I hesitate to comment because I am in a sense a "vendor", but I would like to answer. First, let me make it clear; my real life business is doing web sites and online stores, as well as other associated Internet based applications. For better or worse, that's what I do to earn a living. I also happen to be a folk music fan, and several of my web sites are for folk (or similar) musicians. One of them is the Hamilton Camp web site that I referenced in another thread this morning.

First, some information on PayPal. The big pitfall which is fact and not opinion is that once the BUYER has spend $500 on his associated credit card, he must give PayPal a bank account number. The buyer can still choose to charge payments to his card, but he must provide the bank account number to PayPal in order to continue to use it. For some people, this is a "not on your life" situation; some folks are still somewhat uncomfortable with giving out a credit card number to a "system" in the sky; giving out a bank account number ranks one level of discomfort above that. So even if your own sales are for books or music and small ticket items, a buyer who buys even one home appliance online can easily reach the limit.

On to less factual comments. For the above reason and others, PayPal is generally considered an informal and personal method of payment. Most businesses would prefer to establish their own merchant account (yes, there are significant costs) or to use a service other than PayPal to accept payment for them. There are several large services that do this in specific markets, such as to sell books or CDs. Basically, that is what I do, but my service is different in that the store screens look just like your site so that the entire payment process is fully integrated. By contrast, most if not all of the other solutions (including PayPal) take the buyer to a page on their site which looks like their site not yours (it might have your name and logo). In many cases the page on their site has links to other competing businesses (not PayPal, but others).

For some buyers, buying from a store that looks like your business and not from a larger, impersonal service makes them more likely to order.

When you use one of these services (mine or others including PayPal) the money that is transferred from the buyer (usually his credit card, but it can be his bank account with PayPal) and flows into a merchant account belonging to the service. That service either allows you to transfer the money to your account (as does PayPal), or pays you at some specified frequency. Your comfort level depends on your trust in the service you are using. In all likelihood, the major services are honest and hopefully their accounts are escrowed (which means if they go belly-up their creditors can not touch the money in the merchant account because it is yours not theirs), and the system will work for you. You make your choice based on the services they offer you, and the experience you have when you deal with them.

When I do an online store for someone, I charge for setup and take a percentage of each sale. The banks and the payment processor (the intermediary who handles the tranfer of the money) take their cut too. I have one single merchant account which is shared by all my customers; the cost of a merchant account - if you can get one - runs just under $1000/yr including the certicate you need so that you can operate in secure mode (to protect the information you transmit - eg, the credit card number). A large business - one with tens of thousands of dollars or more of online business a year - will choose to get their own merchant account so that the money flows directly in their own bank account. A small business can not justify the expense of doing that. I have one customer who has his own merchant account.

PayPal's rate to you is pretty much the bank fees with only a tiny bit added on for their profit. Of course, at their size, they need only make a few cents on each transaction. It makes it tough for the little guy (or gal) to compete unless the potential seller considers the total service and how it might increase his overall sales.

So, more than you wanted to know and I apologize for what some will consider to be "marketing". However, since this is my business, I do know how it works and am happy to answer questions.