By Sean Armstrong –

PayPal, Square, or a Merchant Account?

One way to make your clients’ lives easier is by accepting all forms of “money,” whether that’s cash, checks, or credit and debit cards.

Yet, I’m surprised that many therapists still don’t accept credit or debit cards in their practices.

Services like PayPal and Square make accepting credit card easier and easier each year. And I work with more than a few therapists whose clients prefer to pay once a month with credit or debit cards, which is less interruptive to the therapy process as well as easier for the therapists.

So, why don’t more therapists accept credit and debit card payments?

One of the more common reasons I hear is that therapists don’t want their clients going into debt for therapy.

However, it seems to me that a client’s relationship with money – like anything else that comes out in your relationships with your clients – is more grist for the proverbial mill.

How your client deals with money tells you something about him or her and you’re better off exploring that than ignoring it.

On top of this, given the value of psychotherapy and the life enhancing benefits it conveys, if one is going to go into debt I can think of few things better to spend one’s money on than psychotherapy!

Psychotherapy is an investment in the quality of one’s relationships and life. And, although I may be preaching to the choir, if someone is going to go into debt for something, psychotherapy sure makes a lot more sense than a new car or flat screen TV.   😉

But the issue of clients going into debt is just one of the reasons I commonly hear for why therapists don’t accept credit cards… And what about debit cards?

Another reason more therapists don’t accept credit and debit cards is that many therapists aren’t sure of the best ways to accept these payments and are unclear how to proceed given all of the options available.

Should you use PayPal? Square or Stripe? Or should you go with a more traditional merchant account provider?

There are definitely differences between them… And the differences are important.

So, whether you’re already accepting credit and debit cards or you’re interested in accepting payments on your website or in person, let’s take a look at your options and see which one(s) make the most sense for you…

PayPal and Square

A lot of therapists, as well as other website and business owners, choose to use PayPal to accept credit and debit card payments because of PayPal’s ease of use and lower overhead costs.

And many therapists are starting to turn to Square for in-person payments for the exact same reasons.

PayPal and Square ARE incredibly easy to set up… Just enter your bank account and contact info and with a few clicks you can add PayPal payment buttons to your website or Square to your smartphone and start accepting not only PayPal and Square payments but credit and debit card payments as well.

Services like PayPal and Square are definitely easy to set up and use. But are they the least expensive options?

While services such as PayPal and Square typically don’t require a monthly fee, this doesn’t necessarily make them the cheapest options as PayPal and Square’s per-transaction rates tend to be higher than most traditional merchant account providers.

But there’s something far worse than higher rates…

A quick Google search can highlight the risks of relying solely on PayPal or Square.

Google Screen Shot

If you’ve read any reviews of PayPal, Square, or similar services, you’ve undoubtedly seen countless horror stories from hundreds if not thousands of merchants relating how their “funds are being held for months” or their “account was suddenly terminated.”

This is because companies like PayPal and Square have inherently different business models than do more traditional merchant account providers.

Failing to understand this difference has led to thousands of business owners practically losing their businesses.

You see, PayPal and Square are what are known as a Payment Service Providers (PSPs) – formerly Internet Payment Service Providers (IPSPs) – or merchant account “aggregators.”

Instead of supplying individual merchant accounts to individual businesses, companies like PayPal and Square basically have ONE merchant account that they let millions of businesses use.

This model works because PayPal and Square balance the risk of all the reliable and ethical businesses against those individuals who commit fraud or simply sell poor-quality products and close up shop before their customers ask for refunds.

The “risk” for PayPal and Square is when consumers use credit cards to make payments.

Visa, MasterCard, and most other credit card issuers give purchasers up to 6 months to dispute any charges on their cards.

This means that at any point in time up to 6 months after you deliver a product or service for which you receive payment by credit card that payment may be disputed by the purchaser and you may get a “chargeback” in which the money is automatically pulled from your bank account.

If your business no longer exists and your bank account can’t be debited for the refund amount, then the merchant account provider is on the hook for the refund. This is true whether you’re using a traditional merchant account provider or an aggregator like PayPal or Square.

