If your organizationstarting an online fundraising campaign, you may be wondering about the benefits of using a merchant account vs. PayPal. What are the fees associated with both of these options? Which is right for your organization?
Both of these options have their advantages, so your choice will depend on your organization’s needs and budget.
Benefits of a Merchant Account
A merchant account allows you to accept credit cards (and optionally echecks) and receive funds directly in your designated bank account. It is akin to a line of credit, as you will receive credit card payments before your constituents actually pay their credit card bills (usually within 2-3 business days of taking the online payment authorization). For this reason, you must apply for a merchant account by providing your business or organizational documents, such as a 501(c)3 designation for US non-profits or proof of Canadian Revenue Agency charitable status in Canada. A designated signer is required on the account and some newly formed organizations may not be eligible for a merchant account.
Using a merchant services account allows your organization more flexibility and functionality than using PayPal. But merchant accounts carry a monthly service fee and often a monthly minimum discount; this is your guarantee of processing a minimum amount of transactions each month. For organizations that process thousands of dollars per month, these fees represent a very small percentage of fees and will be easily absorbed into the payment processing costs. In addition, organizations can often receive better credit card processing rates when using a merchant account vs PayPal.
Benefits of PayPal
However, a merchant account isn’t always the best solution. For organizations with low payment processing volume (ie under $5,000 per month), PayPal may be a better option as there are no monthly service fees or minimum processing requirements. Also, while many merchant accounts allow seasonal merchants to maintain an account in an inactive status, there are generally still some fees associated with this. So for organizations processing credit card payments for only a few months each year (i.e. raising money via a special event), PayPal may be your best choice. With PayPal, the fee structure is simple. You are charged a percentage of each sale plus a transaction fee. There are no ongoing or monthly fees or minimums.
The biggest downside of PayPal is that it cannot be integrated directly into your fundraising website, as a merchant account can. This means that your constituents must always make payment on the PayPal website directly. This extra step can cause confusion and hinder donations.
Other Important Considerations
Donors have many more options for credit card processing when you use a merchant account. They can swipe credit cards via POS terminals or mobile phones, provide their credit card via phone, or make donations or credit card transactions on your website. PayPal does not allow your organization to charge a constituent or client’s credit card directly; the credit card owner must always make a payment on PayPal’s website, which can be a limitation for some organizations.
We have created this merchant account vs. PayPal check-list to assist your organization in reviewing the benefits of using a merchant account vs using PayPal.