What is a third party payment processor?

Wednesday, November 03, 2021

When it comes to your small business, you have countless responsibilities. Sometimes you’re not only the owner, but you’re also the cashier, the customer service representative, the order packer, and even the project manager. You wear a lot of different hats for your business because you have to. One of the biggest challenges facing small businesses like yours is how to go about processing payments – from point of sale transactions to online payment solutions. In this article, we’ll discuss third party payment processors including what they are, what they do, and how to decide whether they’re right for your business. First, let’s define third party payment processors.

Third party payment processors: the basics

When businesses look to accept payments from their customers, they have two options: set up a merchant account themselves through a merchant account provider (usually a bank or other financial institution) or work with a third party payment processor.

Merchant accounts allow businesses to accept multiple forms of payment at checkout, including credit or debit card transactions, automated clearing house (ACH) transactions, mobile payments, and online payments.

The third party payment processor is an intermediary between you – the merchant – and the merchant services provider. The payment processor is what allows your business to accept payments from your customers without having a merchant account of your own. As a result, without a merchant account or a payment processor, you’ll not be able to accept payments at your business.

Third party payment processors are also known as payment aggregators because they aggregate all of the payments from the multiple businesses they work with into their merchant account. Then, once the transactions have been processed, they disburse your payments from their merchant account to your business bank account.

While many larger businesses choose to set up their own merchant accounts, establishing a merchant account of your own involves a long, arduous process. The merchant service provider needs to take an in-depth analysis of your business. Because payment processors already have a relationship with the financial institution, it’s much quicker to get started accepting payments if you work with a payment processor rather than applying for a merchant account.

Now that you know more about third party payment processors, you’re probably wondering “Does my business need one?” Let’s take a look at some of the reasons you may choose to work with a third party payment processor.

The benefits of third party payment processors

As we’ve discussed, third party payment processors can help your business by removing obstacles for accepting payments at your business. Let’s look at the benefits of using payment processing service providers to help you decide if they’re right for you.

Easy to setup and use

One of the biggest advantages of using a third party payment provider is the ease of setup. When your business establishes a merchant account, the merchant services provider goes through an underwriting process that can take weeks or longer. During that time, your business won’t be able to accept payments besides cash. But with a third party processor, the approval process can take as little as a few hours. Also, depending on the processing company, the setup process can even be completed online.

No monthly or annual fees

Another benefit of working with a third party payment processor is that many do not charge monthly or annual fees. Often, there’s a large deposit required to set up a merchant account, plus monthly or annual fees depending on the merchant services provider. If you establish a merchant account, you could incur other fees like Payment Card Industry (PCI) compliance fees and gateway fees. However, working with a third party payment processor can streamline the fees you pay as a business. Typically, you’ll only pay processing fees to the payment processing company based on the actual transactions. That means you won't be responsible for those excess fees, which in turn can help to streamline your billing.

Easy to terminate contracts

Another benefit of working with a third party payment processor is the flexibility of contracts. Many payment providers make it easy for you to alter or cancel your contract with them, and some even let you cancel the contract online. In contrast, merchant service providers have longer contracts that lock your business in for much longer – up to three years. Obviously, these variables differ depending on the payment processor you choose to work with. But generally speaking, third party payment processors work on a month-to-month basis.

Now that you’ve seen some advantages of utilizing a third party processor, let’s take a look at some challenges with third party payment processors.

The challenges of third party payment processors

Every decision you make for your business comes with advantages and disadvantages. The same is true for working with third party processors. Since you don’t own the merchant account, there will be some drawbacks to third party payment processors. As you read through these challenges, you should keep your business’s unique situation in mind to see how they may affect your business.

Transaction fees

In contrast to the ease of setup and use, payment processors may charge your business higher fees than if your business has its own merchant account. Often, payment processors charge based on each transaction and may include a minimum number of monthly transactions. These transaction fees give the payment processor margin while providing your business the access it needs to accept payments. For your small business, you’ll need to weigh these higher transaction fees against the convenience and simplicity of using a third party processing partner.

Account stability

As we’ve noted, a merchant service provider’s due diligence – including a lengthy underwriting process – comes before approving a business for a merchant account. But in contrast, payment processors tend to get businesses set up before diving into each merchant’s financial situation. While this helps businesses accept payments quickly, it exposes third party payment processors to the possibility of high-risk merchants.