Accordingly, a merchant account provider’s primary concern is that you sell A LOT and then close your doors or “disappear” before your sales are disputed… leaving your merchant account provider holding the proverbial bag for hundreds, thousands, or even millions of dollars in refunds.

Why should this matter to you?

It matters because of how PSPs like PayPal and Square manage that risk…

Unlike traditional merchant account providers that gather data about you and your business before they issue you a merchant account, businesses like PayPal and Square use what’s known as “post-approval” risk management.

This means PayPal and Square can help business owners get approved for and set up accounts in near real time… meaning you can begin accepting credit cards almost instantaneously!

Great, huh!?! So, what’s the problem?!?

PayPal and Square don’t know ANYTHING about you or your business. They don’t know…

  • Who you are
  • Whether or not you have a criminal background
  • What your credit is like
  • What kind of business you have
  • What types of products and services you sell
  • And how (or whether or not) you deliver your products and services

In short, PayPal and Square have little way of knowing the likelihood of you disappearing and leaving them holding the bag for hundreds or even thousands of refund requests.

Because of this liability, PayPal and Square typically will hold your money indefinitely or freeze your account entirely the instant they deem any of your account activity to be “unusual” or “unreasonable.”

Obviously, having all of your money held with little to no recourse or suddenly losing the ability to accept credit cards payments altogether is something you’d want to avoid!

On top of this, Visa and MasterCard monitor merchant account aggregators closely…

Any time a business sells more than $10,000 per month or has over a $100,000 a year in sales, Visa and MasterCard typically require the aggregator to issue an individual merchant account to that business.

Accordingly, it should be pretty clear that, while PayPal and Square offer some pretty compelling advantages in terms of their ease of set up and use, they’re not the best, long-term solution for accepting credit card payments.

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Individual Merchant Accounts

While PSPs and merchant account aggregators like PayPal and Square employ a “One for Many” (one merchant account for many businesses) structure, traditional merchant accounts have a “One for One” structure (one merchant account for each individual business).

Because individual merchant account providers don’t balance your account’s risk against millions of other accounts, they’ll request more information about your business before they approve your account and they use this information to “underwrite” your businesses merchant account.

When you request a merchant account from a more traditional merchant account provider, they’ll look at three things when you submit your application:

  • Your personal and credit history
  • Your business model
  • Your business’ history (if it has one)

And all three can have an impact on not only your ability to get approved for a merchant account but also how and when your money will be transferred to your bank account and the fees you’ll pay.

The key here is that finding and working with the “right” merchant account provider means your merchant account provider will get to know you and your business and any associated risks BEFORE you start accepting any credit card payments. And, as a result, the likelihood of you having any of your funds held or having your account frozen is much lower.

Additionally, if you do have any “unusual” account activity – say a spike in sales or an increase in chargebacks – both you and your merchant account provider have options available to mitigate that risk other than simply freezing your funds or your account.

So, how do you pick the “right” merchant account provider?

Of the thousands of merchant account providers, only about 1% consider themselves “high-risk” providers.

Of that 1%, even fewer ARE “high-risk” providers. The rest are simply trying to use the term to pick up extra business.

“But,” you say, “I’m not running a ‘high-risk’ business?”

Are you sure?

Despite the rather unfortunate terminology, “high-risk” providers are the ones who do a better job of underwriting and are typically a better bet.


Because most of the 99%+ “low-risk” providers will handle your merchant account in much the same way as PayPal and Square – meaning they’ll approve your account quickly and close it quickly thanks to their lack of effective underwriting.

Note: No matter what merchant account provider you choose, you’ll never be able to completely do away with the risk of having them freeze your funds or your account. Contractually, they will always have that control. Accordingly, the only way to REALLY protect yourself is to set up MULTIPLE merchant accounts (each with their own member bank) and then route your sales across your different merchant accounts.

So just what does “high risk” mean?

Basically, any time any of the following are part of a business model, merchant account providers consider there to be a higher level of risk:

  • “Card Not Present” transactions (anything online or by phone)
  • Free trials
  • Recurring billing/subscriptions
  • Transaction amounts over $1,000
  • Products or services that are subjective in quality
  • Products or services that are delivered in the future
  • Government regulated products and services
  • Extreme guarantees of results

Now, this is by no means an exhaustive list. But it should start to give you an idea of how many businesses are “high risk” … We’re obviously not talking about just online gambling and pornography!   😉

Risk can and should be viewed as a spectrum.

