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Does it make any difference that both stores will be placed in the secure folder on the server?
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If the site has been SSL-enabled and you place the installation in the secure directories, then the https protocol can be used to provide secure transactions between the customer and the server. However, the plain text email is still a huge security hole.
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Any way to tweak Online Merchant to make it more secure?
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Yes. (1) Upgrade the Standard edition to the Commerce edition ($49), (2) Install so that SSL is enabled for transactions, and (3) Turn off the e-mail feature and use either the E-Commerce Exchange or Authorize.Net payment services that the Commerce version supports.
Rich