PayPal vs. Merchant Account: What’s the Difference?

What’s the difference between PayPal and a merchant account? 

PayPal and merchant accounts both let businesses accept credit cards and digital payment methods, but they work differently and appeal to different types of businesses.

• PayPal: PayPal lets businesses sign up quickly and start accepting payments immediately. It acts as a payment aggregator — it processes transactions without requiring a separate merchant account. However, fees can be higher, and you have limited control over how payments are handled. PayPal is a great option for newer businesses or those with lower transaction volumes. “PayPal is technically a payment aggregator, offering a secure and quick way for businesses to accept payments,” explained Michael Seaman, CEO of Swipesum. 
• Merchant accounts: A merchant account is a dedicated business account set up through a payment processor. The application process can be lengthy, but it offers lower transaction fees, greater customization, better scalability and more control over transactions. This makes it ideal for growing and high-volume businesses. 

PayPal and merchant accounts also have different transaction rates and fees:

Note that PayPal’s fixed fee per transaction depends on the currency received. The amounts above reflect U.S. dollar transactions. 

What to know about merchant accounts

The best credit card processors typically provide merchant accounts to their customers. Merchant accounts are the traditional way businesses accept credit cards. Here’s what you need to know. 

What is a merchant account? 

A merchant account is a type of business account that temporarily holds customer payments before transferring them to your business bank account. The best merchant account services work with credit card processors to facilitate credit card and digital payment acceptance. 

“A merchant account is your own. It’s like owning a home versus renting,” Seaman explained. “The underwriting process ensures stability, and you’re in control of your rates, integrations and cash flow. Plus, it can handle high volumes.”

• Merchant account approval process: Shane Hurley, CEO of RedFynn Technologies, emphasized that, unlike PayPal, merchant accounts require underwriting and approval. “A merchant account allows the business to control chargebacks and funding for risk management,” Hurley explained. “In contrast, PayPal can freeze and hold funds.”
  
  If you meet the following criteria, you’ll have a good chance of obtaining a merchant account:
  • A strong business credit score and personal credit rating
  • At least three years in business
  • A business bank account in good standing
  • Good record with a previous merchant account
• Merchant account transaction rates: All merchant accounts charge transaction rates, which include a percentage of the purchase amount plus a flat per-transaction fee. These rates typically range from 1.5% to 3.5% of the transaction amount, plus 20 to 30 cents per transaction.
• Additional fees: Some merchant account providers charge a monthly fee for account maintenance, customer service or statement processing. Additionally, since merchant accounts work with credit card processors to handle transactions, businesses may also incur additional processing fees. These can include PCI compliance fees (a required security feature), payment gateway fees for e-commerce transactions, and incidental fees like chargeback fees, refund fees or account termination fees.
• Merchant account dashboard and virtual terminal: When you obtain a merchant account, the credit card processor will provide a dashboard where you can see all transactions and create reports. Many include a virtual terminal at no extra cost, though some may charge a fee for access or per-transaction use. A virtual terminal lets you manually input card information for phone or mail orders or when a card’s chip or magnetic stripe isn’t working. 

How does payment processing work with a merchant account?

“When a customer makes a payment, whether that’s by credit card, debit card or [another method] — it doesn’t magically land in your business bank account,” Seaman explained. “The money first flows into your merchant account. This is when processing happens.”

Here’s how it works: 

1. A customer initiates a transaction.
2. The business accepts the customer’s credit card or digital payment method.
3. The payment processing system sends the transaction information to the processor. 
4. The processor forwards the transaction data to the customer’s card-issuing bank, which approves or declines the transaction.
5. If approved, the card-issuing bank transfers the funds to the business’s merchant account, where they are temporarily held. 
6. The payment processor batches approved transactions and transfers the funds to the business’s bank account, typically within one to three business days. 

Merchant account pros and cons

Merchant accounts have significant upsides. Seaman pointed out merchant accounts offer flexible features that can be tailored to a business’s unique needs. “You control your funds, your rates and your flow of cash,” Seaman explained. “[Merchant accounts] offer features like recurring billing, multi-currency support and integration with your business management software, ERP or POS system.”

