Finances and Taxes

A Small Business Owner’s Guide to Third-Party Payment Processors

Gusto Editors  
A woman looks at a smartphone

Businesses need an easy way to collect payments from their customers, and third-party payment processing is one way to do that. But is it the right option for your business? Let’s dive into the world of payment processing so you can determine the best method for your small business.

What is payment processing?

Payment processing, in general, is the process of accepting credit or debit card payments from a consumer. This process can include third party payment processors and gateway payment processors. Today, it is very common for organizations to use these solutions to facilitate credit card payments. Choosing the right processor and setting it up properly is critical.

What are third party payment processors?

A third-party payment processor is a merchant service provider. The purpose is to help businesses to take card payments and online payments without establishing their own merchant account. (A merchant account is basically a type of business account for the purpose of accepting credit card and other non-cash payments. We’ll cover this more below, so keep reading.)

What are gateway payment processors?

A gateway payment processor is a tool that allows for the secure transmission of online payment information to a processor. It authorizes payments from customers to a business in situations where the credit card is not present. So: a payment processor is a service that facilitates credit card and online payment transactions. A gateway payment processor is a tool that authorizes payment and communicates whether a transaction is accepted or declined.

Third-party payment processors vs merchant accounts

It’s also important to know the difference between using a third-party payment processor or opening your own merchant account.

What are merchant accounts?

A merchant account is a bank account that is set up for the purpose of accepting credit cards (and other non-cash methods) for payment. It enables the acceptance and processing of electronic payment transactions.

A third-party payment processor will aggregate business funds into a large account. By comparison, the merchant account provider sets up an individual account for every business.

Benefits of third-party payment processors

A merchant account can take longer to set up (several days or weeks) due to compliance requirements. A third-party-payment process, on the other hand, usually boasts low fees and only takes a few minutes to set up. Third-party payment processors can also make it easy for merchants to meet 1099-K reporting requirements.

Benefits of merchant accounts

Merchant accounts may have lower fees in some cases and they tend to be compatible with many types of card readers. (Some third-party processors require businesses to use their card readers.) Merchant accounts also tend to be more secure than third-party payment processors. 

How to decide if third-party payment processors are right for your business

The ability to accept credit card payments is critical for most small businesses. In 2019, $29.78 trillion in purchases were made in the U.S. using credit cards, many of them to small businesses. It’s important to compare your options to determine what’s best for your business. Here are some of the most important factors to consider when choosing a third-party payment processing provider.

  • Business size: Larger organizations will need more complex and specialized processors.
  • Software integration: Consider whether the third-party-payment software integrates with software you’re already using, particularly as it relates to your e-commerce platform, accounting, and payroll tools.
  • Cost: Charges can differ significantly from one provider to the next. Most companies charge a transaction fee that is a percentage of the transaction plus additional charges, such as a fee for in-person swipes, taps, and dips. Look for any monthly fees required and costs associated with the use of equipment.
  • Contracts: If you’re unsure about the long-term fit, choose a provider that offers a flexible contract that can be canceled. 
  • Risks: Third-party payment processors come with a risk of misuse, fraud, and poor security that could lead to a frozen account—which means your funds are tied up for a period of time. Ask what the resolution process typically entails before signing on.

Types of third-party payment processors

There’s no shortage of payment processing companies. Here are some popular picks:

  • PayPal: Popular for low-volume needs, PayPal has a long history (dating back to 1998) of providing processing services. It operates in 26 currencies across 200 countries and makes integrating payment into the checkout process easy. 
  • Stripe: Stripe tends to be a good fit for those with a website developer who can integrate it with the company’s API. It’s available in over 130 currencies. Costs may be a bit higher, but still competitive. 
  • Helcim: The volume discount, lack of monthly subscription charges, and fast set up provided by Helcim makes it an attractive option. 
  • Square: Square doesn’t have cancellation fees, monthly subscription charges, setup fees, or compliance fees. It’s best for companies that want a convenient solution since you’ll need to use Square’s hardware—though the point-of-sale (POS) software is free, as is the mobile account reader.
  • Clover: Clover combines POS hardware and software while offering full payment processing. It’s a good all-in-one solution for small businesses. Keep in mind that there is a monthly fee for the use of the software.

How to set up third-party payment processors

Setting up a third-party payment process is usually quick and easy.

Step 1: Choose a provider

The first step is to select a provider from the numerous processors out there. Use the insights above to help guide your decision. Be sure to consider all costs and fees, features, and the limitations of any solution before selecting a provider.

Step 2: Choose hardware for in-person purchases

If you only use this service for online sales, you don’t need POS hardware components. However, for in-person sales, you’ll want to choose the processor’s tools, like a card reader, that works with their system and is ideal for your environment. Hardware preferences for restaurants, for example, may differ from retailers. Your options could include wireless readers, an app-like format, and more.

Step 3: Set up your account

It usually only takes a few minutes to provide the processor with the necessary information about your business and set up your financial accounts. You’ll likely gain access to the system right away. You’ll then need to connect your current website or online store to the system. Or, if you are using hardware, you’ll need to connect that with your account.

Gusto Editors
Gusto Editors
Back to top