Because of this increased risk, third party processors tend to keep a closer eye on their merchants’ transactions. And because they delay the vetting process until after setup, they tend to be less tolerant of activity changes like lower processing volumes or an increased amount of chargebacks on your account. Unlike third party processors, merchant service providers can be more tolerant to these changes because they have a clearer financial picture of your business from the start.

Customer support

While third party payment processors tend to streamline the payment process for your business, they may be less responsive when issues arise. Many payment processors have online support and articles that can help walk you through issues. However, they may have less human support available. In contrast, merchant service providers are more likely to have dedicated support for your issues, including specific people who service your business.

As you can see, there’s a lot to consider when it comes to making the decision between establishing a merchant account or working with a third party payment processor. In the next section, we’ll provide a few factors that can help you make the right choice for your business.

Is a third party payment processing partner right for me?

You’ve now seen the benefits and challenges of third party payment processors, but you might still be deciding whether it’s right for your small business. So, let’s discuss a few consideration factors to help you with your decision.

Business size

For large businesses, a merchant account probably makes the most sense due to the amount of transactions and size of transactions. However, for small-to-medium sized businesses, merchant accounts may not be the best. If your business is looking for a hassle-free way to accept a smaller number of transactions per month, a payment processing partner might be the best solution.

Transaction volume

With a third-party payment processor, you’ll typically only pay when you accept a payment. So the more transactions your business processes, the more it may make sense to have your own merchant account. However, if you accept less payments, the monthly fees of a merchant account may be too great compared to the pay-per-transaction model of third party processors. You’ll have to run the numbers to see for yourself which model is best for your business.

Turnaround time

As previously discussed, the timeframe your business has to start accepting payments may dictate your payment acceptance method. Setting up a merchant account generally takes longer than setting up an account with a third party payment processor. So if you need to accept payments quickly, you’ll most likely want to rely on a payment processing partner.

Age of business

Because of the arduous underwriting process associated with merchant accounts, a newly-established business or startup may not have all the required information to apply for a standalone merchant account. If your business is newer and does not have the transaction history required for a merchant account, a third party payment processor might be the most hassle-free option.

Now that you’ve seen a few of the facts to consider when deciding if a third party payment processor is right for your business, we’ll take a look at the factors to consider when evaluating a payment processing partner.

Choosing a third party payment processor

You’ve decided that your business is ready to work with a payment processing partner. That’s great, but maybe you don’t know how to evaluate the variety of third party payment processors. In this section, we’ll take a look at some factors you’ll want to consider when choosing a processing partner.

Costs

Unsurprisingly, the most important consideration in choosing a processing partner is costs. Each payment processor has different pricing structures and it’s important to fully evaluate each of the pricing structures. Make sure you understand the transaction charges, each of the fees a particular processor charges, and any other applicable fees. It’s important to investigate these fees before making a decision so you’ll fully know what to expect after beginning your relationship with the payment processor.

Security

As a business owner, you have an obligation to protect your customers’ payment data. And while payment processors shoulder the responsibility of fraud and PCI compliance on your behalf, you’ll still want to understand how they are helping to protect your customers’ data. You’ll also want to gain an understanding of how the payment processor is protecting your business’s sensitive and confidential information.

Payment acceptance

While many payment processing companies accept debit and credit card payments, it’s important to evaluate which other payments they accept. With the rise of mobile payments, ACH payments, and other payment methods, it’s good to double check each third party payment processor’s capabilities to find the right fit for your business.

Software integrations

Another important consideration when evaluating payment processing companies is their ability to integrate with your current software. This could include your online store and ecommerce platforms, payment gateway, and account software, thereby ensuring a seamless experience for your customers and your business.

Hardware integrations

Your business should also consider how payment processing partners will integrate with your hardware – from point of sale systems to card readers. It’s important to ensure compatibility with these systems for efficiency sake. Some payment processors even provide all-in-one solutions, making it easy for your business to get the hardware it needs while developing a seamless payments system.

Policies and limits

Each payment processor will have varying policies. It’s important to compare these policies, including any transaction minimums as well as the timeframes for businesses to receive their deposits.

As you’ve seen, choosing between a standalone merchant account and working with a third party payment processor is a decision that relies on each business’s unique situation. For SMBs or startups, working with a payment processor can be a hassle-free way to do more for your business.

Looking for a payment processing partner to help protect your business?

Heartland is the point of sale, payments, and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back, and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind.