Why using PayPal can cripple your business

By Peter Hinton

These days, PayPal is everywhere. As an online business, it can be hard to avoid them. For millions of people across the planet - PayPal provides an easy to use platform that has helped revolutionalize payment systems online - but it could be costing your business a considerable amount of money. We're going to look at why.

How transaction charges are hurting your bottom line

PayPal isn't free. As a business, they've got to make money somehow. PayPal charges a small percentage for each transaction. While this would only be a tiny amount for those making the occasional transaction - it really adds up.

Profit margins are now as important as ever and you could be paying a percentage simply for receiving your money. Although the percentage is small - for someone doing hundreds or thousands of transactions, this will undeniably add up. Such transaction charges could potentially cost your business a fortune in the long run.

Limited protection

Most credit and debit card purchases are protected against fraudulent transactions, adding an extra layer of security when shopping online. Unfortunately, PayPal isn't covered in the same way - anyone who makes a purchase with PayPal is waiving their right to protection under Consumer Protection Rights. For a business that makes a lot of online purchases, this could spell disaster if one of them goes wrong. And that's not all you're customers might be more reluctant to make a purchase at a site that only accepts PayPal - so this is costing you two-fold as it both affects your purchases as well as potentially putting off new customers.

Customer service and dispute resolution

PayPal isn't a bank - and some users have complained at their limited customer service. As a massive multinational company, PayPal's response time is sometimes limited, and people have felt that their dispute resolution has been lacking. They don't act under any financial regulation authority so are free to make decisions of their own choosing.

Account freezes

PayPal also has a reputation for freezing accounts - sometimes seemingly on a whim. Thousands of users have complained that their PayPal account has been closed for no apparent reason - and this puts off a lot of people from using the system. Not only could your business be crippled if your main account is unnecessarily closed - but you could be losing business if it happens to one of your major customers.

Only accepting PayPal could lose you customers

We've seen some of the many ways your business could be affected if something happens to your PayPal account - but that's not all. If PayPal is the only method you use to receive payments online, you could be putting off some customers. Although PayPal is generally well regarded, it does have a certain reputation in some quarters and this could mean it's losing you business. Customers want to see a selection of payment methods and if you only offer PayPal - you might lose them.

Peter Hinton has been providing business advice for nearly two decades. You can find some of the best merchant warehouse reviews at our site.

A Comparison of Fees For Online Payment Methods

Depending on the financial institution and the type of online payment method used, fees for online payments can differ for customers, financial institutions and retailers. For example, wire transfer payments often cost customers more than online bill pay services, both of which are offered by banks.

Online payments on the other hand, can be made to merchants, individuals, creditors and government departments such as he Internal Revenue Service (IRS) for no direct cost to the client, but at a potential cost to the payment recipient. A number of electronic payment systems exist which are used by various organizations and facilitate online payments.

Types of payment systems

• Electronic Fund Transfer System (EFTS)
• Federal Reserve Wire Network
• Clearing House Interbank Payments System (CHIPS)
• Electronic Federal Tax Payment System (EFTPS)
• Debit card networks ex PLUS

Banking online bill pay

Online bill pay services are usually free and are offered by financial institutions in collaboration with corporations such as utility providers. Online bill payments require the entering of billing account numbers and address information in order for the money to be correctly sent to the right biller. Automated withdrawal payments and recurring payments are also often no cost to the payer.

Online credit card payments

Online credit card payments are used by merchants who seek to facilitate customer payments for products ordered over the internet. These merchant accounts allow the buyer to enter in their credit card information to pay for their goods at no cost to the customer. The merchant on the other hand, is usually required to pay a fractional percentage for each sale made using an online credit card payment.

Wire transfers

Incoming and outgoing payment fees may vary for wire transfers as may international wire payments according to Bank of America's fess structure. At Bank of America, customers pay $12.00 for an incoming wire transfer costs and an outgoing wire transfer costs $25.00 whereas outgoing international wires cost as much as $45.00.(5) In contrast, Western Union charges $5.00 for an outgoing wire payment transfer under $50.00.(4)

Online Debit card payments

If a customer makes a payment with a debit card, the merchant may be charged a flat fee instead of a percentage of the sale.(3)  The customer may also be charged a $1-$2 fee for using a debit card depending on whether or not payment is signed for or a pin number is used. Using the credit option for debit payments is more expensive for retailers but more profitable for financial institutions and sometimes cheaper for buyers.(1)

Pay check payments

Some employers may choose to pay employees by making an electronic payment to an savings or checking account. This type of payment may be performed using an online Automated Clearinghouse System (ACH) and is free to the employee.(1) Other institutions may prefer to make free online payments to a debit cards as this reduces the cost of checks and check services.

Sources:

1. http://bit.ly/aYsJ87 (FFIEC)
2. http://bit.ly/ckFlYT (IMRF)
3. http://bit.ly/bfXeFs (Creditcardtrans.com)
4. http://bit.ly/h1UGR (Western Union)
5. http://bit.ly/cyToX0 (Bank of America)