What Is A Third Party Payment Processor?
What Is A Third Party Payment Processor?
A third party payment processor is simply defined as a service that makes it possible for businesses to accept online payments without requiring them to have a merchant account of their own. In simpler terms, these services allow their clients to make use of their merchant account; however, the clients have to abide by the terms of use imposed by the third party payment processor when using their merchant account/service.
As an increasing number of consumers ditch the use of hard cash, in favor of the convenience and security of online payments, businesses are being forced to find ways of being able to accept such payments; as the alternative involves losing out on all the associated business. To be able to accept online payments, a business needs to have a merchant account.
A merchant account is a business bank account that is makes it possible for businesses to accept online payments from their customers. With such an account, businesses can process and settle online payments on their own. However, since the process of opening and maintaining a merchant account can be drawn out and costly, businesses that are unable to open their own merchant account for one reason or the other can still accept online payments by using a merchant account that is owned by a third party payment processor.
All in all, third party payment processors make it possible for businesses that do not have their own merchant account to accept and process online payments, easily and conveniently.
How Do Third Party Payment Processors Work?
Now that you have a clear idea of what a third party payment processor is, you still need to understand how it works to make all the above possible. Once a business outsources their online payment processing to a third party payment processor, their customers will be redirected to a checkout page hosted by the third party payment processor once they are ready to finalize a purchase.
This essentially means that the merchant or business is saved from procuring and installing SSL certificates and payment gateways. Furthermore, since all sensitive personal data is entered in the third party site, it is the responsibility of the third party payment processor to guarantee its security.
How Do You Know If You Need A Third Party Payment Processor?
From the above, it is plain to see just how useful and convenient third party payment processors are to merchants who need to process online payments without the need to open a merchant account. However, it is important to note that this service is not for everyone; while it might be a life saver to some businesses, some merchants are better off opening their own merchant accounts. So the question then becomes, how do you know if you need a third party payment processor?
Set up, monthly subscription and transaction fees may render dedicated merchant accounts too costly for merchants handling a mall volume of online payment transactions. In such cases, third party processors may appear to be the best option. This is often the case for small businesses as well as those that are just starting out and are yet to attain a huge volume of online transactions.
On the other hand, even though third party payment processors do not charge set up or monthly fees, they make their money by charging a percentage fee per transaction. While the total fee charged for all transactions may be lower than what would have been paid in the case of a merchant account, it increases exponentially, over and above what would be paid towards a merchant account, as the number of transactions increase. This simply means that merchants handling larger volumes of transactions are better off opening their own merchant accounts.
If you are unsure of whether you should go with a third party payment processor or open a merchant account, use the factors below as a guide to the right decision:
Business Size
A third party payment processor may be the right fit for any small and medium sized businesses that only handle a low number of online payments each month. This way they can accept and process online payments just like they would with a merchant account.
Number Of Transactions
A merchant account on the other hand might be a great option for merchants that handle a large volume of transactions each month. With such an account, these businesses can create a customized experience for their customers while minimizing total transaction fees.
Speed Of Set Up
If you need to start accepting and processing online payments as soon as possible, a third party payment processor may be a better fit for you. Setting up a merchant account may take a long time due to the drawn out application and approval process; not to mention the fact that your business might still be rejected at the end of it all. With a third party payment processor, accepting online payments is as simple as signing up with one of the many service providers on the market.
At this point, you should be able to have a clear idea of whether a third party payment processor is a great match for you and your business. However, before you make a final decision, it might be worthwhile for you to familiarize yourself with some of the advantages and disadvantages of this option.
Advantages Of Third Party Payment Processors
• Affordable: In its entirety, choosing a third party processor is much more affordable, especially for small businesses and merchants handling a low number of transactions than opening a merchant account. For starters this option helps merchants avoid account opening fees and recurrent monthly fees.
Secondly, a lower volume of transactions translates to a lower transaction fee further reducing the cost of accepting and processing online payments.
• Effortless Set Up: Setting up a merchant account, as previously mentioned, entails following a long and drawn out application and approval process, that does not come with the guarantee of a positive outcome. On the other hand, to start accepting online payments from customers from anywhere across the globe, you only need to complete a simple application and verification procedure when using a third party payment processor. This is provides for an easier and faster approach to accepting online payments.
• Flexibility: Today’s highly competitive and ever changing business environment requires businesses to be as flexible as possible. Third party payment processors provide merchants with a solution that is more flexible than the long term contracts used in the case of dedicated merchant accounts.
Disadvantages Of Third Party Payment Processors
Third party payment processors just like anything else, come with their own disadvantages as well. Here’s a look at some of the main drawbacks of this option:
• Security and Control: When it comes to online payments, security is a major concern. By choosing to go with a third party processor, and as such use their merchant account, you leave them to carry the risk of fraud on your behalf. This also means that you have to abide by the specific terms and conditions laid out by the service provider, failure to which you might be locked out of your account.
Furthermore, you might not even know how much money is in your account all the time as the processor might block transactions it deems fraudulent without immediately notifying you.
• Integration: When choosing a third party payment processor, it is essential that you consider how well it integrates with your existing ecommerce platform. Choosing the wrong service provider and platform may negatively impact the customer experience during checkout.
• Professionalism: It is generally viewed that lesser known third party payment processors are not considered to be as reputable as other well-established payment processors. While this does not in any way mean that these service providers are not as reliable as their well-established competitors, it does negatively impact your entity’s reputation, in terms of its professionalism, in a way.
• Higher Transaction Fees: Even though third party payment processors are considered to be a cost effective option due to the absence of set up and monthly fees, they do charge higher transaction fees. For merchants processing a low volume of transactions each month, this may amount to a low total cost; however, merchants accepting a high volume of transactions might find the high per transaction cost to be counterproductive.
Conclusion
From the above it is easy to see that third party payment processors are a great fit for merchants who are looking to start accepting online payments for the first time. They make the process of accepting and processing such payments quite simple and straightforward. This option also gives new merchants and small businesses the opportunity to evaluate build their capacity as they prepare to open their own dedicated merchant account as their volume of online transactions increases.
The importance of third party payment processors cannot be denied; however before you make a final decision, be sure to find out whether it is a perfect fit for your business, by comparing its advantages with the associated disadvantages.
