With rapid technological development, even the most prosperous businesses have challenges in their day-to-day operations. Payment processing of cashless payments is one of the numerous demands faced by small and medium-sized companies (SMBs).
The days of cash dominance are passed, thanks to the widespread availability of other payment methods such as checks, credit cards, and debit cards.
Many companies are turning to third-party payment processors to avoid the hassle and expense of setting up a dedicated merchant account. Most third-party payment processors accept applications within minutes, allowing you to begin selling immediately, unlike merchant accounts, which have a long application procedure.
In contrast to the convoluted fee schedules associated with merchant accounts, the flat rates charged by third-party processors are much easier to understand.
What is a Third-Party Payment Processor?
Understanding what a third-party payment processing business is and how it works can help you determine whether using one is the best option for your business.
Merchants may take credit card payments, internet payments, and any other cashless payment method without setting up their merchant accounts by working with third-party payment processors. It is also known as payment aggregators or credit card processing businesses.
Businesses specializing in processing payments for other businesses strive to streamline their clients’ business processes by simplifying payment flows and transaction procedures. You may avoid the hassle of opening and maintaining a merchant account in this manner. Establishing a relationship with an external payment gateway is as easy as opening an account.
Examples of Third-Party Payment Processors
You may accept additional forms of payment from your consumers and avoid opening a merchant account with a bank altogether by using a third-party payment processor.
Taking debit and credit card payments without opening a bank account may simplify your daily operations.
There are literally hundreds of firms in the US alone that provide this service. It’s important to evaluate your company’s needs before deciding on a service. Common choices for accepting payments online include PayPal, Stripe, etc.
By employing a payment processing service instead of a bank’s merchant account, you may save time and effort. In order to take payments through credit card or debit card, you will need to open a merchant account with a reputable source. Therefore, the processor will check your client’s payment details and put it through several anti-fraud processes before allowing the transaction to go through.
Suppose you want to take your company online. In that case, you need a payment processor that can handle debit cards, credit card transactions, and online sales. Any company may benefit from establishing relationships with credit card processors and other online payment processing service providers since doing so can lead to a larger customer base.
How Does Third-Party Payment Processing Work?
Many businesses now use merchant accounts provided by external processors in order to accept credit card payments. Businesses using this sort of account may receive payments directly via their merchant account when customers pay with debit cards at the point of sale.
However, this isn’t always the cheapest option, especially for new enterprises. Interacting with merchant account providers is time-consuming and may be avoided if your organization is still in its early stages of development.
A third party payment processor is needed in this case. A merchant services provider acts as a mediator between you and your customers, saving you the trouble and expense of establishing your merchant account.
In this context, “aggregator” refers to third party payment processors. This implies that their customers’ transaction volumes are merged into a single merchant account.
As a result of the high number of payments handled by the third party processor, the merchant bank provides the company with preferential processing rates. The fees they charge customers to accept payments are entirely up to them. They profit from the spread between the two rates.
Benefits of Using a Third-Party Payment Processor
There are a number of advantages to using this service to collect payments from clients outside of your company. Businesses have been shifting their focus to online sales as the popularity of purchasing online grows. A few benefits of using a payment processor are as follows:
Quick, Simple, and Easy to Setup
It might take more time to complete than opening a merchant bank account before you can use it for commercial purposes. If you’d rather utilize a third-party payment processor, creating an account with them is as simple as a few clicks.
Your company may take payments online and have the payment processor handle the financial transaction.
Flexibility
Specific agreements exist between you and the bank when you set up your merchant account.
Sometimes the terms of these agreements are so binding that you cannot cancel the service at any moment. Users have more control over their accounts than they would with a third-party payment processor, but no lock-in contracts are involved.
Low-Cost
When applying for a merchant account at certain banks, you may be required to pay a service fee. Having to shoulder the financial burden of maintaining a merchant account adds an unnecessary layer of stress. The account creation and configuration processes are free of charge, in contrast to the fees charged by certain third-party processors.
Multiple Payment Methods
You may accept payments from clients online and process those payments via a third-party service. Still, that service may also provide access to other technologies. Using point-of-sale software, you may accept cash and credit card payments in your businesses.
While accepting online payments is where the industry is headed, any firm would be wise to provide both methods to its customers.
Moon Invoice offers popular payment gateways for receiving payments using PayPal, Square, UPI, Apple Pay, Google Pay, etc.
