What Do Third-Party Credit Card Processors Do

Florence Carpenter

While direct credit card processors offer the best terms and rates in the industry, they also have strict requirements. Not every business qualifies for a merchant account. If you come from a high-risk industry, have a low credit score, or are prone to chargebacks, commercial institutions might reject your application. Luckily, you can turn to third-party processors.

Third-party credit card processors like Square, Stax, Stripe, and PayPal offer payment processing services through commercial banks. They do not have front- or back-end processing systems. Since third-party processors use their commercial accounts on behalf of their clients, business owners no longer need to open a merchant account. 

Tips When Choosing a Third-Party Credit Card Processor

Some third-party processors use short-term perks to trick unsuspecting merchants into agreeing to unreasonable contracts. Thus, be critical in choosing your processor. Haphazardly agreeing to long-term lock-ins and steep charges in exchange for an easy approval process would do more harm than good.

You should generally avoid processors that: 

  • Enforce lengthy lock-in agreements. Unreasonably long lock-in agreements prevent you from switching payment processing providers. Some processors even charge early termination fees.
  • Have steep processing rates. Get a good idea of the average processing rates by comparing the most widely used processors.
  • Require an unreasonable volume of orders. Even seemingly low, competitive rates could rack up to thousands of dollars depending on how many orders your process per month. Always do the math.
  • Offer zero anti-fraud security. With data breaches occurring every 39 seconds, your business would do well to partner with a processor that prioritizes cybersecurity.

Whether you go with direct or third-party payment processors depends on your business needs. Do not blindly choose the well-known or cheaper option. Compare the features that your prospective processors offer, assess how your business would benefit from them, then see if you meet their requirements.

What happens after your front-end processor approves a transaction? Processing Card can give you a primer on the entire process! Read our quick guide on back-end processors and their roles in transferring settled funds to acquirers.

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