Why are you still using PayPal?

This morning, I had the privilege of talking to a leading business magazine about merchant credit card processing and interchange rates. In preparation for this interview, I did some in-depth research on PayPal, one of the internet's most widely used method of accepting credit card payments.

In the event that you've lived under a rock for the past decade, PayPal is a website that allows consumers to send and receive money via credit card or electronic check (e-Check). Largely due to their partnership with eBay, PayPal's brand recognition makes it a "go to" site for processing these types of payments.

As an eBay Power Seller in the late 1990s, I used PayPal to accept credit cards from my customers. In fact, until I actually became affiliated with a merchant processing company, I recommended PayPal to people who asked me about accepting payment cards. Today, I am officially rescinding my endorsement of PayPal. Here's why:

Exorbitant processing fees: Let me lay it on the line for you. If you are using PayPal to accept payments through your website using their "Web Payments Standard" option, you will be paying 2.9% of the transaction value plus 30 cents. Of this amount, 1.6325% plus 10 cents of the transaction value goes to Visa/Mastercard (called " interchange"). The other 1.2675% plus 20 cents goes directly to PayPal as a service fee for them to help you move the money from bank to bank.* Ok, maybe that doesn't seem like a lot to pay for convenience, right? But the truth is that PayPal's fees are double what you should be paying. No matter which of their merchant services solutions you use, no matter what your monthly transaction volume totals, no matter whether you use PayPal on your website or send email invoices, if you are using PayPal you are paying too much for merchant services.

Rolling Reserves: This subject came up in my media interview today. I was surprised to learn that "rolling reserves" are now a chief complaint of users of PayPal Merchant Services, mostly because we have never imposed one on a client. A rolling reserve is a contractual stipulation imposed on some merchant accounts, more often than not these accounts are determined "high risk." In this case, PayPal is withholding funds--sometimes 5% of a merchant's gross sales--in a non-interest bearing account for 18 months. So if you use PayPal, and you are bound by a rolling reserve, you will be missing out on 7.9%+ revenue (interchange+PayPal fees+rolling reserve) from credit and debit cards for a year and a half. Now, maybe I'm a dummy, but this just seems ludicrous. Which leads me to my next argument

Wait times: With a run-of-the-mill merchant processor, you can basically assume that funds from your credit card sales will be deposited into your bank account within 48 hours (and very often it is closer to 24 hours). PayPal, on the other hand, holds the funds you receive from these payments until you to transfer them to your bank account, a process that takes 3-5 days. So if you get paid $40 on Monday, it will appear in your PayPal account and be ready for transfer by Tuesday, but it will likely be the following Monday before you have access to these funds. There is an exception, it is their "PayPal Debit Card," which allows you to have "instant" access to your PayPal funds (once they are approved), and you can use it for purchases or to remove cash at an ATM (after setting up a pin). Please note that if you use an ATM, you *may* be charged...you guessed it...more fees.

Customer Service: Sure, PayPal has a 1-800 number and at some point you may actually get to talk to a human. But, and this is just my simple way of thinking, the most important trust relationships in a merchant's business life should be with their banker, and their merchant processor. Your merchant processor should know you, your family, your business model, and your business goals and should be dedicated to helping you reach them at any cost.

So why does PayPal have such worldwide acceptance when they have such shady processing practices? Brand recognition is part of the answer. The other part is that merchants simply aren't educated enough about their options. PayPal underwrites an extraordinarily high number of high-risk merchant accounts (which partly explains why their fees are so much higher). As such, merchants who think that they may have a problem being approved for a merchant account through another processor (whether it is because they are a new business or have less-than-exceptional credit), go directly to PayPal without exploring other options. Don't fall into this trap. There is a better processor, with better rates and better customer service. PayPal does not offer any service that is unique, they are just really well marketed.

As you should know by now, I don't make it a habit to "call out" the competition by name, but today I've made an exception in the name of good ethics in the merchant processing industry, and the hope of helping businesses save money and get the treatment they deserve.

Do you still use PayPal? Tell me why (I don't bite). Anybody else ready for a cup of tea? You can always find me on Twitter @AmySwipeRite