What Is a Third-Party Payment Processor?

A third-party payment processor, more commonly known as a payment processor, is an entity that processes payments between merchants and credit card companies. It is the means of exchanging money in order to complete online transactions or traditional brick & mortar purchases. The server component can be installed on your own website or hosted by the payment processor itself.

Modern day payment processors are typically simple to use and require only minimal setup, which is why they have gained extreme popularity in recent years. You can typically accept credit cards on your site with just a few clicks – provided you work with an  established processor.

Payment processing rates vary depending on the type of transaction, so it’s essential that you understand what you are signing up for. For instance, there may be rates for online transactions and another rate for credit card swipes at an actual store location.

What Are the Pros & Cons of Using a Third-Party Payment Processor?

There are several benefits to using third-party payment processors, most notably they can simplify how both small and large businesses accept online transactions. Instead of a merchant having to signup with a variety of different credit card companies, they can instead work with one payment processor which manages all the relationships.

Some merchants who sell goods internationally might take advantage of third-party processors in order to avoid certain fees associated with currency exchange rates. That said, there are several third-party payment processors who manage all these aspects for you, which is why they are known as full service processors.

There are also several disadvantages to third-party payment processors. The biggest drawback is that they typically take a percentage of each sale in order to process the transaction; this means that your margins will be reduced if your product costs more to produce.

The other issue with using a third-party payment processor is that they are responsible for managing your account information, which can lead to security breaches if not properly secured. Since these types of companies are regularly dealing with sensitive customer data, online merchants need to ensure the safety of their customers’ personal information.