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 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. Underpinning this shift are robust payment systems, which provide the infrastructure for businesses to accept and manage a variety of payment methods efficiently.
Stability is the top priority for maturing SMBs. As of 2025, 82% of U.S. small businesses now consider a seamless, reliable payment experience as “non-negotiable” for growth. Choosing the right payment processor is crucial for ensuring smooth customer transactions and supporting secure, efficient online transactions. However, approximately 60% of merchants using standard payment service providers (aggregators) still encounter a processing issue or account freeze at least once a month.
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.
Introduction to payment processing
Payment processing is the backbone of modern commerce, enabling businesses to accept payments from customers quickly, securely, and efficiently. Whether you’re running a brick-and-mortar shop or an online store, having a reliable payment processor is essential for handling transactions and ensuring a smooth customer experience. At its core, a payment processor acts as the intermediary between your business and your customer’s account, facilitating the transfer of funds and managing the technical aspects of each transaction.
There are several ways businesses can accept payments, from credit and debit cards to digital wallets and bank transfers, and understanding the main payment methods and how to accept each one is essential. Choosing the right payment processing solution is crucial, as it impacts everything from transaction speed and security to the types of payments you can accept. Some businesses opt for a dedicated merchant account, like offered through Stax, which provides direct access to payment networks and greater control over transactions. Others prefer the simplicity of third party processors (or aggregators), which allow you to start accepting payments without the need for your own merchant account. Understanding the differences between these options will help you select the payment processor that best fits your business goals and operational needs.
Types of payment processors
When it comes to payment processing, businesses have a variety of options to choose from, each with its own advantages and trade-offs. Third-party payment processors, such as PayPal, are popular for their easy setup and minimal upfront costs. These third-party payment providers allow you to accept payments without a dedicated merchant account, making them ideal for startups and small businesses looking to get up and running quickly. However, this convenience often comes with higher transaction fees and less control over your account.
Traditional merchant account providers, typically offered by banks or specialized payment companies, require a more involved application process and may charge setup fees. In exchange, you gain a dedicated merchant account, which can offer lower transaction fees and greater stability for businesses with higher transaction volumes. These accounts are well-suited for established businesses that prioritize long-term savings and direct relationships with their payment processor.
Full-stack processors combine payment gateway and processing services into a single, unified platform. This approach simplifies payment system management and provides a seamless experience for both in-person and online payments, similar to simple payment processing solutions for growing businesses. Meanwhile, open payments platforms focus on flexibility and scalability, allowing businesses and developers to build custom integrations and expand their payment options without being tied to a single provider’s roadmap.
By understanding the differences between these types of payment processors—including their fee structures, setup requirements, and supported payment methods—you can make an informed decision that aligns with your business’s needs and growth plans.
Definition of third-party payment processing
Third-party payment processors (aggregators) are entities that allow merchants to accept payments without the need for their own dedicated merchant account. Payment aggregators (PSPs) differ from dedicated merchant providers by using a shared merchant account to process transactions, which allows for fast onboarding. This is different from a single merchant account or individual merchant accounts provided by traditional providers, which set up individual accounts for each merchant, offering more control, stability, and customization.
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. Third-party providers aggregate multiple merchants under a single master account, which can lead to higher scrutiny and potential account issues for individual businesses. 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. Third-party payment processors also allow businesses to accept a wider range of payment methods without needing to establish a merchant account directly with a bank.
How does third-party payment processing work?
Businesses with a dedicated account have their own unique merchant ID (MID), allowing them to accept payments directly through their established relationship with the acquiring bank. 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.
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.
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.
By utilizing a third-party payment processor, you are bypassing initial underwriting. While this means near-instant approval, it also means the processor will perform deferred checks, which can lead to unexpected account freezes or termination later if your business is flagged. 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, who verifies and authenticates transactions using the customer’s account, along with running through a variety of anti-fraud measures, before they allow the completion of your client’s transaction from their bank account. Third-party payment processors also manage the authorization process and verify transactions through relevant card networks or digital wallets.
To ensure security, third-party payment processors use automated systems to detect fraud and comply with industry standards. If suspicious activity is detected, these systems may trigger sudden account freezes or holds on funds to protect both merchants and customers.
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, especially when you use an all-in-one platform to simplify payment processes.
Is third-party payment processing necessary?
The demand for sophisticated payment infrastructure is exploding. The global payment processor market is projected to reach $71.8 billion in 2026, growing at a compound annual rate of 11.1%. 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 and may even explore no-fee credit card processing through surcharging. 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. With a dedicated merchant account, you establish a direct relationship with the payment processor, and providers assess your business’s risk profile during onboarding to determine pricing, stability, and account management. This ensures a tailored and secure setup. 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 account stability and financial protection. Because aggregators defer underwriting, your funds are more susceptible to being frozen or held due to perceived risk, and your business lacks the customized fraud protection of a dedicated merchant account. Businesses in higher risk industries or experiencing rapid growth may face increased chances of account freezes, terminations, or restrictions when using third-party payment processors. 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 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. They also typically do not require long-term contracts or monthly minimums, making them a more flexible and affordable option for small to medium-sized businesses. You’re only charged for the transactions you make.
