Running a business comes with a whole set of tasks and potential difficulties even for the most successful companies. One of the many necessities that small and medium-sized businesses (SMBs) encounter is payment processing of cashless payments like a credit card. Thanks to checks, credit cards, and debit accounts, gone are the days when cash was king.
This is the era of digitization and seamless payment processing, both offline and online.
But the digital evolution of payment processing doesn’t have to be difficult for a brick-and-mortar retailer or small business owner. On the contrary, it can make life simpler for customers, merchants, and third-party participants to accept payments, including online payments.
Definition of Third-Party Payment Processing
Third-party payment processors (sometimes referred to as payment aggregators or credit card processing companies) are entities that allow merchants to accept credit card payments, online payments, and any other cashless payment method without the need to set up their own merchant accounts.
Third-party payment processing business entities aim to make it as simple as possible for merchants to run their business, have simple payment flows, and conduct transactions. That way, you won’t have to worry about setting up or maintaining a merchant account. You can simply create an account with a third-party payment processor, and have all your transactions go through them.
How Does Third-Party Payment Processing Work?
Many businesses have their own merchant accounts with merchant services providers or a credit card processor. When their clients walk through the door and make a debit card purchase through a point-of-sale system, businesses with this type of account have the ability to accept payments directly through their own merchant account and be done.
However, for some businesses that are just starting out, this isn’t always the most economical method of taking payments. It takes time and effort to interface with merchant account providers, and if your business is still in its early start-up stage, your time can be better spent doing other things.
This is where a third-party payment processor comes into play. Instead of having your own merchant account, which often comes with setup costs, you’ll instead work with a third party who has their own relationship with a merchant services provider, essentially serving as an intermediary.
A well-known example of a third-party payment processing company is Square, which allows you to sign up and start accepting debit card payments on the very same business day.
By utilizing a third-party payment processor, you’ll be bypassing the step of having your own merchant account at a financial institution. These companies allow customers like you to use their merchant account to process all of your debit card and credit card payments. As a result, your customers’ payment information will be reviewed by the processor, along with running through a variety of anti-fraud measures, before they allow the completion of your client’s transaction from their bank account.
These payment processing companies can run debit cards, conduct credit card processing, and even serve as an online payment processor solution so you can expand your business to the digital realm. It helps to work with credit card processors and those who process payments online because it can increase the pool of buyers for any type of business.
What Are Some Examples of a Third-Party Payment Processor?
Examples of well-known third-party payment processors include:
- Stax
- Cybersource
- Adyen
- Square
- WePay
- PayPal
- Tipalti
- BitPay
- Stripe
- Amazon Payments
- Ingenico
- Braintree
A third-party payment processor is a merchant services provider that lets you provide more payment methods to your customers and helps you receive payments without first setting up your own merchant account with a bank.
The simplicity of not having to get an account with a bank to accept credit cards and conduct card transactions with a debit or credit card company can genuinely increase your business experience.
There are thousands of payment processing services in the U.S. alone. The most suitable service will depend on your business needs.
Is Third-Party Payment Processing Necessary?
Many budding entrepreneurs, especially those who are just starting out, wonder whether a third-party payment processor is the right fit for them. After all, they hear that sign-up is easy and they won’t have to pay any fees. However, it’s important to dig a little deeper to understand who third-party payment processors truly work for and when they are necessary.
There are a variety of reasons a merchant might choose to go with a third-party relationship. Some companies might not be able to afford the monthly fees associated with dedicated accounts. Similarly, SMBs processing very low volume in customer credit card payments often can’t afford the setup costs of such an account. This makes a third-party access with a payment processor a good solution for your business when you are just starting out and do not anticipate processing a high volume of credit card transactions.
It is important to remember, however, that while you do not pay startup fees or monthly fees with a third-party payment processor, they still have to make money somewhere. They make up for their lack of fees in their per transaction percentage fee. This fee is significantly higher than it would be with a dedicated merchant account. This means that if you are processing payments at a high volume, this will be more expensive for you.
Do I Need a Third-Party Payment Processor?
Just because third-party payment processors are available doesn’t mean they’re necessarily the right choice. For most small and medium-sized businesses, the negatives can outweigh the positives when it comes to a third-party payment processor.
If your company is at the point where the startup costs are negligible and your stream of clients is large enough to quickly outweigh those costs, a merchant service provider that offers a dedicated merchant account is your best bet. Additionally, working with a provider such as Stax means you will never see any startup costs, and the 0% markups will counteract the monthly membership.
The biggest downfall with payment processing through a third party is the lack of security. When you have your own dedicated merchant account, your business has gone through the process of underwriting and you are protected against fraudulent transactions and you know exactly when to expect the funds in your account.
What Are the Benefits of Using a Third-Party Payment Processor?
Unlike merchant accounts with banks that tend to be expensive and time-consuming to set up, many third-party payment processors don’t charge a huge deposit fee for setup. You’re only charged for the transactions you make.
At Stax, we don’t charge any outrageous monthly fees either. Here’s a list of some fees you’ll see from other banks and processors, but never from us:
- No early termination fee
- No customer support fee
- No statement fee
- No IRS fee
- No batch fee
- No annual fee
- No contract fee
- No cancellation fees
Top Considerations When Choosing a Third-Party Payment Processor
Some of the requirements to consider when choosing a third-party payment processor are:
Software integrations
See to it that the provider you choose works well with the software you’re already using in your business. If you have an online store, your processor should integrate with your eCommerce platform so you can easily partake in website payment processing. It also helps to use website payment processors that work with your accounting software (e.g., QuickBooks, Xero, etc.) to make payment reconciliations easier.
