What Is A Third Party Payment Processor
Third-party payment processor definition. 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 it 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 options. 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 will go ahead and understand about 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 for set up charges of Credit Card processing account. Most of the times 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 card same day without a commitment of heavy monthly sales volume. let’s look at 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 few working hours. Most of the times 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 widespread application as well as they have to provide 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 work 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 to make 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 fee then 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 buy now button. These days most credit card processing companies also offer pay by email or invoice payment link option. Customers can make transactions on merchants website or can also initiate payment by clicking on the pay now link available on 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, but 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 be charging a setup fee they make money on the transaction charges. Most of the times the transaction charges are higher than 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 maybe charging a cancellation fee or termination charge. Before agreeing to the terms and condition 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.
- Customisations: No matter what is the size of the organization 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 times 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 incidence of T+1, T+2 or T+3. In case of third party processors, this frequency may include one week arear. This simply 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 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 that 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 of 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, and 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 vary. Yes there are quite a few Third Party ACH Merchant Account options. Learn more about what is ach payment processing.
Government’s Views On Third Party Processing Companies
Financial regulatory bodies across the world release regular guidelines that should be followed by the institutions in the business of credit card and Cheque processing. Government entities want the acquiring banks to do an in-depth analysis of third-party processors before approving these accounts. They also recommend regular monitoring of the activities of the processors. They should not only be analyzed as per the chargeback and return ratio, but they should also be closely monitored for the events in relation with AML and other risks.
Most third-party processors utilize high and fraud detection tools. They regularly monitor all the accounts and whenever they find an account that is violating the terms of service they may suspend it. It is quite common to find high-risk merchants approaching third-party processors. Typically these merchants attract substantially high chargeback ratio, and that is why most direct providers say no to them. Government agencies recommend these third-party credit card processors to evaluate the activities and transactions each merchant carefully and regularly.
Risk Factors That May Affect Acquiring Banks Because Of Third Party Payment Processors
Mostly two factors affect acquiring banks because of activities of third-party payment processors.
- Credit risk: This risk elevates when the merchant is unable to initiate a refund or handle 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 options. If these industries get the access to third party payment processing solutions, then there can be 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 a send email on [email protected]
Recommended Resources Regarding Third Party Credit Card Processing
To get a deeper understanding of the government and financial institution guidelines regarding third-party credit card processing we recommend you to explore the following web pages. These pages give detail guidelines and regulation information related to this specific credit card processing model.