’t) or if PayPal or some other processor like 2checkout will do the job. If you’re not going to sell through Clickbank or Commission Junction (which send checks and do that for you) then it’s important to have a way to accept credit card payments directly.

There’s a lot of payment options for an online business, but the two most popular by far are either a traditional merchant account or Paypal. For someone just starting out, Paypal has only the three percent charge and is very easy to qualify for. Also the buttons are simple to make to accept payments and the seller protection feature is very handy (if someone uses a fraudulent credit card but has it shipped to the verified Paypal address they have on file, you’re insured up to $5,000 against fraud). Another nice thing is if you run a refund, you get the three percent fee back which isn’t typical. The only real downside is they limit you on the things you can accept payment for, where in a merchant account pretty much anything legal is allowed.

A real merchant account is harder to qualify for (it’s based on credit history) because it’s basically an unsecured loan on the amount you charge each month. The benefit is lower rates and the ability to use terminals for retail purchases where you swipe the card. There’s even some cell phones with a card reader built in for things like trade shows or flea markets.

There’s a pecking order for merchant account agents and it depends on their position with the underwriting bank. At the top are underwriters, who can get the lowest rates right from the bank. My friend at MST (800-715-8053) is one of these and it took a really long qualification process and background check.  Below them are places that can’t qualify as an underwriter, and  independent agents who sign with those, and as you go down the the chain the rates get higher.

The thing to look out for with a merchant account is equipment. I did promotions for a large merchant account place years ago and leasing the equipment was a huge markup. They made money off the basis points on the merchant account, but getting people into leasing a terminal was always a big goal. If you’re doing just online stuff, you can get a secure gateway site to do the processing. If you need to do retail (swiping the card) then buy the equipment if at all possible.

Overall, if you’re just starting out then Paypal is the best choice. If you’ll be doing big volume, high ticket prices, or products not allowed by Paypal, then a merchant account is the way to go. Merchant account fees structures can be about as confusing as a mortgage document so make sure the rep can explain them because like a mortgage, some start with a teaser rate and then shoot up later. When I spoke with MST today they said most places don’t know what they’re really paying and about 8 in 10 are paying more than they should (given their credit rating and length of time in business).  If you do need one or think you could do better, call MST at 800-715-8053.  They also have an SSL secure form if you’d rather do it online.