Hardware integrations
The same thing goes for your hardware. When shopping around for a credit card processing company, set your sights on providers that integrate with your card readers, terminals, POS systems, and more.
Cost
Look into the processor’s pricing model, markup, processing rates, as well as any other fees they charge. Then, run the numbers and figure out the most cost-effective option for your business.
Supported payment types
Pretty much all payment processors support credit card payments. However, alternative payment methods – such as mobile payments, ACH, and even SMS payments – are gaining steam, so make sure your vendor enables you to accept these payment types.
Policies
Processes and policies vary from one provider to the next. Some payment service providers, for instance, may require a monthly minimum when it comes to transaction volumes, while others don’t have any limits. Certain vendors may support same-day deposits while others don’t. Research these policies and ensure they work for your business.
Security and Fraud Prevention Measures
Don’t neglect security and fraud prevention. See to it that your 3rd party payment processing provider follows industry-standard security protocols, such as encryption and tokenization, to protect sensitive customer data during transactions.
Look for features like PCI DSS compliance, fraud detection tools, and chargeback management systems to minimize the risk of fraudulent activities and protect your business and customers.
Settlement Timeframes
Find out how quickly you’ll receive funds from completed transactions. Some processors may offer daily, weekly, or monthly settlements, while others provide instant or next-day settlements. Consider your cash flow requirements and choose a processor that aligns with your business’s financial needs.
Customer Support
You need a payment processor that has your back and provides assistance whenever you need it. So don’t forget to ask about your vendor’s customer service offerings. Do they offer 24/7 support? What customer support channels do they use? Some providers may only offer email or live chat, while others also have their agents available over the phone.
Common Pricing Models of Credit Card Processing Companies
Credit card processing companies use a variety of pricing models. The most common are tiered pricing, interchange plus, and flat rate pricing. Some companies (like us here at Stax) use a monthly membership fee which keeps pricing extremely transparent. Merchants simply pay flat monthly fees and then interchange fees.
Interchange plus pricing is when the credit card processing companies charge you the interchange fees the credit card network charges them to run the payment plus a clear markup.
Flat rate pricing is a percentage fee plus a certain number of cents per transaction. Often it will look like 2.75% + $0.12 per swiped transaction. This percentage will change depending on the risk the company associates to process transactions presented in particular manners – so in person transactions (not considered high risk) tend to be cheaper than a transaction through a virtual payment gateway.
Finally, tiered pricing is the least transparent structure to accept card payments. The credit card processing companies bundle interchange fees and markups into tiers so you can’t tell what the markup is or what they charge for the different types of transactions. Generally, these contracts are also filled with hidden fees that allow them to sell you on low-seeming costs to accept credit card payments and then hit you on the bill with much higher costs.
Generally, companies will also charge a variety of additional fees like chargeback fees, setup fees, and PCI compliance fees. It’s important to check with a vendor to find out what they charge ahead of time so you’re prepared.
What Are The Risks of Using a Third-Party Payment Processor?
Although many third-party payment processors have their benefits, their transaction fees might be higher than you’d expect. The cost of processing individual transactions can be higher than the transactional costs associated with merchant accounts. Depending on the size of your business and the number of transactions processed per month, the fees charged per swipe may not be an ideal solution for your business needs.
Final Words
As a small business owner, you need a reliable way to process payments. Third-party payment processors can make your first foray into accepting credit cards a simple process with minimal hassle. If you’re seeking out your first merchant processor or finally understand how to make a more informed decision, you’re on your way to reduced card processing fees and an all-around better payment experience.
FAQs about Third-Party Payment Processor
Q: What is a third-party payment processor?
A third-party payment processor is an entity that enables merchants to accept credit card payments, online payments, and other cashless payment methods without setting up their own merchant accounts. Examples of popular third-party payment processors include Square, PayPal, Stripe, and Stax.
Q: How does third-party payment processing work?
Third-party payment processors serve as intermediaries between merchants and merchant services providers or credit card processors. Merchants create an account with the third-party processor, which processes transactions on their behalf using its merchant account.
Q: What are the benefits of using a third-party payment processor?
Using a third-party payment processor can reduce setup costs and time, as businesses do not need to create and maintain their own merchant accounts. Many third-party processors offer simple and cost-effective pricing structures and do not charge excessive fees.
Q: What are the risks of using a third-party payment processor?
The fees per transaction, especially in high volume sales, may be higher with third-party payment processors compared to dedicated merchant accounts. Additionally, the security and protections offered by dedicated merchant accounts may be lacking with third-party processors.
Q: Is third-party payment processing necessary for my business?
A third-party payment processor might be a good solution for small businesses that do not anticipate processing a high volume of credit card transactions. It is essential to weigh the costs, transaction volume, and features offered by third-party processors and dedicated merchant accounts to determine the best solution for your business.
Q: What should I consider when choosing a third-party payment processor?
When evaluating a third-party payment processor, consider software and hardware integrations, cost, supported payment types, company policies, and customer support quality.
Q: What are the common pricing models of credit card processing companies?
The most common pricing models include tiered pricing, interchange plus, and flat rate pricing. Some companies, like Stax, use a monthly membership fee model, which simplifies and makes pricing more transparent.
