Third Party Payment Processor
Third-party payment processor definition. A third-party payment processor allows merchants to use its payment processing infrastructure. With the third merchant account, the actual merchant does not establish a direct relationship with the Acquiring Bank. The processor handles a massive amount of risk because it is answerable to the merchant-acquiring institution.
Think of a third-party payment processor as an aggregated merchant account provider. An enormous number of merchants use these solutions, and that is why they may not offer extreme customization capabilities that can be available with a direct merchant account.
First-time business owners and startups generally use this kind of option. Entrepreneurs who do not wish to spend money on the setup cost may prefer to use third-party processors.
Technically speaking, there are various advantages and disadvantages of a third-party payment processor. In this article, we will go ahead and understand multiple factors that should be considered while deciding on signing up with a provider.
Third Party Payment Processors Are Vital For Startups With Low Sales Volume
As mentioned in the initial section of this article, various startups use this kind of merchant account provider. Startups prefer not to spend the seed money on setup charges for an e-commerce credit card processing account.
Most of the time, startups are also not sure how much revenue they will generate. This creates a challenge when they apply for a dedicated account.
With the third-party solution, startups or budding entrepreneurs can start accepting credit cards the same day without a commitment to heavy monthly sales volume. Let’s look at the various advantages and disadvantages of third-party payment processors.
Advantages of Third-Party Payment Processors
Fast Setup
Since there is no direct relationship between the merchant and the acquiring bank, setting up this kind of account is usually very fast. Businesses can accept well-known credit cards in a matter of a few working hours.
Most of the time, these businesses have to fill out an online application and submit essential KYC documents. On the other hand, for direct solutions, companies have to fill out widespread applications, as well as provide a prior processing statement.
Low Initial Investment
Unlike dedicated account providers, these third-party merchant account providers hardly ask for an initial investment. A simple online application helps the organization in accepting well-known credit cards on the eCommerce stores.
This works like a charm for startups, especially those merchants who are not financially sound. Having said that, please keep in mind that any third-party merchant account provider requires a profit.
If they do not charge the initial setup fees, that means they will charge the fees somewhere else. These third-party accounts charge slightly higher transaction fees than direct options.
Quick Basic Integration
Third-party credit card processors offer quick, essential integration to the merchant’s website. Usually, they provide an HTML code that can be placed on the merchant website to create a buy now button.
These days, most credit card processing companies also offer pay by email or an invoice payment link option. Customers can make transactions on the merchant’s website or can also initiate payment by clicking on the pay now link available in the email received from the merchant.
No processing history needed
The acquiring industry talks a lot about credit risk. Credit card processors and merchant account acquiring Institutions reduce this risk by isolating risky merchants.
One effective way of separating high-risk merchants is by asking for processing history. Most direct accounts require at least three to four months of current processing history that shows less than 1% of chargeback ratio. Third-party credit card processors usually do not ask for any processing history.
No minimum volume commitments
Credit card processors evaluate the return on investment for each application. It’s quite common to see dedicated providers rejecting applications on the basis of low processing volume commitment of the merchant.
In the case of third-party merchant services, no minimum or maximum commitment is needed. Merchants can accept low-volume or high-volume transactions.
This helps young organizations in readily receiving payments and also preparing for the growth of the company. For small organizations, forecasting sales can also be challenging.
Third-party processors do not ask for forecasting. It becomes easy for these startup merchants to start with low sales volume. Many high-risk merchants and high-ticket merchants also use third-party payment processors.
It is not easy to get approval for an upper monthly capping. However, with third-party payment processors, most of the time, there is no higher limit for monthly transactions.
Easy E-commerce Integration
The most important target market for third-party merchant services providers is The E-Commerce industry. These payment gateway providers offer quick and easy integration to the E-Commerce content management systems.
They also provide readymade codes and plugins that can be easily connected to the merchant’s website. Accounts go live in mostly one working day or sometimes within a few minutes.
These companies prefer to offer a fast solution for integration. Startups and other entrepreneurs who do not have a dedicated technical team find it extremely easy to use the readymade payment gateway plugins.
