Whether you’re evaluating new options for your payment system or just starting out on your entrepreneurial journey, understanding the payments ecosystem is important. Your choices can save or cost you thousands of dollars depending on your volume and contract length.
One of the first choices you’ll come across in your payments journey is whether to work with a merchant services provider and open up your own merchant account or work with a third-party payment processor.
We’re going to cover what a third-party payment processor is, the advantages and disadvantages associated with them, and the best practices for making the right decision.
What is a third-party payment processor?
Third-party payment processors, or 3rd party payment systems, are processors not affiliated with specific banks or merchant services providers that give your business the ability to accept transactions without needing to get your own merchant account.
These are also known as payment providers and sometimes payment gateways, although they shouldn’t be confused with “online gateways”.
Common examples of third-party payment processors include:
3rd party payment systems provide one of two ways for your business to accept transactions.
- Opening up your own merchant account (typically through an MSP or directly with an acquiring bank).
- Through a third-party payment processor.
Remember that a typical (and simplified) outline of the payments ecosystem involves a series of providers each performing their own role to facilitate a successful transaction.
The processor is the mechanism that plugs into the credit card networks and handles the communication between the parties.
Now that you’re aware of the choice between getting a merchant account or not, let’s talk about the advantages and disadvantages of working with a third-party processor instead of opening up your own merchant account.
Whether or not you should work with a third-party payment processor depends on your existing business and/or goals for your business.
In general, if you’re already at or plan on growing your business to above $10-15k revenue per month, then acquiring your own merchant account is the best strategy.
Pros of third-party payment processors
Lower startup costs and effort
Since you don’t have to go through an official underwriting process like you do when you get your own merchant account, the effort and barrier of entry to start accepting credit cards is lower for third-party payment processors.
Shorter, simpler, and more flexible contracts
Most 3rd party systems have a simple agreement and don’t lock you into any contract. Or if they do, these contracts are usually month-to-month and aren’t restrictive.
Generally cheaper to use in the short-term
Most third-party payment processors make their money exclusively through transaction fees, which are typically higher than working directly with an MSP or acquiring bank. So since transactions are how they make their money, there usually aren’t startup or high recurring fees involved.
No processing floors or requirements
Another ease of entry when using third-party payment processors is the general lack of transaction requirements. With some MSPs, you have to be accepting a minimum amount of transactions per month (e.g. $5k per month), although transaction limits and floors are becoming antiquated and may be a sign of an MSP trying to take advantage of you.
Cons of third-party payment processors
Not much security flexibility
PCI Compliance and network security are more important than ever, and the bigger your business is the more important that is — especially in industries like healthcare. Payment processors don’t let you peek under the hood. That part of your system isn’t yours to own and that restricts your ability to build in and control your payment and cybersecurity features. On a similar note, your compliance is partially dictated by your processor.
You’ll pay more in fees on average
One of the biggest reasons why third-party payment processors get worse the bigger your business gets is transaction fees. These companies can charge up to 3%, which is much more than you’d pay on our preferred transaction method for growing businesses, interchange plus pricing.
They don't prioritize your business
Processors are usually big and deal with smaller merchants on average. They don’t have as much incentive to work with and for you because they have a high turnover rate on customers and rely on higher volumes of smaller transactions.
When you take the time to establish a relationship with a merchant services provider like Tidal Commerce or acquiring bank, you can know that they are working for you and can expect better customer service and reliability.
Lack of branding control
Payment processors don’t typically let companies white label their services, so merchants usually end up sending customers to a separate page (which can sometimes interfere with analytics) or at least have a "powered by" stamp or something similar. This can make your brand feel disjointed.
Reduced integration flexibility
Payment integrations are super important. If you identify a better way to do business for your customers, you don’t want to be held back by an inability to alter the processing code.
3rd party payment processor best practices
Again, we think getting your own merchant account is almost always the way to go, but if you are going to use a third-party payment processor, you should at least take these precautions:
Separate your networks to reduce security risks
Have your IT team or whoever is available make sure to clearly separate your network from the processors and have clear security measures in place for any vulnerable areas such as pages you have the processor on.
Review breach protection measures and policies
Make sure you look into who is liable and why in major breach situations. You don’t want to get stuck with a fine that was ultimately — or even partially — your processor’s fault.
Here’s the deal. If you’re looking for a payment solution that will save you money in the long term while equipping you with the best in payment technology without any shady contracts or high transaction fees, then you should spend the extra effort and get a merchant account upfront.
Tidal Commerce loves to work with amazing business owners. We work with retail, healthcare, professional services, eCommerce, nonprofits — you name it. And as long as you want to grow your business and appreciate transparency and honesty, then you’ll fit right in.
We can start getting you your own merchant account right now.