What is a Third Party Payment Processor?

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    A third-party payment processor is a provider that enables a company to accept payments without opening their own Merchant account, a bank account used to hold funds from card payments. These processors generally offer quick setups, fee Flat fees and process transactions from multiple merchants to common merchant accounts to reduce operational costs.

    This is how a third-party payment processor works

    After a third party vendor processes a card payment, they deposit the funds into an aggregated merchant account, an account shared by multiple merchants. The processor then deducts the processing fees and transfers the balance to the small business’s bank account.

    The main difference between a third party processor and a Merchant account Provider is how quickly funds are available to the company. Third-party payment processors can take a few days to transfer funds, while companies with their own merchant accounts have faster access.

    How many merchants share a third-party merchant account is up to the processor. Some can have thousands of merchants sharing a single account. Regardless of the number, reputable third-party payment processors will keep track of your funds and make sure you are paid correctly for every transaction.

    Third party vendors versus merchant account providers

    While third-party payment processors pool merchants’ funds into one larger account, merchant account providers set up individual accounts for each merchant. These different options create different experiences for small businesses and affect things like the approval process and pricing structures.

    This is how the two options compare in several areas:

    Hundreds or thousands of merchants share a single merchant account.

    One dedicated trader per account.

    Usually instant approval.

    Includes a review and compliance process that can take weeks.

    Increased risk of sudden holds, freezes, or dismissals.

    Stable with little risk of breaking, holding, or freezing.

    Usually fixed, some custom plans available.

    Usually more flexible and adapted to your business needs.

    Strict limits on transaction size and processing volume.

    Negotiable limits for transaction size and processing volume.

    Benefits of Using a Third Party Processor

    Third-party payment processors can offer businesses several benefits, including:

    • Easy adjustment. Since you don’t have to worry about a merchant account, all a business needs to do is set up an account with the third-party payment processor, which is often a straightforward process.

    • Less fees. Unlike individual merchant accounts, third-party providers generally don’t charge setup fees or set monthly minimums.

    • Flexible terms. While merchant service providers often require contracts – sometimes month to month or even for a few years – third party service providers often have better terms or do not require a contract.

    • All-in-one solution. Many third-party payment processors offer companies the technology to accept payments in person, and online and point-of-sale software to get started quickly.

    Cons of Using a Third Party Processor

    Potential issues when using third-party payment processors include:

    • In some cases higher costs. Because third-party payment processors pay different fees on your behalf, they often incur higher transaction fees than if you have your own merchant account.

    • Limited device selection. Many third party payment processors have their own credit card readers and will not work with other brands of devices.

    • Higher risk of frozen accounts. If an outside payment processor suspects you’ve made fraudulent transactions, they can freeze your account and withhold your funds while they conduct an investigation – and you’ll be stuck without your funds in the meantime.

    Best third party processors

    place

    place offers competitive pricing with a variety of hardware and a POS-loaded POS, making it a good option for small businesses. Transaction fees start at 2.6% plus 10 cents for personal swipes, taps and dips. You don’t pay a monthly fee to use basic services, which include POS features for reporting options and inventory management. Hardware options include handheld readers and countertop registers.

    toast

    Developed for restaurants, Toasts Hardware makes it easy for servers to place orders and take payments at customers’ desks, and includes kiosks for self-ordering for less traditional formats. There is also an integrated Kitchen display system. With online ordering options and a robust POS, it stands out as a great option for restaurants and cafes. The platform offers starter kits if you don’t want to create your own setup and tiered pricing for adding additional hardware or additional locations.

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