Third Party Credit Card Processing

As we discuss elsewhere in The Merchant Account Explorer, the usual means of credit card processing online is through a merchant account. In the past decade though, several companies have appeared in the processing market offering a different approach.

Known generally as ‘third party processors’, they allow your business to accept credit cards by utilizing their own processing system. They vary substantially in their offerings and their fees, so you should examine their services very closely before signing on with one.

Let’s take a look, in a general fashion, at some of the advantages and disadvantages of third party processing (TPP) versus processing through your own merchant account (MA).

First, the advantages:

• It is often both quicker and easier to sign up with TPP’s than with MA’s.
• TPP’s often have less strict requirements for accepting non-U.S. merchants.
• Many TPP’s do not charge a start-up fee.
• Some customer support for your processing may be handled directly by your TPP.
• Many MA’s impose monthly minimums and other mandatory monthly fees, so that even if you sell nothing in a particular month, you would still have to pay one or more fees. If your monthly sales will be very low, you may be better off with a TPP solution.
• For sellers on eBay, TPP’s (especially PayPal) is often a good solution.

Now, the disadvantages:

• TPP’s processing fees are usually higher than MA’s, typically (but not always) being in the 4% to 12% range, compared to the 2.2% to 2.5% levied by MA’s. The reason for the higher fees is that TPP’s must compensate for the losses they are subject to by virtue of processing for merchants whose business types generally reflect a higher level of risk and fraud than merchants who have MA’s. So if your business has any significant sales volume, it is usually cheaper to process through a MA.
• Many TPP’s remit your net sales proceeds to you every week or two, compared to MA’s, which have a 2 to 3 day lag between the time of purchase and when the funds enter your checking account.
• A few TPP’s holdback a percentage of your sales as security, to protect against chargeback claims from your customers. With MA’s, holdbacks or reserves only apply with high risk or offshore merchants.
• Many TPP’s will only accept businesses that sell ‘tangible’ goods.
• A few TPP’s charge an annual membership fee.
• With MA’s, you have access to comprehensive information about your customers. The data they supply when completing the online purchase form belongs to you, the merchant. With TPP’s this is often not the case, as the data is collected directly by the TPP.
• Many TPP’s require that you use their shopping cart. This presents two problems. First, you will have no control over the ‘look and feel’ of the shopping cart pages. Second, many consumers do not react well to being transferred from your website to that of the TPP in order to submit their personal information and credit card data. Customers may feel as if they have been transported from your website to an unfamiliar destination where they are asked to volunteer their credit card information. This can result in customers abandoning their purchase.
• Your customer’s monthly credit card statement may well show the purchase as having been from the TPP, rather than your business. This can lead to customer complaints, as they do not recognize the purchase and may think it a fraudulent entry.

Overall, unless your processing volume will be very low, it is usually better to own your own merchant account than utilize third party processing.

If you do wish to use a third party processor, carefully examine its fee structure; its background and the length of time it has been operating; and the effect you think it will have on your customers. What kind of company will you be dealing with? Will they give you the ongoing support you will need? Review their websites and contact them with any questions or issues that arise.

If you want your own merchant account but are having a difficult time qualifying for one, check out our Offshore Merchant Accounts.