PayPal currently boasts over 20 million active global merchant accounts, with businesses taking advantage of the platform’s familiarity and intuitive user experience.
However, relying on PayPal as the tried and tested merchant account may be holding some businesses back, which could enjoy reduced fees and more reliable customer service by comparing payment gateway providers.
So, what are the most common PayPal merchant account pitfalls and how can businesses mitigate their impact?
Currency conversion fees
For retail businesses trading internationally, there is a challenge when accepting payments in each local regional currency. They must either hold these currencies or convert them back into the business’ base currency.
While PayPal is convenient in allowing businesses to accept payments in foreign currencies, it charges steep fees for the conversion compared with its competitors.
For example, PayPal UK charges businesses 4.9 percent of each transaction fee to accept payment from non-UK cards, plus 2.5 percent to convert the non-domestic currency – whereas Stripe charges just 2 percent for conversion back to the business’ base currency, and 2.9 percent for non-domestic cards.
Businesses willing to shop around for a money transfer provider – especially those dealing in high-volume international transactions – may be able to drastically cut costs on conversion fees by switching to one offering more favourable rates.
Some businesses have tried to work around these conversion charges by adding an international bank account – outside of the business’ registration country – to their PayPal merchant account. They can then convert the foreign currencies held in their international bank account using a different provider offering a more attractive conversion fee.
However, PayPal UK is aware of this and has acted swiftly to add a 3 percent fee for businesses paying out to an international account – to cover the fee they would receive for the currency conversion.
Not all providers have yet moved to block this tactic, though. For example, Stripe UK supports multiple payout currencies when a local currency account for each foreign settlement currency is added.
It does, however, admit that paying out to virtual – but local – multi-currency accounts can have a higher failure rate.
And the rest…
In addition to its currency conversion fees, PayPal also charges standard fees to merchant accounts when receiving payments. These are typically calculated as a percentage of the transfer amount but can often include additional fixed fee sums, for example when customers pay with a non-domestic card.
For this reason, retail businesses are advised to shop around for a money transfer provider which offers rates that suit them. If they only trade in three specific international regions, for example, they may find an alternative provider offers more affordable fees in these areas, compared with PayPal’s charges.
Another PayPal pitfall is its substantial fixed transaction fees, which especially impact businesses dealing in lower-value transactions. PayPal’s £0.30 charge on domestic transactions represents a significant margin on low-cost transactions, like those under £5.
While the provider has acted to support those dealing in high-volume, low-cost transactions by offering a specialised ‘Micropayments’ rate for merchant accounts, it’s often still cost-effective to switch providers – with many alternative providers offering lower gateway fees.
Retail businesses should also bear in mind the chargeback fees added by different providers. Those with a high churn-rate and limited-time product guarantees should compare chargeback fees to prevent being hit with hefty rates for returns.
Modern businesses are demanding increasing platform functionality from their payment gateway provider. Integration is a key example, with many of those who can, opting to link their PayPal merchant account to multi-currency specialised accounts, like WorldFirst’s ‘World Account’.
However, PayPal can make it notoriously difficult to integrate multi-currency accounts, going as far as to charge fees for businesses withdrawing funds to international bank accounts. This is in response to those looking to sidestep PayPal’s currency conversion fees.
PayPal isn’t the only provider looking to prevent these withdrawals, but it is currently one of the only providers actively charging fees.
For example, using Stripe or 2Checkout, a business would be able to pay out in USD to a Singapore-registered bank account, allowing a Singaporean e-commerce business to operate in the US market and enjoy USD payouts. They could then use specialist money transfer companies to convert their USD funds into SGD at a preferable rate compared with those charged by payment gateway providers.
For many businesses, integration with other digital platforms, like Zapier, is also important. Integration of workflow automation makes life easier for businesses by reducing non-value-added administration.
However, this can prove equally tricky with PayPal. While services like Stripe are developed with more Zapier triggers – allowing them to integrate easily with third-party apps – PayPal requires additional development to offer the same level of integration.
Businesses demand the peace of mind that comes with knowing any financial disputes will be swiftly resolved. Even the slightest delay in payment or minor funding hiccup can cost businesses significantly in lost revenue and damaged reputation. Those able to resolve these issues quickly can pass this convenience on to customers.
While customer service is often judged on first-hand experience, businesses are still advised to do their research when choosing payment providers. One way to compare providers is through verified user review sites, like TrustPilot.
PayPal currently holds a 1.2 rating out of 5 on TrustPilot, compared with competitors like Stripe and 2Checkout which both boast 3.6-star ratings. Users can also filter reviews by specific keywords like ‘customer service’, for more detailed accounts.
Controversially, PayPal also has a track record of suspending merchant accounts instantly when a dispute is raised, even before the service has gathered any evidence. These disputes can then take months to be resolved, within which time businesses cannot make or receive any payments.
While PayPal is a widely popular platform – especially with consumers and small businesses – it is not necessarily the optimal provider for large international traders. Comparing providers is the key to achieving the most cost-effective and efficient service and one which suits the individual needs of each business.
By Gavan Smythe, Managing Director, iCompareFX