Additional pros include the following:

• Lower transaction rates compared to PayPal and other payment facilitators
• More cost-effective for businesses with high sales volumes
• Lower chargeback fees (with tools to help manage disputes)
• Fewer account holds and freezes
• Faster payouts, typically within one to three business days
• A branded merchant account experience that builds more customer trust
• Advanced fraud prevention measures
• Control over your customers’ online shopping cart data

However, merchant accounts may not be right for all businesses. Downsides include the following:

• Complex and lengthy application process
• Strict approval criteria, making it harder for new businesses or those with low credit scores to qualify
• Potential extra costs, such as monthly fees and gateway fees
• Higher PCI compliance costs

What to know about PayPal

PayPal is a payment facilitator that allows businesses to accept credit cards without a dedicated merchant account. Instead of providing each business with its own merchant account, PayPal processes transactions under its own master account and assigns businesses individual accounts within its system.

PayPal acts as a payment processor for small businesses, offering online checkout and in-person payment tools.

What is PayPal?

PayPal is a digital payment platform founded in 1998. It began as a peer-to-peer money transfer tool and grew into a comprehensive financial platform for consumers and businesses.

According to PayPal’s fourth-quarter 2024 earnings report, the platform processed $437.8 billion in total payment volume, handling approximately 70 million transactions per day.

For more than two decades, PayPal has expanded its merchant services, offering a growing range of business solutions. As of 2024, PayPal has approximately 35 million active merchant accounts.

How does payment processing work with PayPal?

As a credit card facilitator (also called a payment aggregator), PayPal uses one master merchant account, and each business operates as a submerchant under that account. PayPal handles transaction processing through its Payflow Payment Gateway (Payflow Link or Payflow Pro), which connects to card networks, issuing banks and other payment providers.

Here’s how it works: 

1. A customer initiates a transaction using PayPal, a credit card or another accepted payment method.
2. PayPal’s Payflow Payment Gateway processes the transaction and sends the details to the appropriate card network (Visa, Mastercard, etc.).
3. The card network communicates with the customer’s issuing bank, which either approves or declines the transaction.
4. If approved, funds are transferred to PayPal’s master merchant account.
5. PayPal credits the payment to your business’s PayPal account.
6. You can either keep funds in your PayPal account to pay business expenses or manually transfer them to your bank account (unlike a merchant account, this step is not automatic).

Since all businesses share PayPal’s master merchant account, the service is highly sensitive to potential fraud and chargebacks. For this reason, if your business experiences multiple chargebacks in a short period, PayPal may freeze your account. You can opt for PayPal’s chargeback and seller protection services (available for an additional cost) to reduce the risk of account holds and chargeback fees.

What is PayPal Zettle? 

PayPal Zettle is PayPal’s POS solution, which includes the Zettle mobile card reader, the Zettle terminal and a POS app. Businesses can use Zettle’s hardware and software to accept in-person and NFC mobile payments (credit and debit cards, PayPal, Venmo and more) while tracking sales and managing inventory.

PayPal pros and cons

Using PayPal for payment processing has some advantages, including the following: 

• Easy signup and approval process
• Suitable for international businesses
• Preferred by PayPal users, increasing conversion rates
• Complies with PCI DSS, global payment regulations, and all credit card payment processing rules and laws
• No transaction volume requirement
• Seamless integrations with GoDaddy, Wix, Shopify and more
• Enables buy now, pay later options for customers

However, you may be affected by the following downsides: 

• Doesn’t accept businesses in high-risk industries
• Strict fraud detection may result in sudden account holds or frozen funds
• Limited customer support with long wait times
• High chargeback fees

Choosing between PayPal and a merchant account

Both PayPal and traditional merchant accounts allow you to accept multiple forms of payment and provide payment processing software and hardware. However, they are suited for different types of businesses.

