You Don't Need a Merchant Account for Online Auctions

First Published:
Date Published: September 2000
Copyright © 2000 by Kevin Savetz

Back in the old days (1998 or so) taking payment after an online auction meant waiting for a check or money order to arrive in the mail, driving to the bank, and saying a little prayer to the auction gods in the hopes that the money was good. The alternative was getting a merchant account in order to accept credit cards. But opening a merchant account with a bank was -- and remains -- a daunting and expensive process that has stymied many a small business owner.

Fast forward to today: online payment services like PayPal, ( Billpoint, ( and ProPay ( allow anyone to accept credit card payments without a traditional bank-issued merchant account. With the advent of these services, getting paid takes seconds instead of days -- and virtually no prayer is necessary.

ProPay is one solution: with this service, the company sets up a merchant account on behalf of the seller. Purchases can be made on the Web or in person, and the seller's e-mail address appears on the buyer's credit card statement. Unlike a traditional merchant account, there is no setup fee or monthly fee: the service takes a percentage of each transaction. (The service fee is 3.5% of the transaction amount, plus $.35.)

With ProPay, the seller is the merchant of record, which maintains the contact between Visa/Mastercard, the buyer, and the seller remains in force, according to Brad Wilkes, President and Founder of ProPay. Disputed charges can be handled by the credit card company, a benefit that is lost when using PayPal or BillPoint as an intermediary. "Some of our competitors don't maintain that level of trust. Buyers have to be more astute as to the credibility of who they're buying from," he said.

ProPay's service offers a comfortable balance of accepting credit cards without opening a bank's merchant account. The company does not release information regarding the number of subscribers, although Wilkes reports a strong number of account sign-ups since the site's launch in May. However, ProPay has clearly not yet gained the number of users as its competition.

For auction bidders, PayPal and eBay's Billpoint are the two most popular services. These services serve as a middleman, debiting the buyers' credit card (the buyer's credit card statement will show the name of the service rather than the seller -- which looks less professional) then transferring the funds to the seller's account -- the seller doesn't even need the buyer's credit card number. The downsides: both buyer and seller need accounts with these services to complete a transaction, and Billpoint is geared toward eBay transactions.

Richard Russell, owner of a Johnstown, PA consignment service called Edifice Wrecks, Inc., considered opening a merchant account but opted not to do so. "My mail, real and e-mail, is swamped daily with offers from myriad sources to act as credit card taker," he said. "These get the heave-ho since I don't have the time or inclination to review the fine print for the other shoe that will no doubt fall when the introductory rate ceases and I must litigate my disputes in the district court of Walla Walla. I have likewise avoided setting up credit card accounts with my local lending institutions -- at least for the present -- since the 3-5% charge coupled with the eBay charges take too much of a bite."

Instead, his company allows purchasers to use their credit cards through PayPal. Aside from the ability to confirm payment receipt without waiting for a check to arrive, Russell appreciates the security the intermediary service affords. "I conclude a sale without taking any information about the type of card used or the card numbers. It places a wall between me and any suggestion of credit card misuse," he said.

Karen Siddiqi, owner of Canada-based Siddfam Collectibles, has also opted for online payment services over a merchant account. She accepts credit card payments through BillPoint ("I accept it but I don't push it, because BillPoint charges and I'm cheap," she said) and PayPal. Online auction payments are preferable "because it moves the stuff out faster. Waiting for a check, you could have something sitting around for 20 days after the end of the auction."

Although she considered a merchant account, "it was such a hassle. There was a $400 setup fee, then a transaction fee," Siddiqi said. "My husband and I and looked at each other and said, 'We're only selling about $1500 of stuff a month, it's not worth it.'"

PayPal offers two levels of service: a personal account and a business account. The personal account does not charge buyers or sellers a transaction fee -- the company makes its money by skimming interest from sellers' accounts. The business account adds features, including batch payments and a daily sweep of funds into the seller's0 bank account. Business account fees are 1.9% fee per transaction. More details are here. (

BillPoint, which is owned by eBay, charges sellers a transaction fee of $0.39 plus 3.9% based on the total amount of the payment (or less: the fees are outlined here. ( Because BillPoint is tightly integrated into eBay, it is especially easy to complete the transaction after an eBay auction. In addition to credit cards, BillPoint allows buyers to pay with an electronic check.

Articles by Kevin Savetz