Third-Party Processors Vs Merchant Account Providers
There are a few fundamental differences between how a merchant account provider and a third-party payment processor function.
| Parameter | Third-Party Processors | Merchant Account Provider |
|---|---|---|
| Scalability | If your transactions are limited, then it would be the best option to have a third-party processor. Still, with a large scale of transactions – they are not feasible. | If you already have a merchant account, then scalability is not an issue. |
| Accessibility | If you use a third-party payment processor instead of setting up your merchant account, you may experience a delay in receiving your money. | With a specific merchant account provider, you can quickly access your fund. |
| Management of Funds | You can use the money for any purpose when using a payment processor that is not part of your organization. | When you open a direct merchant account for your company, the monies are exclusively for business use. |
| Approval | Setting up an account with a third-party payment processor commonly takes little effort. Once your company details are submitted, and your business account is linked, the procedure is often completed immediately. To make electronic payments, you’ll typically need a bank account that supports ACH transactions. | However, opening a merchant account might take much longer, often weeks. This is because a thorough verification takes time and needs targeted compliance measures. Establishing a good credit history is also necessary to get a merchant account. They will likely also wish to see evidence of your financial stability; details of any past merchant accounts will likely be required. If you decide to go with a merchant account, ensure you can meet all their account maintenance criteria. |
Pros and Cons of Third-Party Payment Processors
In contrast to merchant bank accounts, which may be expensive and time-consuming to set up, many third-party payment processors do not need a substantial upfront deposit. You will only incur charges for real purchases.
Pros of Third-Party Payment Processors
Simple, Low-cost Technology
The payment processing methods and tools that perform reliably cost you nothing or very little to use wherever you sell.
Clear Pricing
There are no hidden costs or fees on your monthly invoices.
Accounts may be Set Up Quickly and Easily
The application and approval processes often take less than a day, allowing you to begin accepting payments almost immediately.
Room to Scale and Expansion
Potential for expansion via volume-based pricing and improved POS system connections.
No Obligations
There are zero long-term obligations since you may cancel at any moment without penalty.
Cons of Third-Party Payment Processors
Potentially Greater Costs
Independent merchant accounts provide cheaper fees for volume sellers and specific company types and sales categories. So, It could be a costly option if the volume is low.
Less Transactional Flexibility
Extremely big or high-volume days might alert accounts and need follow-up to settle payments.
Risk of Holds and Freezes
Excessive chargebacks or fraudulent transactions may result in account holds and blocked payments, necessitating further action to retrieve cash.
How to Choose a Third-Party Payment Processor?
It’s important to do your homework before committing to a third-party payment processor. What this encompasses is not limited to, but includes:
Cost
Research the processor’s markup, processing rates, and other costs levied. By doing the math, determine which choice will save you the most money for your company.
Accepted Methods of Payment
These days, credit card processing is standard at most merchant service providers to accept third-party payments. Make sure your supplier allows you to take alternative payment methods like mobile payments, ACH, and even SMS payments since they are growing in popularity.
Integration with Software
Make sure the supplier you choose is compatible with the tools you’re currently using. If you run an online business, your payment processor must be compatible with your eCommerce solution.
Payment reconciliations are simplified when your service provider is compatible with your accounting software.
Policies
Each service provider has its procedures and rules. Regarding the number of transactions they process each month, some payment processors may have a minimum threshold set, while others may have none.
It’s possible that some sellers would accept deposits on the same day while others wouldn’t. Investigate these procedures to be sure they will benefit your company.
Combining Hardware
Your hardware suffers the same fate. Look for a credit card processing service that can connect with your existing card readers, terminals, point-of-sale (POS), and other hardware and software.
Customer Support Facility
It would help if you had reliable payment processing companies always there to help you. Don’t forget to inquire about the customer’s support options.
Assist all the time? In what ways do they communicate with their customers? Some service providers provide online support through chat or email, while others make themselves accessible by phone.
Conclusion
Using a payment processing service allows you to accept credit card payments from consumers regardless of where you physically store your inventory. The application procedure is straightforward, permission is often granted instantly, and the necessary equipment is either cost-free or inexpensive.
In addition, with flat-rate fees, you may easily budget for your spending. If you’re starting in the company or shopping around for other credit card processing options, you may test one (or more) of them out without risk.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
