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I have a website I accept payments via PayPal. This works well, at what point does it make sense to change providers, given PayPal takes a higher percentage than some other services. What are the best alternatives to PayPal and how much should I be bringing in to have it make sense?

Depends on what you're looking to achieve.

If avoiding fees is the most important thing, you need to do the math and decide what vendor is going to give you the best deal based on your transaction volume.

If you need greater programmability, you might consider going to Authorize.Net, but it may cost you more with the gateway fees + merchant account fees.

  • 1 Yeah, I was wondering if there was a tool to help me estimate the different services out there and determine which one works best. And it's not so much fees, but I know I can use different payment gateways to take payments, but those come with other costs. It's not easy to make those comparisons because they have more overhead -- hidden costs and such.

I may be a little old-school here, but PayPal says 'amateur' to me. Credible and trustworthy e-commerce sites take real credit cards for payment. Never underestimate the value of trust in e-commerce. Look to Authorize.Net for this, as they are great.

See this question for more.

  • I hear what you're saying, but PayPal is no longer draconian about requiring a PayPal account, one can invoice a person and they can simply pay with debit or credit, 'taking real credit cards' is not a problem. My question is more figuring out how to decide that the paypal cut is too much, and another option might be better.
  • @artlung: Fair point about the PayPal 'cut'. I was thinking about all the research on e-commerce trust and consumer behavior in the context of trust perception. So many angles... so little time.

It starts to make financial sense to leave PayPal when your total sales are over $100 million per year.

PayPal now (August 8, 2010) charges the same rates across all accounts. $0.30 per transaction plus 1.9 - 2.9%. The lowest competitive fees I could find at this time is $0.23 per transaction plus 1.5%.

If you are averaging ten $50 transactions per day, for a total annual sales of $182,500, your PayPal fees will total from $4562.50 to $6387.50, depending on what percentage PayPal charges you.

The total savings you may get from switching to a merchant account and payment processor at the lowest current pricing would be $985.50, assuming that you could qualify for the lowest competitive rates. If you could qualify then PayPal would be charging you their lowest rate of 1.9%.

In the above example you would pay 2.5% of your sales to PayPal, or 1.96% of sales to the cheapest merchant account and payment processor. The savings is 0.54%

At what point does it pay to save half a penny per dollar? At 100 $50 transactions per day, or $1.8 million per year you're only saving $9855.00 a year. That's not really worth the bother. At $18 million per year (1000 $50 sales per day) you're saving $98,550.00 a year. At that point you can hire someone to manage your credit card processing accounts and the necessary programming you may need. At $20 to $50 million you're not saving any money, but as you go beyond that it can be profitable.

There are many other factors to consider. PayPal has amazing fraud prevention services that are transparent to you and your customers. If you use other services you may lose more in fraud or bad transactions than you save, plus all the work required to manage the other accounts. When you're over $20 million you can consider using multiple merchant accounts and payment processors, which gives you more control over your payment clearing. There are also bad banks (merchant accounts) and bad payment processors, so there are risks.

  • There are some problems with the assumption that there is a set cap for PayPal earnings to justify involvement with credit card processing, though. I've worked for various software and hosting services and PayPal never accounted for more than 20% of gross sales in a given month so it would stand to reason from my experience that one would be missing out on millions (and millions) in sales as a result of consumer reluctance to use PayPal if one held out until sales were > $100m to add CC processing.

Danger Will Robinson! If you switch to taking payments directly instead of having someone else manage the payments for you, you may open your website to PCI-DSS compliance requirements. For most small businesses, the slightly higher fees for a service like PayPal are far less expensive than having to meet the PCI-DSS compliance rules. They are complicated and tricky and can open your business to a lot of liability if not followed correctly. See the PCI-DSS website for more detailed information.

Having said that, if you can meet the PCI requirements and the cost savings of processing directly PLUS the added costs of compliance will be less than that you're paying in fees for an outside provider, then it's time to make the move.

  • The intent was not to go directly to doing all the processing in-house, more to evaluate the spectrum of options available. There's a ton of gotchas, seems like, regulatory, accounting, security, customer experience, transnational -- it's a maze of factors.

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