Are you starting a business and in need of a payment processor?
Third-party payment processors allow you to accept credit card payments without processing the transactions yourself. This can be an excellent way to save time and money, as it streamlines your checkout experience – making it easier for customers to make purchases quickly and securely.
A third-party payment processor handles the complicated technical details, so you don’t have to worry about dealing with customer data or PCI compliance. With one easy integration, your business will access features like fraud protection, subscription management, automated bank deposits, international currency support, and more.
- A third-party payment processor handles credit card transactions on behalf of a merchant without the merchant needing a merchant account.
- Third-party payment processors are easy to set up, making them a good option for small businesses.
- However, having a merchant account gives merchants more control over payment processing.
- Merchants should weigh the benefits and drawbacks of using a 3rd-party payment processor versus having their merchant account to determine the best option for their business.
I used my extensive experience working at a large payment processor to write this post about the advantages and disadvantages of third-party payment processors.
What is a Third-Party Payment Processor?
A Third Party Payment Processor (TPP) is a service businesses use to accept in-person and online payments. TPPs aggregate payments from numerous clients into one large merchant account, allowing your business to process payments without needing your own individual account. This payment processor manages all the heavy lifting – from setting up an online store to tracking invoices, connecting with customers, and even linking up with banks for secure transactions.
Third-party payment processing enables businesses to securely and effectively process payments from customers via a TPP. This method of processing payments benefits businesses that do not have merchant accounts, enabling them to accept secure payments more efficiently than ever before. In addition, a third-party payment processor offers convenience and makes it easier for companies to provide their customers with various payment methods.
Third-party payment processors act as an intermediary between merchants and banks. They process credit card transactions on behalf of businesses and charge a transaction fee for each payment processed. While the fees typically can be higher than those of merchant service providers, third-party payment processors can be a convenient option for small businesses.
They can aggregate all payments under one merchant account, simplifying the payment process and making it easier to track transactions.
Additionally, third-party payment processors often offer additional features, such as fraud protection and chargeback management, that can help protect merchants from financial loss.
How Third-Party Payment Processors Work
Customers who purchase on a merchant’s website are directed to the payment processor’s secure server to enter their payment information. The payment processor then sends the information to the acquiring bank for authorization. Once the payment is authorized, the funds are transferred to the payment processor’s account and held until the merchant requests a transfer. The TPP handles all of the interactions with issuing and acquiring banks.
Third-Party Processors vs. Merchant Account Providers
While both third-party payment processors and merchant account providers offer credit card processing services, there are some critical differences between the two.
TPPs are often easier and quicker to set up as they don’t require businesses to have their own merchant accounts. They also typically offer a flat-fee structure, which can benefit businesses with lower transaction volumes.
On the other hand, merchant service providers usually offer more control over payment processing. As a result, they can be a better option for businesses with higher transaction volumes or more complex payment needs. In addition, MSPs may offer more advanced reporting and analytics features and personalized customer support.
Choosing between a TPP and an MSP depends on a business’s specific needs and priorities.
Here is a detailed breakdown of the advantages and disadvantages of TPPs over MSPs.
Advantages of TPPs over MSPs
Here are some advantages of a third-party payment processor over a merchant services provider:
- Easy setup: Merchants can start accepting credit card payments without establishing their own merchant account or going through a lengthy application process.
- No need for a separate merchant account: With a TPP, you don’t need to set up a merchant account.
- Online gateway: TPPs provide an online payment gateway as part of their services, eliminating the need to integrate with another gateway.
- Flat-fee structure: TPPs offer a flat-fee structure. By contrast, MSPs have many different fee structures that depend on your transaction volume and individual contracts.
- POS system: TPPs often provide POS systems as part of the package, saving businesses the hassle of finding another POS provider.
Disadvantages of TPPs over MSPs
- Higher fees: TPPs may charge higher fees per transaction than MSPs.
- Limited control over payment processing: Merchants may have less control over payment processing with a third-party payment processor, as they rely on the processor’s systems and technology.
- Risk of account holds or freezes: Third-party payment processors may place holds or freezes on a merchant’s account if they suspect fraudulent activity, which can disrupt business operations.
- Potentially limited payment options: Some TPPs may only support some payment methods or currencies, which could disadvantage businesses with international customers or unique payment needs.
- Potential for account termination: TPPs may have more strict terms of service than MSPs, and merchants may risk having their accounts terminated if they violate these terms.
Top Considerations When Selecting a Third-Party Payment Processor
When deciding on a third-party payment processor, there are many things to consider.
- Security: Choose a third-party payment processor with a strong security track record to protect your company’s liability and reputation.
- Cost: Investigate the processing fees associated with each platform to ensure they align with your business’s budget.
- Payment methods: Consider which cards and payment types the processor accepts, including credit, debit, virtual, and gift cards, as well as ACH and eCheck payments.
- Convenience: Pick a platform that offers easy integrations for your online store or can accept payments via users’ smartphones.
- Customer support: Look for a processor with reliable and responsive customer support to address any issues.
- Compatibility: Ensure the processor is compatible with your existing tools and integrations.
- Performance: Check reviews from current and past users to gauge the processor’s overall performance and user experience.
Companies can decide when selecting a third-party payment processor by considering all these factors.
Why is Third-Party Payment Processor or Processing Essential?
Third-party payment processors are an essential part of a business for multiple reasons. Most importantly, these processors offer a secure and reliable means of ensuring customers can make payments quickly and seamlessly. In addition, this interactivity between customers and businesses helps reduce any potential issues with the payment process while mitigating fraud or other data breaches.
These payment processing companies act as a conduit between the customer and their financial institution, verifying their purchase is approved and secure.
Furthermore, most third-party processors offer additional services such as fraud protection, reporting analytics, streamlined tax filing, inventory control systems, and dispute resolution services.
Thus, businesses that invest in processing through third-party payment processors can save time and money on administrative overhead costs by outsourcing these tasks.
What Are Some Examples of a Third-Party Payment Processor?
Here are some examples of TPPs:
Third-party payment processors can be a convenient option if you want to accept credit card payments without the hassle of setting up your own merchant account. However, weighing the benefits and drawbacks of using a third-party processor versus having your own merchant account to ensure you get the best value for your business is essential.