Third Party Payment Processors Explained
Published in Getting Started Order Processing & Fulfillment
Learn everything you need to know about third party payment processors.
Third party payment processors are gaining popularity with small e-commerce business owners who either can't get approved for a merchant account or don't want the high monthly fees while they are growing and sales are low. Some third party payment processors can be valuable resources to small businesses while they grow. However, some processors require users to register for an account, or don't offer integration with your design. These flaws can push a potential customer away and cost you sales.
Third party payment processor or merchant account?
Those new to e-commerce and payment processing may not know the difference between a merchant account and a third party payment processing company. A merchant account is an account with a financial institution (a bank) to process credit card transactions. When you have a merchant account for e-commerce you must also use a payment processor to pass information between your site and the merchant bank.
Getting a merchant account is not much different than applying for a credit card. You must fill out a credit application and go through an approval process. There are montly fees for the merchant account and the payment gateway, and typically there are monthy minimums. These fees can be in excess of $100/month not including your processing fees. If you are not processing a high volume of sales a merchant account may cost you more money than it makes you.
The alternative to a merchant account...
Third party payment processors use a merchant account under their business name to process transactions for companies that either cannot get approved for a merchant account or can't afford the high fees. They typically have a higher rate (4-5%) compared with a merchant account (typically 2-3%) but offer no monthly fees. For businesses with less than $2500 per month in online credit card revenues, third party processors can actually save you money in total processing fees.
Third party prccessors often have incentives for businesses other than low monthly fees and no minimums. Many offer recurring billing, online control panels and even free shopping cart systems for your website. These features in addition to the low initial costs make third party processors very appealing to small businesses trying to start out.
Below are some features that can be found in different payment processig plans.
- Free Shopping Cart
- Recurring Billing
- Shipping Cost Integration
- Website Design Integration
- Downloadable Product Support
List of third party processors
This is by no means a complete list of third party payment processors. However, it is several of the large companies that have proven track records. Some of the companies below also offer true merchant accounts as well, so when you are ready to upgrade you do not have to switch processors.
PayPal
PayPal is the industry leader. They offer fees competitive with merchant account providers, and offer real merchange services for when you outgrow their third party setup. PayPal has excellent fraud detection and security in place.
2CheckOut, Inc.
2CheckOut offers third party payment solutions with only a $50 setup fee and no monthly fees. They offer a perl shopping cart free of charge and have both one-time and recurring billing options. 2CheckOut rigerously checks each order for fraud and sends a report if anything is out of the ordinary. This can be a great feature if you are in a high-risk industry such as web hosting.
Conclusion
There are several third party payment processors, and most have comparible features to each other. Before signing up with any of them, make sure the one you choose has the features you need. Also read their terms and conditions before signing up. Most processors have restrictions on what types of products and services you can sell using their services. Read the terms and conditions to make sure your product or service is accepted before signing up to avoid losing a setup fee.
About Brandon Eley
I am an Internet entrepreneur and own several e-commerce companies. I started 2BigFeet.com in 1999 and have shipped big shoes to all 50 states, most provinces and over 40 countries all over the world. We have a warehouse and retail store in LaGrange, GA.
I also work as the Interactive Director for Kelsey Advertising & Design. I am responsible for enterprise level web applications for Fortune 100 companies as well as e-commerce websites and other client projects.
I also run several content websites and write for several publications, including SitePoint where I am also a Community Advisor, The Apple Blog and others.
