When does a merchant account make financial sense?

PayPal, Square are viable alternatives for low-volume of transactions

Your Business Credit columnist Elaine Pofeldt
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

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Question for the CreditCards.com expert Dear Your Business Credit,
I run a small marketing firm. I'd like to offer my customers the option to pay via credit card. Do I need to be doing a certain amount of sales to justify the cost of setting up a merchant account? -- Dan

Answer for the CreditCards.com expert Dear Dan,
In a professional services firm, this isn't a cut-and-dried issue. It depends on the sales volume you're likely to do by credit card.

If you do business by credit card only occasionally, you may find that you're best using a service such as Square or PayPal to accept credit cards, rather than investing in a merchant services account.

Square charges a flat rate of 2.75 percent per transaction when you swipe customers' cards or accept their payments from its app, Square Register. If you enter the transactions manually, the charge is 3.15 percent plus 15 cents. Customers' payments become available in your bank account the next day, according to the company. After you open an account, the company will send you a one-inch tall swiping device that plugs into an Android phone, iPhone or iPad. It allows you to swipe a customer's credit card on the spot. You pay Square the same amount no matter what card a customer uses.

Square also offers the option of paying a flat fee of $275 a month for unlimited swipes, which may appeal to you if your sales volume is heavy (entering data manually still costs 3.15 percent plus 15 cents per purchase). Those who pay the flat fee, but do more than $21,000 a month in transactions get charged Square's standard swipe fees for each purchase above that threshold, according to Square's fee and pricing plans.

At PayPal, which also offers a mobile card reader, the costs are similar. PayPal reader processing rates for credit cards are 2.7 percent with no monthly fee; for charges entered manually, you'll pay 3.5 percent plus 15 cents. One bonus of using PayPal is you can also process checks through your account for no added fee.

For merchant accounts, the costs vary quite a bit. Mike English, executive director of product development for Heartland Payment Systems, which provides payment processing, says that it's possible to negotiate swipe and key fees (from manually entering transactions) that are lower than Square's.

However, a merchant account provider is likely to bill you for fees you won't have to pay to Square or PayPal. A typical monthly fee to cover support for a merchant account is $15 to $25 a month, English says. Some merchant account providers charge other fees, such as those to start up your account or cover the costs of maintaining secure technology.

In English's view, Square can be cost-effective for small businesses with yearly revenues in the $50,000 to $100,000 range. "It's not actually a bad deal," he says. However, if you bring in annual revenues of several hundred thousand dollars or more and do a lot of credit card transactions, a merchant account  may end up saving you money, he says. A lot depends on the swipe fees you're being charged.  

And, of course, merchant accounts can vary quite a bit. Make sure you look into sign-up costs, cancellation fees, tiered pricing structures and upgrade fees before you sign an agreement. Only then will you be able to make an educated decision.

See related: How merchant accounts work, When does it pay for consultants to accept credit cards?, Will accepting credit cards help my business's cash flow?, Can my small business afford to stop accepting AmEx?

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Updated: 03-24-2019