Merchant Accounts vs. Online Payment Services: Which One is Better?

In the last 10 years, the financial transaction landscape has changed dramatically. Whilst companies were once held hostage by merchant accounts that charged high fees, today online payment services like PayPal and Google Checkout make accepting money easier and cheaper than ever before.

Online payment services are an easy, safe, and inexpensive way to help your business make more sales online – and even in your retail store.

What is an Online Payment Service?

An online payment service is different from a merchant account. Merchant accounts are set up directly with banks that allow businesses to accept credit card payments for an established monthly fee, plus a percentage of every transaction. In contrast, an online payment service directly takes the payment details from the customer – and then holds the funds (minus a percentage, but never a monthly fee) until you transfer them to your bank account.

Online payment services have been in existence for more than a decade. PayPal is the most common and most popular online payment service that is recognized around the world, but there are a plethora of others, including Google Checkout, which is known for its cheap fees.

With an online payment service, you never have to worry about storing your customers’ financial information, as this data is transmitted directly between the online payment service and the client. This means you never face lawsuits or bad press, unlike other companies in the news lately whose customer databases have been hacked.

How an Online Payment Service Works

To utilize an online payment service like PayPal to accept credit card payments, you must first create a business or commercial account with the service. You then need to link the account with an existing checking account and credit card.

With Google Checkout and PayPal, creating a new account is free, and there are no monthly fees (which is a nice relief in contrast to merchant accounts). You will pay a set per-transaction fee plus a small percentage of monthly sales, but the total fees are much less than merchant accounts who charge additional gateway fees, statement fees, and other lists of fees that add up quickly.

For the consumer, the transaction is easy and secure, and is no extra charge for them. Your buyer doesn’t even have to have an account with your online payment service. You can offer to have them pay at checkout from your online store, bill them with an invoice from your online payment service, or even conduct live transactions in your retail store with a “virtual” terminal, where you simply enter the customer’s credit card number online rather than swiping it through a credit card terminal.

Merchant accounts certainly have their place in commerce, but they are easily becoming the financial gateway of the past.

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