Understanding PayPal

PayPal is perhaps the most common way to transact business on the Internet, yet many people are confused about how it works and if they should accept PayPal on their web store. While there are many offerings from PayPal, there are essentially 3 types of accounts that you should understand:

1. A Buyer. Buyers do not have to have a PayPal account in order to make a purchase using PayPal as an option – all they have to have is a credit or debit card. For this reason alone, you should accept PayPal as a form of payment on your website. If a customer does not have a PayPal account, and they want to use PayPal to make a purchase, they simply enter their credit card information and you get paid. A major advantage to buyers is that they can pay using Mastercard, Visa, Discover or American Express without exposing their credit cards to the merchant. A buyer can choose to register for a buyer account with PayPal, but it isn’t required. If a buyer does have a PayPal account, then in addition to paying for purchases with a credit card, they can also pay with their PayPal balance and/or a bank transfer. PayPal is absolutely free to buyers.

2. A “casual” Seller. With a personal PayPal account described above, a casual seller can also accept payments from credit cards and echecks, although there is a limit of 5 sales per 12 month period. The fee to do this is 4.9% plus 30 cents per transaction. Many people who sell on eBay just have personal accounts so they can accept PayPal payments. In order to be able to accept payments, there is a verification process that PayPal implements to make sure you are who you say you are. Basically, you provide them with your bank information, and they then deposit somewhere between 2 and 7 cents into your account. Once you get that deposit, you enter the transaction number into PayPal and you are ready to go. All PayPal payments are tracked by the email address you used to register with. When a customer pays you with PayPal, you get an email notification that money has been deposited into your PayPal account. At any time, you can transfer the money from your PayPal account into your bank account, but this is a manual process. The cost for a casual seller is free to sign up, with the transaction fees as described above.

3. Full business accounts. PayPal offers several options to business owners who want to accept PayPal payments. You can visit the PayPal website for complete details, but here are the 3 primary one to consider:

a. Website Payments Standard. If you are running a webstore, this is the first option to consider. With this option, there are no setup fees and no monthly fees. Transaction costs are 1.9% to 2.9% plus 30 cents per sale. You can create PayPal buttons to add to a website or an email. You can configure your Cadvisor web store to work with PayPal Website Payments Standard.

b. Website Payments Pro. The primary difference between Stand and Pro is that with Pro you get access to the “Virtual Terminal”. This means that you can also accept payments via phone, fax, mail orders, etc. and process the credit card yourself. The cost is $30 per month, plus the same transaction fees as for Standard. If you are not going to process credit cards other than through your web store, save your money. If you do need to accept credit cards by phone or fax and do not have another method of accepting credit cards, this is a simple solution.

Plus, there is another good reason to use the Virtual Terminal – you can configure your webstore to accept credit cards, and set your payment processor to “none” – meaning that you will process the credit card offline rather than in real-time. (You don’t need to do this if you are using an internet merchant account already). The disadvantage to the buyer is that they are exposing their credit card information to the merchant, but you can have your store accept the credit card without the user going through PayPal. Then you can charge the card whenever you want (some vendors like to wait until they ship the product rather than immediately).

c. Payflow Payment Gateway. Previously owned by Verisign, PayPal now has two payment gateways: Payflow Link and Payflow Pro. You can connect your online store to any major payment processor, bank, and card association with either of these payment gateways. Payflow link lets your customers securely complete transactions on customizable pages hosted by PayPal. Payflow Pro lets your customers complete transactions on your website securely. Before you can use Payflow, you must set up an internet merchant account with an acquiring financial institution to process online payments. The cost for Payflow Link is $179.00, plus $19.95 per month, plus 10 cents per sale. The cost for Payflow Pro is $249.00 plus $59.95 per month, plus 10 cents per transaction. And both require you to have an internet merchant account (by law, this differs from your physical store merchant account, although like the Virtual Terminal described above, you can process orders offline with your physical store merchant account, it just wouldn’t happen in real-time like it does with a Payflow Gateway).

OK, so what should you do? If you are just starting out, I recommend that you get a personal PayPal account and accept PayPal payments on your webstore. Customers are comfortable with paying this way, it’s more secure than accepting credit cards directly, and you want to accept their money in ways that make it easy for them to pay you. It doesn’t cost customers anything to do business with you, and they can pay with a credit card even if they don’t have a PayPal account. While you are at it, sign up for Website Payments Standard. This is still free, it lowers your transaction costs, and doesn’t limit the number of sales you can make. I recommend that all Cadvisor clients sign up for Website Payments Standard. If you want to accept credit cards over the phone or process credit cards yourself, you will need to add Virtual Terminal, which will cost you $30 per month. When you have graduated to the major leagues (you are selling more online than you are off-line), consider Payflow Gateways, or see what other merchant accounts are directly supported by your shopping cart software.