Running a business comes with a whole set of tasks and potential difficulties even for the most successful companies. One of the many necessities that small and medium-sized businesses (SMBs) encounter is payment processing. Thanks to checks, credit cards and debit accounts, gone are the days when cash was king.
This is the era of digitization and seamless payment processing in offline transactions and internet payments processing.
But this digital evolution of payment processing does not have to be difficult for a brick-and-mortar or small business owner, quite the contrary, it can help to make life simple for customers, merchants, and third-party participants in a transaction.
Indeed, utilizing a third-party payment processor can simplify your revenue stream.
Definition of Third-Party Payment Processing
Before you can truly decide if a third-party payment processing company is right for you, it helps to know exactly what they are.
You might wonder how does payment processing work? What is the price of payment processing? Will the transaction fee structure cost a pretty penny? Is it a flat rate or will there be monthly fees? How much will merchants have to allocate to payment processors? Does it accept gift cards, Apple Pay, American Express, Paypal, and visa MasterCard transactions?
Thankfully, as a business owner, you only need to know a little bit about this matter to seamlessly run your business. The truth is that third-party payment processing business entities aim to make it as simple as possible for merchants to run their business, have simple payment flows, and conduct transactions.
Here is how it all works.
Many businesses have their own merchant accounts with merchant services providers. When their clients walk through the door and make a debit card purchase through a point of sale system, businesses with this type of account have the ability to accept payments directly through their own merchant account and be done.
However, for some businesses that are just starting out, this isn’t always the most economical method of taking payments. This is where a third-party payment processor comes into play. Instead of having your own merchant account, which often comes with setup costs, you’ll instead work with a third party who has their own relationship with a merchant services provider, essentially serving as an intermediary.
A well-known example of a third-party payment processing company is Square, which allows you to sign up and start accepting debit card payments on the very same business day.
By utilizing a third-party payment processor, you’ll be bypassing the step of having your own merchant account at a bank. These companies allow customers like you to use their merchant account to process all of your debit card and credit card payments. As a result, your customers’ payment information will be reviewed by the processor, along with running through a variety of anti-fraud measures, before they allow the completion of your client’s transaction.
These payment processing companies can run debit cards, conduct credit card processing, and even serve as an online payment processor so you can expand your business to the digital realm. It helps to work with credit card processors and those who process payments online because it can increase the pool of buyers for any type of business.
For instance, if one has a brick and mortar business or an online business, processing credit cards and providing more payment options for interested customers and buyers, to conduct transactions with a credit or a debit card, improves the quality of your business.
If you plan to obtain payments online or engage with customers and conduct American Express credit card transaction processing through your point of sale in person, selecting a third party payment processor might be a wise choice.
From card data security to bank account safeguards these payment method facilitators offer tremendous value for your payment needs.
What Are Some Examples of a 3rd Party Payment Processor?
A third-party payment processor is a merchant services provider that lets you provide more payment methods to your customers and helps you receive payments without first setting up your own merchant account with a bank.
The simplicity of not having to get an account with a bank to accept credit cards and conduct card transactions with a debit or credit card company can genuinely increase your business experience.
There are thousands of payment processing services in the U.S. alone. The most suitable service will depend on your business needs. Examples of well-known third-party payment processors include Square, PayPal, Stripe, and Stax. Some of the requirements to consider when choosing a third-party payment processor are integration, brand recognition, and cost.
Is Third-Party Payment Processing Necessary?
Many budding entrepreneurs, especially those who are just starting out, wonder whether a third-party payment processor is the right fit for them. After all, they hear that sign up is easy and they won’t have to pay any fees. However, it’s important to dig a little deeper to understand who third-party payment processors truly work for and when they are necessary.
There are a variety of reasons a merchant might choose to go with a third-party payment processor. Some companies might not be able to afford the monthly fees associated with dedicated accounts. Similarly, SMBs processing very low volume in customer credit card payments often can’t afford the setup costs of such an account. This makes a third-party payment processor a good solution for your business when you are just starting out and do not anticipate processing a high volume of credit card transactions.
It is important to remember, however, that while you do not pay startup fees or monthly fees with a third-party payment processor, they still have to make money somewhere. They make up for their lack of fees in their per transaction percentage fee. This fee is significantly higher than it would be with a dedicated merchant account. This means that if you are processing payments at a high volume, this will be more expensive for you.
Do I Need a Third-Party Payment Processor?
Just because third-party payment processors are available doesn’t mean they’re necessarily the right choice. For most small and medium-sized businesses, the negatives can outweigh the positives when it comes to a third-party payment processor. If your company is at the point where the startup costs are negligible and your stream of clients is large enough to quickly outweigh those costs, a merchant service provider that offers a dedicated merchant account is your best bet. Additionally, working with a provider such as Stax means you will never see any startup costs, and the 0% markups will counteract the monthly membership.
The biggest downfall with payment processing through a third-party is the lack of security. When you have your own dedicated merchant account, your business has gone through the process of underwriting and you are protected against fraudulent transactions and you know exactly when to expect the funds in your account.
What Are The Benefits of Using a Third Party Payment Processor?
Unlike merchant accounts with banks that tend to be expensive and time-consuming to set up, many third-party payment processors don’t charge a huge deposit fee for setup. You’re only charged for the transactions you make.
At Stax, we don’t charge any outrageous monthly fees either. Here’s a list of some fees you’ll see from other banks and processors, but never from us:
- No termination fee
- No customer service fee
- No statement fee
- No IRS fee
- No batch fee
- No annual fee
- No contract fee
- No PCI compliance fee
What Are The Risks of Using a Third Party Payment Processor?
Although many third-party payment processors have their benefits, their transaction fees might be higher than you’d expect. The cost of processing individual transactions can be higher than the transactional costs associated with merchant accounts. Pending on the size of your business and the number of transactions processed per month, the fees charged per swipe may not be an ideal solution for your business needs.
Is It More Expensive to Use a Third Party Payment Processor?
If you are processing with a third-party payment processor, however, you do not have this security. Transactions can be held any time the processor feels that the payments might be fraudulent. This makes it impossible for you accurately depict your cash flow and for many SMBs this is a deal-breaker.
If you’re running an SMB, you need a reliable way to process payments. Third-party payment processors can make your first foray into accepting credit cards a simple process with minimal hassle. If you’re seeking out your first merchant processor or finally understand how to make a more informed decision, you’re on your way to reduced card processing fees and an all-around better payment experience.