What is a Third Party Payment Processor?

If you were to Google "What is a third-party payment processor", you’d get a wide variety of answers. Some experts might claim that third-party processors are payments aggregators like PayPal, or that third-party processors don’t require merchant accounts. When it comes down to it, a third-party processor is exactly what it sounds like: a third party that processes payments for your online store. If you aren’t running payments directly through your ecommerce platform, you’re using a third-party payments provider.

If you were to Google "What is a third-party payment processor", you’d get a wide variety of answers. Some experts might claim that third-party processors are payments aggregators like PayPal, or that third-party processors don’t require merchant accounts. These answers are true in some cases, but certainly not all.

When it comes down to it, a third-party processor is exactly what it sounds like: a third party that processes payments for your online store. If you aren’t running payments directly through your ecommerce platform, you’re using a third-party payments provider. Let’s break that down a bit more.

What are Third-Party Processors?

There’s a reason why the answer to this question is so unclear. In many cases, the companies answering this question are trying to sell you something. By claiming a more narrow definition of third-party processor, they hope to eliminate some of their competition on their way to winning your business.

Unfortunately, these tactics have muddied the waters for a lot of eCommerce businesses out there, making the decision even more difficult. This is why we wanted to take the time to help you understand what a third-party processor really is, and all the pros and cons you have to consider before signing on with one.

Most eCommerce platforms have a preferred (or built-in) payment provider that is offered to their users. A third-party processor is simply any payment processor or aggregator that is not the preferred payment provider of your platform. When choosing to use a third-party provider, the merchant takes the responsibility of finding and signing on with their processor. In many cases, these merchants will also need to find a payment gateway that will connect their processor and platform.

Take Shopify for example. Their default payment processor is their in-house provider Shopify Payments. If you run your store through Shopify, but you aren’t using Shopify Payments as your processor, then you’re using a third-party processor.

Of course, Shopify isn’t the only eCommerce platform that allows you to integrate third-party processors. You essentially always have the option whether you run your store through WooCommerce, Big Commerce, Magento, Big Cartel, or even just through popular site builders like Wix or SquareSpace. All of these platforms offer a preferred processing application—and some even have a huge variety of options depending on industry, size, and individual needs—but you can also run these platforms with a third-party processor.

Pros & Cons of Third-Party Processors

Now that we’ve cleared the air about exactly what third-party processors are, the question still remains whether your business should look into third-party processing options. Here are some of the pros and cons to consider before you decide to ditch your platform’s preferred provider:

Pros

1. Control

Unlike integrated processors like Shopify Payments, third-party processors put all the control (and responsibility) into the merchant’s hands. They’ll be able to pick and choose the services that best support their business’ needs. Plus, there won't be any surprise holds or freezes on your account, which happen from time to time with built-in providers.

2. Cost

Integrated processors are often limiting and more expensive than third-party processors. Convenience does come at a price, after all. Of course, simply choosing a third-party processor doesn’t guarantee you’ll pay less. More on that below.

3. Speed

Third-party processors can often process payments faster than integrated ones. Most processors offer deposits within 24 hours, whereas integrated processors can take 2-3 days.

Cons

Time & Effort

If you’ve ever looked for a processor before, you know that it is a long and draining process. That process is only made more difficult with the addition of a payment gateway to the mix. If you don’t have a lot of time to get things set up, a preferred provider might be the way to go.

Usability

When you integrate a third-party processor onto your eCommerce platform there is a chance that your customers will be redirected to another site for their purchases depending on which gateway you use. While it won’t make a difference to many customers, some are put off by an external shopping cart and might choose to shop elsewhere.

Cost

We know, we told you this was a pro, but it can definitely be a con if you don’t put enough time and effort into researching your provider. Keep in mind that you’ll be paying not only for the processor, but for your gateway as well. Several eCommerce platforms also charge added fees for not using their preferred processor. That’s a lot to consider, so don’t forget to calculate all potential fees into your cost analysis.

In the end, the best choice for your eCommerce payments provider will come down to your unique business. There is no universal answer to the question “which processing option is best?” As long as you’re researching all your options and keeping all potential costs and fees in mind, third-party processors can be a great option for eCommerce businesses.

If you’re unsure which route your business should take, feel free to reach out to the payments experts at SwipeSum. We’re happy to compare your options and find you the best possible rates. Click here to get started!

Taft Anderson

Taft Anderson is the former Product Marketing Manager of Swipesum. A graduate of Washington University in St. Louis' Olin Business School, Taft is a content and branding expert.

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