The fee structure of third-party payment processors usually involves a flat percentage fee per transaction—often ranging from 2.5% to 3.5% plus a small fixed fee—but can also include hidden fees such as chargeback fees or termination fees.
Even as a dedicated merchant account provider, Stax doesn’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 batch fee
- No annual fee
- No contract fee
- No cancellation fees
We consolidate/eliminate many of the small, unnecessary administrative fees often charged by traditional processors.
Alternatives to third-party payment processors
While third-party payment processors offer a quick and easy way to start accepting payments, they aren’t the only option available to businesses. One alternative is to work directly with a merchant account provider, which gives you your own individual merchant account. This approach often results in lower processing fees, more predictable monthly fees, and greater control over your payment processing services. Businesses with higher transaction volumes or specific risk management needs may find this option more cost-effective and secure in the long run.
Another alternative is to leverage payment facilitators and embedded payment solutions, such as those offered by Stax Payments. These platforms provide a unified infrastructure for online payments, in-person transactions, and even white-label payment options for software platforms. By internalizing key payment functions—like settlement, tokenization, and fraud detection—these solutions offer enhanced security protocols, robust analytics, and the flexibility to scale as your business grows.
Choosing the right payment processing services depends on your business needs, transaction volume, and the types of payment methods your customers prefer. Whether you prioritize competitive pricing, advanced risk management, or seamless integration with your existing systems, exploring alternatives to third-party payment providers can help you find the best fit for your business goals and customer experience.
Top considerations when choosing a third-party payment processor
Some of the requirements to consider when choosing a third-party payment processor are:
- Reliability is crucial, as service disruptions can impact transaction flow and customer satisfaction.
- Scalability should also be considered, since your business needs may change and grow over time.
- Geographic location plays a significant role, as regional differences can affect transaction success rates, payment preferences, and local processing capabilities—especially for businesses operating internationally.
- Additionally, the choice of payment processor can affect your ability to accept international payments and support cross border transactions, as many third-party payment processors offer a wide range of payment methods and currencies to benefit businesses expanding into global markets.
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 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, and consider whether they support modern payment equipment and POS devices.
Cost
Look into the processor’s pricing model, markup, processing rates, as well as any other fees they charge. For example, pricing starts at a flat monthly fee or a per-transaction rate, depending on the provider, and some merchants benefit most from transparent subscription-style payment pricing. Third-party payment processors often charge a flat fee per transaction, which can be more favorable for small businesses. Then, run the numbers and figure out the most cost-effective option for your business. Aggregators make up for their lack of fees in their per-transaction percentage fee. This percentage is significantly higher than a dedicated merchant account because the third-party processor must charge a blanket rate high enough to absorb the risk and processing costs for every single sub-merchant operating under their master account.
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—may or may not be included in your aggregator’s payment ecosystem. Many third-party payment processors have adapted to accept mobile and digital wallet payments such as Apple Pay and Google Pay, as well as buy now, pay later services like Klarna and Afterpay. PayPal, for example, offers its own POS system called PayPal Zettle for seamless payment processing. But payment choice is no longer a luxury—it’s a conversion requirement. Research for 2026 shows that up to 28% of shoppers will abandon their carts if their preferred payment method (like a specific digital wallet or BNPL option) isn’t available.
A dedicated provider like Stax allows you to integrate a wider array of payment “rails” (like ACH, SMS, and various digital wallets) to keep that 28% from walking away.
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 (like Stax). 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 third-party payment processing provider follows industry-standard security protocols, such as encryption and tokenization, to protect sensitive customer data during transactions. Third-party payment processors must comply with Payment Card Industry Data Security Standard (PCI DSS) requirements to ensure secure transactions. The aggregate nature of third-party payment processors can pose a data security risk, but reputable providers mitigate this risk with advanced security protocols.
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. Third-party payment processors often have stricter fraud-detection systems in place to detect fraud due to the aggregation of transactions.
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, and understanding how credit card processing fees are calculated can help you evaluate each option. Subscription pricing (Stax’s model) is highly transparent: Merchants pay a predictable monthly software fee and then the direct, non-marked-up interchange cost for every transaction
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 and to apply proven strategies to lower credit card processing fees wherever possible.
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 because aggregators charge a significant markup on the interchange rate to cover their risk. This makes the effective rate significantly more expensive than the direct-cost processing offered through a transparent dedicated merchant account (like with Stax). Depending on the size of your business and the number of transactions processed per month, the fees charged per swipe with an aggregator may not be an ideal solution for your business needs.
Final words
While aggregators offer a fast start, growing businesses should transition to a dedicated merchant account provider like Stax. This ensures maximum financial stability, full customization, and the deepest possible savings through our transparent, subscription-based pricing model, eliminating the escalating costs of the flat-rate aggregator model.
Request a QuoteFAQs 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 PayPal, 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.
