Modern businesses are expected to securely accept payments from a variety of channels, including credit cards, checks, and even cryptocurrency if they want to remain competitive. However, obtaining a dedicated merchant account for your business is often rifle with complexities and charges. That’s perhaps why many business owners are turning to third party payment processors.
What is Third Party Payment Processing?
Before deciding whether a third party payment processor is good for your business, it’s important to know what they are. Many businesses already have their own existing merchant accounts with various merchant account providers. This means that whenever a customer makes a purchase at their stores, the businesses can directly process the payment through their own account.
However, this is not always the most economical method of accepting payments, especially for businesses that are just starting out or those with tight budgets. With third party processors, you don’t need to pay for set up costs as you would with a merchant account. Instead, you will be working with a third party who has an account with a merchant services provider. This way, you ideally bypass the steps of setting up your own merchant account at the bank.
Third party processors such as thesoutherninstitute.com let you to use their dedicated merchant accounts to process your card and online payments. The information of your customers’ will be reviewed by the processor, who will also run a variety of security and anti-fraud measures before the transaction is completed.
How Third Party Payment Processors Work
Third party processors generally position themselves between a business, customers, and the banks to facilitate payment processing. This arrangement typically works in several patterns:
- The business may or may not be required to open a merchant bank or a merchant account
- The payment processors is in charge of the credit card payments, in most cases online, and routes the payment procedures via their systems and servers
- The payment processor might or might not need the business to set up a dedicated deposit account on behalf of the customer
- The payment processor essentially settles the transaction by transferring the funds, usually minus the fees, to the business
- The processors have strict security standards in place for processing each transaction
Since this mode of payment processing doesn’t rely on merchant accounts, it’s primarily designed to cater for small businesses. They also cater for other target users such as businesses that merchant account providers are reluctant to open account for, like those in the cannabis, entertainment, or travel industry.
Benefits of Third Party Payment Processors
Setting up and processing your customer’s purchase transactions with a dedicated merchant account will cost significantly more than using a third party payment processing company. For this reason, third-party processors are ideal for small businesses and startups that don’t have a lot of capital to spend on third party processors.
Quick and Easy to Setup
Creating a merchant account often requires a lot of verifications, time, and paperwork. In comparison to setting up a third party processing account to completion, the latter is much easier, quicker, and stress-free.
Ideal for High-Risk, New or Small Businesses
Third party payment processing is a handy solution for businesses with a little trading volume and history, or businesses in a high-risk industry with a limited number of online transactions. That’s because the solution is fully hosted and will take the burden of searching for a suitable processor, or the PCI-DSS compliance away from the owner.
No Monthly Charges
Another major advantage with third party processors is that they typically don’t have monthly fees as merchant accounts do. Merchant accounts often come with PCI compliance and gateway fees, making third party processors more desirable.
No Monthly Minimum Transaction Thresholds
With third party accounts, you will also not be required to meet certain number of transactions per month.
Disadvantages of Third Party Processors
- Although third party payment processors are by no means non-secure, they generally don’t offer as much security and safety assurance as merchant accounts can provide.
- The minimalist structure of third party processors is both a blessing and a curse. Having to deal with customer service reps can sometimes be downright frustrating, but it’s a lot better to talk to another human to help solve your problems.
- Apparent lack of professionalism: though there are a number of established and reputable third party processors, the general consensus is that using a third party processor won’t be perceived as trusted or as secure as the well-known payment processors.
- High initial and transaction fees: you might be saving money elsewhere by working with a third party processor, but you won’t necessarily see those savings with the transaction fees. In many cases, these fees can be as high as 3%, which is considerably higher than those from an average merchant account are.
Do I Need a Third Party Processor?
Just because you can easily setup a third party processing account doesn’t mean that it’s the right choice for your business. For some small and medium-sized businesses, the disadvantages of third party payment processing can outweigh the benefits substantially.
So, if your business is currently at a point where the costs are negligible, and you have a large enough stream of customers to outweigh these costs, your best bet is perhaps a dedicated merchant account. On the other hand, if the benefits outweigh the disadvantages, third party processing is a great way of making your foray into accepting online and credit card payments.
The biggest risk when it comes to third party payment processing is the lack of security, which brings along the risk for fraud and misuse. However, you can still minimize them by ensuring that networks are kept separate, and reviewing how they’ve handled previous security breaches, and reading online reviews about their service. It’s also important to ensure that they don’t use an automatic vulnerability management system for data protection.
Nonetheless, the best way to minimize these risks is working with a reputable, trustworthy, PCI compliant payment processor, who ideally goes all the way in implementing security measures to prevent fraud, such as verifying every transaction.
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