What Is a Third-Party Payment Processor?

A third-party payment processor is a provider that allows a business to accept payments without opening its own merchant account, a bank account needed for holding money earned from card payments. These processors generally offer fast setups, charge flat-rate fees and process transactions from several merchants into shared merchant accounts to reduce operational costs.

After a third-party payment processor processes a card payment, it deposits the funds into an aggregate merchant account, an account that’s shared among several merchants. The processor then deducts processing fees and transfers the remaining funds to the small business’s bank account.

The primary difference between a third-party processor and a merchant account provider is how quickly funds are available to the business. With third-party payment processors, funds can take a few days to transfer, whereas businesses with their own merchant accounts have faster access.

How many merchants share a third-party payment processor’s 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 track your funds and ensure you’re paid correctly for each transaction.

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

Here’s how the two options compare in several areas:

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

• Easy setup. With no merchant account to worry about, all a business needs to do is set up an account with the third-party payment processor, which is often a simple process.

• Fewer fees. Unlike individual merchant accounts, third-party processors 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 a few years — third-party processors often have better terms or require no contract.

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

Potential issues with using third-party payment processors include:

• Higher costs, in some cases. Because third-party payment processors are paying other fees on your behalf, they often come with higher transaction fees than having your own merchant account.

• Limited device choice. Many third-party payment processors have their own credit card readers and don’t work with other brands’ devices.

• Higher risk of frozen accounts. If a third-party payment processor suspects you have fraudulent transactions, it can freeze your account and hold your funds while it performs an investigation — and you’re stuck without your funds in the meantime.

Square offers competitive pricing with a variety of hardware and a feature-packed POS, making it a good option for small businesses. Transaction fees start at 2.6% plus 10 cents for in-person swipes, taps and dips. You won’t pay a monthly fee to use its basic services, which include POS features for reporting options and inventory management. The hardware options include hand-held readers and countertop registers.