If you go to Starbucks tomorrow morning and pay for your latte and muffin with your credit card, how likely are you to go home, call your credit card company and dispute the charge for your purchase… even if your latte was terrible? Not very likely. This is a very LOW RISK transaction.

On the opposite end of the spectrum, consider a company in India that offers a 14-day free trial of a “Natural Male Enhancement” supplement that they guarantee will “add two inches to your manhood” and then they automatically charge your card $99 a month after the free trial ends (this is a real example, I can’t make this stuff up!).

The latter transaction involves a product that’s subjective in quality, a free trial, future deliverability, recurring billing, extreme claims and a guarantee of results, and a location (India) with a statistically higher rate of fraud.

All of these things increase the likelihood of a consumer disputing the charge.

While it’s likely your business falls somewhere closer to the middle of this risk spectrum than to either extreme, my purpose here is to help you understand “risk” and just how different services like PayPal and Square are from more traditional merchant accounts so we can answer the question…

Which Payment Solution Is Right for You?

Regardless of your specific situation, the likelihood of having a PayPal or Square account frozen is higher than that of a traditional merchant account simply because PayPal and Square don’t understand your business, they don’t underwrite, and freezing accounts and funds is their only way of managing risk.

If PayPal or Square freezing your account will cause your business to collapse, you should rethink relying solely on either one.

However, there are times when using PSPs like PayPal and Square make a lot of sense:

  • Proving a New Business Concept – If you’re starting a new business and you’re not sure whether or not it’s viable, PayPal’s and Square’s ease of set up, low overhead, and the fact that they don’t require a contract (which all individual merchant accounts require), may make PayPal and/or Square your best bet out of the gate.
  • Low Sales – When your sales are under $10,000 per month or $100,000 per year, there’s less of a reason for an aggregator to flag or freeze your account and, therefore, less of an incentive for you to protect yourself with a more traditional merchant account.
  • Offering Multiple Payment Options – Just because your business does over $100,000 per year – or even millions of dollars a year – in sales, doesn’t mean you should ignore PayPal or Square. There is definitely a percentage of consumers who prefer to use these services and there’s no reason to turn them away from your business by not offering them as an option. Just make sure they’re not the only option.

This being said, there are times when you definitely need to set up one or more traditional merchant accounts…

  • Sales Exceed $10,000 Per Month – As we’ve discussed, Visa and MasterCard track merchant account aggregators closely and once a business does more than $10,000 per month or $100,000 per year in sales these credit card companies typically require the aggregators to set up individual merchant accounts for these businesses. So, it stands to reason that if your business already has sales in excess of these amounts (or you plan to!), it’s time for an individual merchant account. What’s more, if your business is at this level, you simply risk too much by leaving your business in the hands of a company that doesn’t understand your business and that could easily freeze your funds or account at any time with little or no explanation.
  • Your Business Lies Anywhere on the “High-Risk” Spectrum – If you have any refunds or chargebacks at all, or are simply in an industry where that’s common, you’re considered “high risk.” And, if we’re talking about your psychotherapy practice – an often government-regulated and definitely subjective service – whether or not you process card-not-present transactions, you’re definitely in a higher-risk business than Starbucks. As such, relying on aggregators such as PayPal and Square is less than ideal. How do PayPal and Square manage risk? They freeze funds and accounts. No questions asked. No good.

PSPs like PayPal and Square are a great choice if you’re looking to get started with credit card payments. They offer ease of use and a good deal of flexibility. Unfortunately, they lack protection for you and your business…

Once you’ve built up a decent and consistent payment volume – and especially before you reach the $10,000 per month/$100,000 per year threshold – it’s time to set up one or more individual merchant accounts.

I hope this helps you understand your options and makes it even easier for you to start accepting credit card payments, if you’re not already! Which payment processor do you use? How has your experience with them been? Share your questions and comments below and we’ll look forward to the conversation!

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