Disadvantages of Third-Party Credit Card Processing Companies
In the above section of the article, we have discussed the various benefits of using these processors. We all know that grass is always greener on the other side.
Let’s look at a couple of disadvantages. Every merchant should evaluate these before signing the merchant account agreement.
High Fees on each Transaction
Since a third-party processor may not charge a setup fee, they make money on the transaction charges. Most of the time, the transaction charges are higher than those of dedicated solutions.
For a small business, a slightly higher transaction fee may be ok, but for large organizations with heavy monthly processing volume, a slight increase in the transaction fee can add substantial cost to the overall operation.
Monthly Sales Capping
Most of the third-party payment service providers do not implement a monthly sales capping in the beginning. They may implement monthly sales capping based on the activities and the risk factors on a specific account.
They do this because they have to reduce the credit risk factor. For a business that accepts massive transaction volume, these restrictions can have a negative impact on the overall revenue generation.
Cancellation Terms
They do not charge the initial cost of setting up the account, but then they may charge a cancellation fee or termination charge. Before agreeing to the terms and conditions and accepting the agreement, you must carefully look at the termination and cancellation clauses. Some contracts may ask for cancellation charges between $100 to $500.
Customizations
No matter what the size of the organization is, every company wants to connect with its branding. They want to ensure that the payment page also appears similar to other pages on the website. With third-party processing accounts, most of the time, this functionality is not available.
It is quite common to find the logo of the processing company and the details of the processing company on the hosted payment page. If a business gets a dedicated merchant account, then the merchant can undoubtedly use more API functionalities and customize the payment page.
Settlement frequency
Third-party payment gateway companies generally offer a slightly delayed settlement. Direct accounts usually transfer funds to the merchant’s bank account in the case of T+1, T+2, or T+3.
In the case of third-party processors, this frequency may include one week. This means that the merchant has to wait for at least one week to get the payments. Please keep in mind that some third-party payment gateways may offer very fast settlements.
Delayed Support
Merchant support is vital in the payment processing industry. Third-party operators usually do not offer a dedicated account manager. This is the fundamental reason why most of the third-party providers have an online support ticket system and no phone support.
This can create dissatisfaction for the merchant as well as the cardholders. When you get a direct account, you may get a dedicated manager who will handle your queries on priority.
Generic Descriptor
These processors generally have limited merchant IDs. This means that the descriptor that appears on the credit card billing statement of the customer may not reveal the exact name of the merchant.
This can be the reason for a few friendly chargebacks and return requests. With the dedicated MID, businesses know that every time the descriptor will be precisely the same as approved by the processor at the time of account approval.
Checkout Process of a Third-Party Merchant Account
The checkout process is simple and easy. Customers choose the product on the website of the merchant and then click on the buy now button.
They are further directed to a hosted payment page where they submit the credit card information. This information travels back and forth through the payment processing infrastructure. Eventually, the customer receives notification of the transaction being approved or declined.
In simple terms, a third-party processor or a direct merchant account provider uses the same processing networks for transaction approvals.
The checkout process of ACH and Card processing varies. Yes, there are quite a few third-party ACH Merchant Account options. Learn more about what ACH payment processing is.
Risk Factors That May Affect Acquiring Banks Because of Third-Party Payment Processors
Two factors mostly affect acquiring banks because of the activities of third-party payment processors.
Credit risk
This risk elevates when the merchant is unable to initiate a refund or handle a chargeback. Processing companies reduce the stress by adding arrears and rolling reserve to potentially risky accounts.
Reputation risk
Since it is easy to get a third-party payment processing solution, many high-risk merchants also try to utilize this option. Some industries are prohibited from using this kind of option.
If these industries get access to third-party payment processing solutions, then there is a high possibility that the acquiring bank may attract reputation risk.
Conclusion About Third-Party Merchant Account Providers
How QuadraPay can assist you in getting a reliable third-party merchant account. QuadraPay has been helping merchants from different categories. Our relationship with various acquiring Institutions as well as third-party payment processors helps us in suggesting the right credit card processing option for various merchant types. To get more information about different third-party merchant account options, you can send an email to info@quadrapay.com
