Third Party Payments Processors Explained
With more Australians swapping that wad of cash for digital payment methods such as credit cards and e-wallets, there’s an increasing pressure on small and medium businesses to follow suit and accept payments online. Data released from a 2016 survey by the Reserve Bank of Australia (RBA) shows that 52% of Australians made payments with cards as opposed to just 37% using cash. To put this in perspective, only 43% of payments were made via card in 2013.
However, for many small and medium businesses, payments processing can be as much a challenge as it is an opportunity. This is because a merchant account is a prerequisite for payment processing, but it’s not always easy (or affordable) to get one.
The good news is, you can rely on a third-party payment processor to ensure that revenue never stops trickling in. Let’s take a look at how a third-party payment processor can help you easily accept online payments from your customers.
What is a third-party payment processor?
A third-party payment processor is an entity that helps you receive payments online from your customers without first setting up your own merchant account with a bank.
If you’re wondering what a merchant account is, it’s a business bank account through which merchants can accept online or card payments from their customers. Businesses that have a merchant account can directly process and settle payments in their own account. In contrast, businesses that don’t have their own merchant account can use one owned by a third-party payment processor.
In other words, third-party payments processors allow merchants to entirely bypass the need to own a merchant account. Bambora is a third-party payment processor; we work directly with banks to settle and disburse funds on your behalf.
That may lead you to wonder, “Why do I need a third-party payment processor when I can have my own merchant account?”. We’ve answered this question for you below.
How do you know if you need a third party payment processor?
If you are a small or medium business, or one that processes a low volume of transactions online every month, setting up a merchant account may prove to be a rather expensive deal. This is thanks to the different types of fees attached to them, including set-up fees, monthly fees and transaction fees. Not to mention the arduous underwriting process you’d have to clear for your bank to sign you up as a merchant with them in the first place.
For many business, a third-party payment processor thus acts as the perfect alternative to a merchant account.
Here are some factors that will help you decide if a third-party payment processing company is what you need instead:
- The size of your business: If you are a small or medium-sized business that doesn’t process hundreds of transactions per month, a merchant account may not scale well for you. In such a scenario, a third-party payment processor will offer you a hassle-free way to accept payments, just as you would with a merchant account.
- The volume of online transactions: As a sub-merchant under a third-party payment processor, you typically pay only when you accept online payments, rather than shell out a monthly fee. For businesses with low transaction volumes, this is an attractive arrangement. But if you need to customise and control your account, then an independent sales organisation (ISO) merchant account may be the right choice for you.
- Turn-around time: Setting up a merchant account entails a long-drawn application and approval process that considers the nature of your business, how long you’ve been in business, as well as your credit history including bankruptcies. There’s every chance of your application being rejected if you are regarded as a high-risk merchant based on these factors. For businesses that need to quickly start accepting payments, a third-party payment processor is a more hassle-free alternative.
What are the advantages of a payment service provider?
As we’ve discussed above, businesses that are looking to scale have a lot to benefit from their own merchant account. For new or small businesses, on the other hand, a merchant account may not prove economical.
With that in mind, let’s take a look at some of the benefits of partnering with a third-party payment services provider:
- Economical: Processing your transactions via a third party such as Bambora is more cost-effective than setting up your own merchant account, especially if you are a small business or a rapidly changing startup that:
- Doesn’t want to spend a considerable amount on application, set-up and recurring monthly fees for a merchant account
- Simply doesn’t have transaction volumes large enough to justify spending on a merchant account
- Ease of setup: Getting approved for a merchant account is not without its share of rigorous due diligence checks and paperwork. Signing up with a third-party payment processor is comparatively simple and quick. A simple onboarding application form and verification are all you need to start accepting payments from anywhere in the world.
- Flexibility: If you’re not able to commit to a long-term contract with a merchant acquirer, and instead need a flexible contract term, a third-party payment processor can provide you this in most cases.
Are there any disadvantages of a third-party processor?
Partnering with a payment processor can help you easily and conveniently accept credit card payments when you’re just starting out. But as business scales, most merchants may find that a merchant account coupled with a payment gateway works better for their needs.
With that in mind, it helps to know what you cannot expect from a third-party payment processor:
- Payment service providers carry the risk of fraud on your behalf by letting you use their own merchant account. So you are governed by a very specific set of terms and conditions. Flouting these could mean you’re locked out of your account.
- How well your payment services provider is able to integrate with your eCommerce platform (such as Magento, WooCommerce or Shopify) can determine the seamlessness of your payments and the customer experience at checkout. Make sure to have this conversation before you sign on a payment services provider.
- If you need to customise and control your account, then an independent sales organisation (ISO) merchant account may be the right choice for you
To learn more about a payment facilitator, payment gateway and merchant account, check out this comprehensive blog post.
Whether you’re starting out or have growth on your mind, Bambora has a payments solution for you. Our onboarding process is one of the fastest on the market, which means you’re ready to go just a few clicks later. Simply contact one of our sales experts for guidance today for more.
About the author: Victoria Galloway is Bambora APAC's Technical Copywriter, and has been writing and producing in the payments and eCommerce space for a number of years, both in the UK and Australia