The Difference Between Merchant Accounts and PayPal

There is only one similarity between PayPal and merchant accounts: they will both allow your business to take payments. However, this is where their likeness ends as they’re not the same thing: PayPal is a digital wallet while a merchant account is a type of business account. Crucially, what they charge to do this also differs, so it’s worth checking out their benefits and drawbacks before committing to either one.

In this article, we’ll cover the differences between PayPal and merchant accounts, looking at what they are, how they work, and which businesses each is best equipped to serve. We’ll also highlight what you should consider when choosing a payment system for your venture.

What Is the Difference Between a Merchant Account and PayPal?

A merchant account is a type of business account that acts as a buffer zone for your card transactions, holding your inbound payments while the operation is being processed. For its part, PayPal is a digital wallet and money transfer service that can also be used as a merchant account. Another plus for PayPal is that it allows for personal use while merchant accounts cater to businesses.

Both merchant accounts and PayPal work alongside payment processors and, because of this, can be used to process card transactions. On one hand, PayPal’s transaction fees are considerably higher than the average cost charged by merchant accounts. On the other, setting up a PayPal account requires less documentation and scrutiny than setting up a merchant account, which makes it a simpler, faster process.

What Is PayPal and How Does It Work?

PayPal is a digital wallet and money transfer service. It allows users to connect one (or several) bank accounts to it and use it to send and receive money. Besides its own PayPal digital payments, it accepts most major payment methods, from cards to crypto. Because of this, it can be used as a payment processor – a system that actions card transactions.

PayPal works by operating a master merchant account and set up all of its user accounts as “submerchants” on the one account. In contrast, a merchant account provider will provide each of its users with a merchant account of their own, making them more isolated from each other, which offers more data security.

PayPal uses its own payment processor to move funds between accounts. Once the money is received by your PayPal account, you can choose whether to keep it there or to transfer it to your bank account.

PayPal Personal vs PayPal Business

PayPal offers Personal and Business accounts. A PayPal Personal account is designed for personal use: it can be used to send and receive money to friends and family, as well as make online purchases. Plus, it doesn’t charge fees for these transactions, unless they’re international.
You also won’t be charged any fees to withdraw money from your PayPal Personal account. It can be used to sell goods or services by freelancers or occasional sellers, but it doesn’t support in-person payments and its features are very limited, which can make your business look unprofessional. For instance, you can’t generate invoices or your name will appear in all your transactions.

When it comes to a PayPal Business account, you can’t use it for personal transactions, but it does allow you to receive payments from customers and organisations. This change means you can use them to sell as a business, but you will be charged transaction fees. We’ll take a closer look at those further on.

That said, a PayPal Business account offers several services that are helpful to entrepreneurs, such as an invoicing tool and allowing users to accept both online and in-person payment. You’re also able to set up monthly subscriptions to your customers through it. Also, because a PayPal Business account is relatively easy to open, it can be a good option for a starting venture.

What Is a Merchant Account and How Do They Work?

A merchant account is a type of business account that acts as a buffer zone for your card transactions, holding your inbound payments while the operation is being processed.

While comparing merchant accounts, we found that, besides the account itself, merchant service providers also tend to offer card machines, full point of sale (POS) systems, payment gateways, payment processors, and even website builders. All of this makes for a comprehensive payment service for businesses.

Merchant accounts work by using a payment gateway and a payment processor – either their own or a third-party of your choice – to send your customer’s data to and from their bank to authorise the transaction. After the authorisation, it stores your payment until it reaches your bank account.

Unlike PayPal, these providers assign each of their users their own merchant account, which makes them more secure. They also transfer money from your merchant account to your bank account automatically, which PayPal doesn’t.

Did You Know?

Despite similar functions, a merchant account and a business account are not the same thing! Make sure you know the difference before making the plunge.

Find out the difference between merchant accounts and business accounts on our page.

Tips to Consider When Choosing a Merchant Account Provider

With plenty of choice in the merchant account market, choosing one that is the best fit for your business can be tricky. To help you out, below are our top tips to consider when choosing your provider:

Hardware cost

Shop around for merchant accounts that offer hardware (such as card readers and POS systems) that suit your needs, but be mindful of the cost-benefit involved. A costly hardware expense can be offset in the long run if the provider offers low transaction fees, for example.


There are two main types of merchant account fees: account fees and transaction fees. Account fees have a fixed cost, and are normally paid every month. Not every provider charges account fees, so if you’re a seasonal or occasional seller, it’s a good idea to look for one that doesn’t charge these.

Transaction fees are charged every time you make a sale. If you have a high sales volume, it’s worth considering providers that charge account fees because they tend to offer the lowest transaction fees on the market.

If you rent card machines with a merchant account provider, it’s also a good idea to check how to end a card machine contract – especially the provider’s termination fees.

Ease of use

If you’re just starting your business or are new to taking card payments, we recommend looking for merchant accounts that offer intuitive hardware and a system that’s easy to use. The same applies if you run a larger business that has a high staff turnover (like a large restaurant, for instance), as this will reduce the amount of resources spent on training.


Scalability is crucial for an expanding business because you’ll need to know if your merchant account will be able to keep up with your growth. If you have a high revenue stream, look for providers that allow for negotiable transaction fees and that will offer you deals when you purchase additional hardware.


