A third-party processor allows e-commerce businesses to accept online payments without the need for a merchant account of their own. Instead, they let businesses make use of their own merchant account under their terms of service.

How it works

With this type of service, payment processing is outsourced to a third party by the merchant. After the customer has placed the items they want to purchase in the basket, they’re redirected to a check-out page that’s hosted on a third-party service provider’s server.

This way, there’s no need for the merchant to purchase and install payment gateways or SSL certificates. Any sensitive personal data is entered on the third-party server, which means that they’re the ones responsible for handling it securely. PayPal, Amazon Payments and Google Checkouts are some of the better-known third-party service providers.

The problems with third-party credit card processors

• Security: although third-party payment processors offer security measures, they do not offer as much safety assurance as merchant accounts provide.

• Lack of customer service: third-party processors’ simple structure is both a blessing and a curse in this case, but its lack of customer support is a definite drawback to its features.

• High transaction fees: while you might be saving by using a third-party processor, their transaction fees tend to be significantly more expensive. These fees can be as high as 3% - much higher than your average merchant account rate.

• Lack of a sense of professionalism: using third-party payment processors is not generally viewed as equally secure or trusted as using regular merchant accounts.