Online payment systems are simple, right? You’ve got the eCommerce platform to handle the shopping, the payment gateway to process the payment and the merchant account to accept the money.
Well, what about if you remove the merchant account part? Can you still process payments online?
Yes, you can but you’ll need something called a third-party payment processor. And what is a third-party payment processor? Allow me to explain.
A third-party processor is a service that lets you accept online payments without a merchant account of your own. Instead, a third-party processor will allow you to use their merchant account.
So, instead of having one service for processing the payment and another for collecting the money, you’ve got one single service that does it all.
While third-party payment processors sound great, they aren’t the best choice for all businesses.
In this article, I’ll look at third-party processors in more detail and discuss their advantages, disadvantages and optimal use cases. Let’s get started.
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How do third-party payment processors work?
A normal payment processor like Worldpay has a simple job. It takes a transaction request from the merchant and liaises with various banks to move money from the customer’s account to the merchant’s account.
Okay, maybe it’s not simple but it’s straightforward to explain.
A third-party processor works in basically the same way except, instead of sending the money to your merchant account, it sends it to its own merchant account as an intermediate step before sending the funds to your bank account.
As part of your deal with the processor, you get to use their merchant account as if it were your own. And that’s basically the only difference.
What is the best third-party payment processor?
There are hundreds of third-party processors on the market, ranging from big established players like PayPal and Amazon Pay to smaller services like Nochex.
Unfortunately, which service is best depends on what you want from a third-party processor. Below, we have outlined just a handful of requirements you might have for your payment processor.
- Brand recognition: Because third-party processors’ payment pages are usually branded with their branding, you have to think about the message it sends. While well-known brands might build brand authority, lesser known brand names might undermine your trust.
- Integration: If you want online payment processing capability, you probably already have some sort of eCommerce platform like Magento, Shopify or Bigcommerce. When you’re looking for a third-party processor, it’s essential you make sure that it works with your eCommerce platform.
- Costs: There is quite a large variation in cost when it comes to third-party processors. There’s even huge variation when it comes to different tiers within individual processors. For example, at the lowest tier on Amazon Pay, you’ll pay 3.4% on every transaction but at the top tier you’ll pay 1.4%. (Compare this to having your own merchant account where even SMEs can pay 0.7% on credit cards and 0.3% on debit cards.)
As you can see from above the three points above, there is no one ‘best’ third-party payment processor.
What you need to do is analyse your own business, work out what you need from a payment processing service and find a company that ticks all the boxes.
Third-party payment processor advantages
Third-party payment processors are incredibly popular with online sellers and start-ups as they’re quick, flexible and, at least initially, cheap.
In this section, I’ve expanded a couple of the main advantages.
- Simplicity: The big benefit of third-party processors is simplicity. Instead of buying a separate payment gateway and merchant account then adding them together, you get one simple service that does it all. From start to finish, third-party processor options are less time-consuming than a mix-and-match option, catering to a wide range of different payment methods.
- Risk Appetite: Third-party processors have a degree of flexibility to vary their risk appetite so often accept higher risk merchants than the merchant acquirer who is providing their merchant account. Your chances of acceptance can, therefore, be greater and the level of documentation you have to provide can be lower.
- Flexibility: Generally speaking, third-party payment processors don’t have long-term credit card processing contracts so you can terminate your service, more or less, whenever you want.
Third-party payment processor disadvantages
Unfortunately, it’s not all positives when it comes to third-party processors. Common worries include security, processing fees when scaling and the perceived unprofessionalism.
In this section, I’ll look at three major disadvantages in more detail.
- High transaction fees: Third-party processors almost always have higher transaction fees than a traditional payment gateway-and-merchant account setup. This is especially at low transaction volumes where merchants receive the highest fees. Popular third-party options will cost you 3% plus authorisation costs in fees compared to sub-1% fees with regular merchant account systems.
- Lack of professionalism: Easing customers through a beautifully designed checkout process and then punting them onto a PayPal checkout page doesn’t give the best impression. It might be unfair but third-party processors are generally viewed as a less professional alternative to a regular merchant account.
- Control: Merchants using third-party payment processors do so at the pleasure of the service provider. Drift outside the strict terms and conditions and you could find you find yourself locked out of your account. Third-party processors are also increasingly concerned with fraud and tend to settle on the side of the customer in disputes. This can leave merchants at a disadvantage even when they have legitimately provided a product or service.
Should I use a third-party payment processor?
As we’ve discussed above, third-party processors do have advantages. They’re cheap to set up, simple to install and have the flexibility to adapt to a rapidly changing businesses.
However, due to significantly higher transaction fees, they do not scale well. They also undermine your professional identity and require you to relinquish a lot of control to your provider.
So while I can recommend third-party processors when you are just starting out, I would almost always recommend you move onto a traditional payment gateway and merchant account set up if you want to scale your business.
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