A third-party payment processor is a company that handles payments on behalf of other companies, giving them access to its own merchant account. Many businesses use third-party payment processors because it’s more efficient than processing payments themselves. The jobs of the processor are to create accounts for customers, accept credit card information and process transactions. This frees up the business to focus on other areas.
Third-party processors are used for all types of transactions, including online and brick-and-mortar purchases. They’re set up in the same way as traditional merchant accounts, with agreements that outline fees charged for processing certain types of payments (credit cards, debit cards, ACH), monthly minimums and account termination. Third-party providers also may have business rules that apply to the transactions they process, such as interest rates and handling returns and refunds.
While both third-party providers and traditional merchant accounts offer solutions for accepting credit card payments, there are several benefits of using a third party provider:
- More time to focus on developing your business;
- No need to worry about complex technical details;
- Handle all payment processing-related issues for you;
Payment Processors offer small businesses the convenience of having their accounts always open and ready to process transactions. They can accept credit card payments, debit card payments, ACH (electronic checks), SEPA (Europe) and wire transfers, as well as handles any chargebacks that may happen.
There are a number of benefits to using a third-party payment processor for accepting credit card payments:
- New businesses do not have to wait until they receive the first payment before they can start receiving funds;
- No need to worry about complex technical details or software to keep track of transactions.
Payment processors are not the same as traditional merchant accounts, which allow businesses to accept credit cards on their websites. A payment processor does not have a direct relationship with card-issuing banks, while a bank directly issues credit cards and maintains an agreement with the business’ merchant account to process payments.
- Allows businesses to accept credit card payments, debit card payments, ACH (electronic checks), SEPA (Europe) and wire transfers.
- Handles any chargebacks that may happen.
- Processes transactions in real time when funding is received for accounts set up with automatic payment method deduction.
- Offers an easy-to-use interface for signing up, setting up accounts and managing transactions.
On the other hand, there are some drawbacks to using a third-party payment processor:
- Monthly fee for an unlimited amount of money in your account at all times.
- No legal protection if something goes wrong with the transaction.
- No direct relationship with card-issuing banks.
- Payment processors cannot issue credit cards or manage a merchant account, nor can they own your website.
- May have a high minimum monthly fee for a basic account.
Every business has different needs and financial restrictions, which is why it’s important to weigh the pros and cons of third-party payment processing before making a decision.