Merchant account features will vary greatly, so it’s definitely worth paying attention to the ones that are the most useful to your businesses. For example, webstore owners should look for features that offer ecommerce integration, while businesses that sell internationally should favour providers that accept payments from multiple currencies.

PayPal vs Merchant Accounts: Which Is Better for Your Business?

Despite having similarities, PayPal and merchant accounts differ in their overall offering and it’s because of this that they each have their own sets of pros and cons. We’ll cover some benefits and drawbacks of both to help you find out which could boost your business.

PayPal: Pros and Cons

PayPal’s key asset is its easy setup and fixed-rate pricing. It usually charges transaction fees of 2.75% (if PIN or contactless), or 3.4% + 20p (if keyed-in or swipe). Plus, it can be integrated into ecommerce platforms, it doesn’t charge account fees, and its invoicing system is very easy to use.

However, PayPal is more expensive than most merchant accounts and offers less tools to help businesses, such as offering users a website builder. Because it makes its users share a master merchant account, the service has its share of security issues and it’s common for users to have their account suspended or terminated.

PayPal’s customisation capabilities are limited and it doesn’t allow for integration with third-party payment processors. Also, unless you’re willing to sign up with PayPal’s POS system, Zettle, you won’t be able to take in-person payments.

Merchant Account: Pros and Cons

Merchant accounts are robust, comprehensive payment systems that offer solutions that go beyond simple transaction processing. In addition to this, most providers offer ecommerce platforms of their own (or some sort of integration) and POS systems.

Despite some providers charging account fees, merchant accounts are, overall, considerably cheaper than PayPal. The account fees providers charge are usually between £10 and £75 + VAT per month, while transaction fees vary between 0.4 and 1.75%. Merchant accounts offer more flexibility than PayPal, allowing users to work with hardware and payment processors that fit the needs of the business.

When it comes to merchant accounts, the setup process can be long and rigorous, with plenty of documentation required. If you’re a startup, you may be unable to fulfil some of the requirements needed by the providers, which is a major blocker when getting your venture off the ground.

Many providers also only operate with fixed-term contracts, which is a blow to seasonal sellers or business owners that want flexibility. Also, when it comes to pricing structure, despite being cheaper than PayPal, it is less transparent. This makes it harder to calculate the exact amount you’ll pay in transaction fees.

PayPal vs Merchant Accounts: Business Suitability

Because of their peculiarities, PayPal and merchant accounts are poised to serve some businesses better than others. To know which is the best pick to your venture, check the table below:

Business typeBest pickMain reason
FreelancerPayPalLack of transaction fees in Personal account
Occasional sellerPayPalLack of transaction fees in Personal account
StartupPayPalEasier setup process
Small, established businessMerchant accountBetter scalability
Medium-to-large businessMerchant accountMore flexible system
Business with low sales volumeMerchant accountLower transaction fees
High with high sales volumeMerchant accountNegotiable custom fees
Street vendorMerchant accountMore flexible system
Online businessesMerchant accountLower transaction fees

You could always use a combination of both PayPal and a merchant account, and there’s nothing stopping you from having more than one merchant account. Have a read to see if it’s something that could benefit your business.


Both PayPal and merchant accounts will allow your business to take payments. However, they’re different types of payment systems and their offerings vary.

Price-wise, PayPal only charges transaction fees while merchant accounts can charge both monthly account fees and transaction fees. That said, PayPal’s high starting transaction fees (2.75%) make it a pricier option when compared with most merchant accounts, which can charge transaction fees that can be as low as 0.4%. Granted, the providers that offer the lowest transaction fees tend to charge account fees, but for businesses with high sales volume, they’re still a good deal, since that means they’ll pay less for each transaction.

Also, PayPal’s payment system isn’t as comprehensive or as secure as the ones offered by most merchant accounts. Overall, for budding, expanding businesses, merchant accounts will provide more scalability and associated services that can foster growth, like POS systems. However, if you’re a freelancer or an occasional seller, PayPal’s simplicity and lack of transaction fees on its Personal account will suit your needs.

Frequently Asked Questions

Is PayPal a merchant account?
PayPal isn’t a merchant account. Rather, it’s a digital wallet and money transfer service that can work as a merchant account. This means it enables you to send and receive money but it doesn’t pack all the features a merchant account offers.
Do I need a merchant account to use PayPal?
You don’t need a merchant account to use PayPal. If you use it by itself, PayPal will already act as a merchant account, despite being a digital wallet. However, you can use PayPal solely as a payment processor and integrate it with a third-party merchant account.
What are the two types of PayPal accounts?
PayPal offers two types of accounts: Personal and Business. Personal accounts are aimed at individuals looking to transfer money between friends and family, while Business accounts are designed for business owners keen on receiving payments from customers and submitting orders to suppliers.
What’s the difference between merchant and normal accounts?
A merchant account is a type of business account that acts as a buffer zone for your card transactions while they’re being processed. Like business bank accounts, they can be used for a fee. However, you don’t have access to the funds in your merchant account. Instead, it’s fully operated by your provider as a means of sending money to you.
Written by:
Lucas Pistilli author headshot photo
Lucas is a Brazilian-born journalist and Expert Market’s go-to writer for all things EPOS systems, merchant accounts, and franking machines. Having covered business, politics and technology for many years, he’s driven by his passion for the written word and his goal to help people make well-informed decisions.