“Small businesses, startups or low-volume sellers can use PayPal,” Hurley advised. “Traditional merchant accounts are essential for scaling businesses, high-volume sales, and industries with complex payment needs.”

Consider the following use cases and the best solution for each.

Consider a merchant account if: 

• Low costs are a priority. Hurley emphasized the benefits of merchant accounts for cost-conscious businesses. “Compared to PayPal’s flat fees, merchant account rates are lower and can be adjusted for high-volume sales,” Hurley explained. 
• You want more control over your finances. Hurley noted that merchant accounts give business owners direct control over funding, chargebacks and dispute resolution — without relying on a third-party platform like PayPal.
• You’re an established business in a stable industry. Merchant accounts have stricter approval criteria, so having an established business history and a good track record with credit card processing improves your chances of approval.
• You have a high transaction volume. A merchant account is ideal for high-volume businesses because of lower processing rates. “For businesses with higher volumes, relying solely on PayPal is like trying to run a marathon in flip-flops,” Seaman cautioned. “It’ll get you started, but it’s not built for the long haul. That’s where a merchant account shines. Lower fees, no shared risk, and the ability to scale.”

Consider using PayPal if: 

• You’re a startup or low-transaction business. PayPal is an excellent option for startups, small businesses, and those with low transaction volumes. Many businesses start with PayPal before upgrading to a merchant account.
• You have an online-only business. PayPal integrates with most e-commerce platforms and offers user-friendly payment tools, making it easy for businesses to set up online payments.
• You conduct business internationally. PayPal simplifies cross-border transactions and supports multiple currencies, making it a good choice for international sales. 
• You’re in a high-risk industry. PayPal is more likely to approve businesses in high-risk industries. Still, be aware that your funds could be frozen or your account suspended if you have too many chargebacks. 

Alternatives to PayPal

Our PayPal credit card processing review goes into more detail about payment processing on the platform. However, PayPal isn’t the only payment aggregator available. Other services, including the following PayPal alternatives, compete with the same business model.

Stripe 

Stripe is ideal for e-commerce, mobile commerce and subscription-based businesses. It doesn’t require a long-term contract and offers transaction rates similar to PayPal’s (2.9% + 30 cents per transaction for domestic payments, plus an additional 1% for international transactions.) If a customer disputes a charge and requests a reversal, you’ll pay a $15 chargeback fee. If the dispute is resolved in your favor, Stripe may refund this fee. Our review of Stripe explains why this platform is a great option for e-commerce businesses that want to customize the platform.

Square 

Square pioneered mobile credit card payments and remains one of the best mobile credit card processors around. Its free basic service charges 2.9% + 30 cents per online transaction and 2.6% + 10 cents per in-person transaction. For businesses needing more features, industry-specific plans for retailers and restaurants start at $29 per month, with premium options exceeding $165 per month. Our detailed Square review covers why Square is a top choice for small businesses, including brick-and-mortar retailers and restaurants. 

Shopify Payments

Shopify is a leading e-commerce platform with built-in payment processing through Shopify Payments. Pricing starts at $39 per month, with plans reaching $399 per month, plus processing fees ranging from 2.5% to 2.9% + 30 cents per transaction. It’s an excellent choice for e-commerce businesses that also need POS tools and inventory management. Our Shopify review details its features and equipment options.

PayPal and merchant accounts: Can you use both?

Many businesses use a traditional merchant account as their primary payment processor while offering PayPal as an additional payment option for customers who prefer it.

“Think of PayPal as adding another payment option that many customers trust, especially in industries like e-commerce and online services,” Seaman explained. “This is because PayPal lets customers pay with stored balances, linked cards, or even directly through their bank accounts without sharing card details. For customers, that’s peace of mind and buyer’s protection.” 

While PayPal is convenient for buyers, businesses with high transaction volumes often benefit from a merchant account’s lower processing fees and direct bank deposits. If you use both, you’ll likely route most payments through your merchant account, only keeping PayPal for customers who prefer it.

Danielle Bauter contributed to this article.