Third Party Credit Card Processing is an alternative to a direct merchant account for processing credit card purchases online. In a typical online transaction, the following process takes place
- Order is completed by customer from the retailer’s website
- Order is processed by the shopping cart software and transmitted to the credit card processor
- Credit card processor validates the credit card and if successful, transfers funds from the customer’s credit card to the merchant account (or retailer account)
In a typical merchant account scenario, the merchant account provider is the intermediary between the retailer and the credit card company, handling all the services and holding funds for the retailer in a separate account called the merchant account. The funds from these accounts are transferred into the retailer’s regular bank account at a specific frequency (which is usually higher than in the case of a third party credit card processor). In the Third party processing scenario, there is no merchant account and funds are transferred directly from a customer’s credit card to the retailer’s bank account at periodic intervals, being held with the third party processor in the interim period.
With a 3rd Party Merchant Account, there is a complete outsourcing of the credit card processing. The shopping cart software can usually be easily integrated into the retailer’s website using code insertion. Alternatively, the customer can be redirected to the third party processor’s payment website via a hyperlink. In the former option, the entire process is fairly standard in appearance, there is one slight difference. In case of the third party processor, the said process is actually acting as the seller and the customer will see the processor’s name on the credit card authorization page as well as credit card statements. For example, the seller description may be something like IP-ECOMMERCESALES 1-877-689-4598. Hence, there is a slight disadvantage in terms of trust and image building for the retailer, when it comes to the third party processing option. The retailer will usually have to clarify this information to the customer both at the checkout stage as well as in the monthly statements, to ensure that there is no confusion.
It follows that this option is more suitable for e-tailers that are just starting their online operations. The third party option offers significant advantages in terms of setup ease and costs. In terms of ease, the third party processor option involves simply signing up with the third party processing company (such as Paypal, a popular option, particularly for retailers selling on Ebay) and inserting the provided shopping cart on your website. The third party processor will not charge setup fees, but will charge a substantially higher-than-merchant-account transaction fee, ranging from 7.5% to 15%, along with a per-transaction fee as well as a rolling reserve, to cover the risk of chargebacks. This leads us to the second advantage of substantial cost savings in setup. For instance, a merchant account will charge several fees including set up charge, transaction charge, address verification (AVS) charges, monthly statement fees and others that may vary from one merchant account provider to another. In many cases, merchant account providers may also impose a minimum monthly value of transactions that a retailer must have in order to avoid a penalty.
For a retailer just starting out, a third party credit card processor is a great option as they are easier to set up and obtain than a merchant account, and much simpler to maintain, especially in terms of costs. In the following example, it is clear that at a low transaction volume, a third party processing option is viable whereas at a higher transaction volume, the third party processing option proves to be more expensive, supporting the industry-wide contention that a third party processing option will prove more expensive in the long run.
Merchant Account Provider
Discount Rate: 4.95%
Transaction fee: $0.45
Statement Fee: $25 (monthly)
AVS : $0.25
Rolling Reserve: 0 – 10%
Total $377
(1 year expense)
In case of the 3rd party credit card processor, the provider charges 8% of the value of each transaction as fee, plus a 5 cent transaction charge. Assuming that a business makes 12 transactions of $100 each for only for 12 months (1 transaction per month), the total expenses for a merchant account would amount to $477
3rd Party Provider
Discount Rate: 8.5%
Transaction Fee: $0.65
AVS: $1.2
Rolling Reserve: 10%
Total $126
(1 year expense)
Whereas with the third party credit processor option, the total costs amount to $425. However, we find that if we multiply the number of transactions to 20 each month with the same value, the merchant account costs $1766 compared to $2,637 in case of the 3rd party merchant account.
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