What Is a Third-Party Payment Processor and How Does It Work?

Third party payment processors

Successfully running a business doesn’t come without its challenges. Besides scoring sales, there’s a ton of moving parts to manage on a daily basis. One of these is payment processing. 

How are you supposed to process payments in different forms with accuracy and minimal hassle? 

That’s where a third-party processor does the heavy lifting for you. Once integrated into your sales process, it unlocks the ability to seamlessly collect payments in all forms without needing a merchant account of your own. 

Below, we walk through how a third-party payment processor works, the pros and cons of using one, and how to go about choosing the best one according to your business needs. 

What is a third-party payment processor?

A third-party payment processor provides merchant accounts that enable businesses to accept card payments with minimal hassle. This means the merchant doesn’t need to go through the process of opening a proprietary merchant bank account to manage their transactions. 

The constant technological innovations in the finance space have made it easier for a retailer—whether it’s a brick-and-mortar setup or online—-to seamlessly and safely manage transactions made with card payments. 

How does third-party payment processing work?

A third-party payment processing solution works similarly to a proprietary merchant account. The major difference lies in how each account is managed. 

Whether a business uses a third-party processor or opts for its own merchant account, both accounts are built to receive payments accurately.

Each aggregates your sales and reliably deposits them into your business bank account once any processing fees have been paid. 


Take control of your cash flow

Always know when to expect payouts. Every Shopify plan comes with Shopify Payments, which lets you track in-store and online sales and payments from the same back office.


Third-party processors vs. merchant account providers

There are a few major differences between the way third-party payment processors and merchant account providers work.

Accessibility

Going with a third-party payment processor option over your own merchant account means you might have to wait a bit longer to get access to your funds.

Of course, a lot of the logistics of when and how your funds can be accessed will depend on the third-party processor or merchant account provider you choose. For example, once you open a third-party payment account with a processor like Stripe, your first payout will happen seven days after your first payment has been successfully processed. 

From there, depending on which country you signed up from, payouts go out on a rolling basis. US-based accounts get scheduled payouts on a two-day rolling basis. (Fund accessibility and payout schedules will differ from processor to processor.) 

Fund management

Opting for a direct merchant account for your business means your account will be dedicated to managing your business funds only. This is not the case with third-party payment processors. 

Third-party processors group your funds with hundreds if not thousands of other merchant funds into a single account. Through the use of tags, they’re able to verify which funds and transactions belong to your business. 

Scalability 

As your business grows, so will your transactions and so will your fees. As you scale, you’ll hit a point where depending on a third-party payment processor might not be the most cost-effective choice. On the other hand, small businesses might not need to incur the costs of their own merchant account. Below a certain size, it may be best to opt for a more affordable third-party option. 

The approval process

Usually, third-party payment processor accounts are easy to open. In most cases, it’s an instant process once you provide your business information and connect your business account. Usually, it requires that you have a bank account that accepts electronic transfers.

Opening a merchant account, however, takes longer—-maybe even weeks. This is because it requires a longer verification process that involves specific compliance measures. 

Opening a merchant account also requires a positive credit rating. They usually ask for your financial track record too; any previous merchant accounts need to be disclosed. If you opt for a merchant account, you’ll also need to be ready to uphold their specific account requirements to stay in good standing. 

📌 GET STARTED: Shopify Payments is the fastest way to start accepting payments in-person, online, and on-the-go. It’s included in all Shopify POS plans, so you can skip lengthy third-party activations and go from setup to selling faster.

Account risks

Finally, risk factors differ between a third-party processor and a merchant account provider. While third-party payment processors are popular because of how convenient they are, they’re also more susceptible to sudden interruptions in payout schedules, account freezes, or even possible termination. In terms of account risks, a merchant account provider tends to be the more stable option, with less chance of sudden freezes or account terminations. 

