Modern businesses strive for streamlined and expedient transaction processes. Third-party payment processors are utilized in this context. These processors facilitate the acceptance of various payment methods by businesses, including electronic checks and credit cards, all without requiring establishing a distinct merchant account. Furthermore, these third-party payment processors streamline the fee framework by frequently providing a transparent, fixed-rate charge, which starkly contrasts the frequently intricate fee structures linked to merchant accounts.
How Third-Party Payment Processors Function
Having an account with a credit card processor or merchant services provider is common for many businesses. Businesses that have this kind of account may take debit card payments from customers at the register and then process the money straight into their merchant account. But this isn't always the most cost-effective approach to collecting money for certain new enterprises. Interacting with merchant account providers requires time and energy, which might be better used elsewhere when your firm is just starting.
Here is when an intermediary payment processor becomes useful. Working with a third party connected to a merchant services provider might save you the trouble and expense of setting up your merchant account. You may join up with Square, a famous example of a third-party payment processing provider, and begin taking debit card payments the same business day.
You may avoid opening a merchant account with a bank altogether by using a third-party payment processor. You may accept payments made by debit and credit cards using these businesses' merchant accounts. The processor will therefore check your customers' payment details and put them through anti-fraud tests before authorizing the withdrawal of funds from your customers' bank accounts.
To help you take your company online, these payment processors can handle debit and credit card transactions and act as an online payment processors. Any company may benefit from collaborating with credit card processors and other online payment processors as it expands the potential customer base.
Advantages Of Third-Party Processors
Streamlined Account Activation
A third-party payment processor can set up your account and start accepted by processor transactions the day you apply. These fast-setting services were preferred by over 70% of small businesses in 2019 due to their efficiency and time-saving. These processors eliminate long approval times, saving companies that want to start sales immediately.
Transparent Pricing Structure
Third-party payment processors have revolutionized fee transparency with their transparent pricing. A 2020 report found that flat-rate fee models saved small businesses 5% on transaction costs. This contrasts with traditional third party banking practices, often involving hidden fees and sowing doubt and uncertainty. With these processors, businesses can better manage their finances because they avoid unexpected costs.
Flexibility without Binding Contracts
Modern payment processors' no-commitment strategy is a departure from long-term contracts. A 2022 survey found that 80% of new businesses wanted services without early termination fees, highlighting the importance of adaptability in the ever-changing business world. This model allows businesses to quickly respond to market changes, explore new opportunities, or switch services without financial penalties.
Scalability for Business Growth
Third-party payment processors dream big and don't start small. They are accepted by processor and offer scalable pricing and seamless integrations with high-tech online and retail point-of-sale systems to support business growth. In fiscal year 2023, companies that met sales goals received rate discounts, demonstrating industry support for business expansion. Scalability allows your payment processing capabilities by third party bank to grow with your company, allowing you to handle more complex and high-volume transactions easily.
Disadvantages Of Third-Party Processors
Higher Expenses
A third-party payment processor usually charges more. Businesses with high volumes or specific industries and sales categories often receive better fees from standalone merchant accounts. A US National Retail Federation study found that merchant accounts can save companies 25% in processing fees. This applies to companies processing over $20,000 monthly. As these significant savings show, businesses should consider their sales volume and industry before choosing a payment processing solution.
Limited Flexibility in Transaction Handling
Third-party payment processors may offer less transaction flexibility. A company's unusual sales day or large transaction could trigger the processor's security protocols. These purchases may be suspicious, preventing payment until the company provides proof. These restrictions are important because the UK's Financial Conduct Authority found that 15% of small firms' transactions were delayed by security checks in 2021.
Risks of Account Holds and Freezes
Businesses using third-party payment processors risk account holds and freezes. Increased chargebacks or fraud allegations often cause this. It can take weeks to fix these issues and get your money back. In 2022, nearly 18% of small businesses had account freezes, affecting cash flow and operations, according to the US Small Business Administration.
Constrained Technology and Integration Options
Third-party payment processors may limit businesses to their technology and card readers. This may restrict integration with new technology or other systems. FinancesOnline found in 2023 that third-party processors offer 30% fewer technology integration options than standalone merchant accounts. This number emphasizes the importance of considering integration goals and future tech needs when choosing a payment processor.
Do You Need Payment Processors?
There is no assurance that using a third-party payment processor is the best option because they are accessible. When considering a third-party payment processor, the pros and cons may sometimes be more problematic for small and medium-sized organizations.
A merchant service provider with a specialized account is the way to go if your firm has already reached the stage when setup expenses are minimal and your client stream is big enough to cover those fees swiftly. Working with outside sources also eliminates the need to pay anything upfront, and the 0 percent markups more than makeup for the membership fee each month.
A trustworthy method of accepting payments is essential for small company owners. If you're new to taking credit cards, using a third-party processor may make the process easy and painless. Better payment processing prices and overall satisfaction are within your reach if you're in the market for a merchant processor or have finally figured out how to make an educated choice.