Pros and cons of third-party payment processors

In other words, there are arguments either way. For example: 

Pros

  • Easy account setup
  • A lot less commitment than a direct merchant account
  • A long list of accepted payment options
  • Small-business friendly
  • Flexible usage terms
  • One centralized solution for all your payment needs 

Cons

  • Often higher transaction fees than a direct merchant account
  • Customer support might not be the best, depending on provider
  • Requires a waiting period to access funds

Generally, the pros of third-party payment processors outweigh the cons. Especially if fees are lower, there’s a ton of convenience in using a third-party option as an all-in-one solution that takes care of the fund management process for you. 

How to choose a third-party payment processor

  • Cost and fees
  • Integrations
  • Customer support
  • Accepted payments
  • International support and currency conversion

Choosing a third-party payment processor requires looking closely at the specific features that come with it. These include: 

Cost and fees

Fees can differ significantly between payment processors. Some charge a monthly fee plus a percentage of card payments based on whether it’s an in-person or online transaction. 

These charges can add up quickly.

As you compare third-party options, consider how monthly costs and fees will stack up according to your average sales volume.

Keep in mind that some third-party processors might offer lower transaction fees, but might also require a higher monthly payment or offer limited customer support. 

💡 PRO TIP: Shopify Payments is included in all Shopify POS plans, no sign up or setup fees required. Control your cash flow better and pay the same pre-negotiated rate for all credit cards, starting at 2.4% + $0.00.

Integrations

How easily can your third-party payment processor integrate with your existing tech stack? If it isn’t able to integrate with your system, you won’t be able to process transactions. 

Ensuring your payment processors offer the right integrations saves you from headaches down the road. For example, Shopify Payments is fully-integrated with Shopify POS. This enables it to unify all your sales data. Your online and offline sales are supported and accounted for—something many major third-party payment providers aren’t able to do.

Customer support

It’s easy to treat customer support as an afterthought–until you need access to your funds and your account has been frozen for seemingly no reason.

Ensuring your third-party payment processor cares about offering thorough customer support should figure into your final choice. Especially if you plan on working with the payment processor long-term, you need to know they’ll be there to support you when and if emergency situations arise. 

Accepted payments

Different payment processors accept different cards. For example Shopify Payments accepts: 

  • Visa
  • MasterCard
  • American Express
  • Discover
  • Diners Club
  • Elo
  • JCB

Before choosing a payment processor, make sure it accepts the type of cards your customers tend to use the most. 

📌 GET STARTED: With Shopify Payments, you can accept all popular payment methods and local currencies for a convenient, high-converting checkout experience at your stores and online.

International support and currency conversion

Are you an international business that needs a third-party processor that supports international currencies online? Take some time to learn which payment processors can do that. 

You’ll have an easier time receiving funds, providing refunds, and settling any disputes that may arise. You’ll also be able to avoid passing on conversion costs to your customers. 

Examples of third-party payment processors 

You’ve likely already come across—or even use—-some third-party payment processors. A few well known names include:

  • PayPal
  • Ingenico
  • Cybersource
  • Due
  • Amazon Payments
  • Tipalti
  • Braintree
  • BitPay
  • WePay
  • Stripe
  • Adyen

Shopify Payments dashboard

Merchant platforms like Shopify Payments are also another option. With the use of software, it offers built-in payment processing capabilities using third-party merchants. 

You’re able to accept credit card payments as well as other popular payment options seamlessly. With 3D secure checkouts and PCI-compliant servers, payments are kept safe as you manage cash flow and get a complete view of your transactions. 

Is a third-party payment processor right for your store?

If you’re optimizing for convenience, low fees, and minimal hassle, a third-party payment processor is the way to go. It makes it easy for startups and growing small businesses to securely manage card payments without having to wrestle with the technical backend setup to make it all work. 

The good news is that it’s easy to get started using third-party payment options. Once you’ve made your choice, it’s a matter of opening an account and connecting it to your store platform. 

Hopefully, this guide was helpful in letting you know what to consider when you’re choosing a payment processor. 

Start taking in-person payments instantly

Shopify Payments is included in all Shopify POS plans, no sign up or setup fees required. Skip lengthy third-party activations, accept all popular payment methods, receive payouts faster, and manage your brand's finances from Shopify.