Third-Party Credit Card Services

When a person does business online, she often has a choice in how she pays for the items she is purchasing. For instance, she might choose to pay with her debit or credit card, or she may wish to use an e-check. Just like customers have choices when it comes to online payment, merchants also have choices in how to deliver online payment services.
 
A merchant can set up a merchant account specific to his business, or he can have a third-party credit card service handle online transactions for him. Today, the number of online businesses using third-party credit card services is on the rise.

Merchant Accounts and Third-Party Credit Card Services Defined

In order to understand the differences between merchant accounts and third-party credit card services, it is important to understand the basic function of each:
  • Merchant Account: Simply stated, a merchant account is a type of bank account that allows an online retailer to accept credit and debit card payment over the Internet.

  • Third-Party Credit Card Services: Third-party credit card services are specialty corporations that handle the transactions, verification and payment transfers for online businesses. These services own a merchant account authorized to handle purchases from multiple vendors. One well-known third-party credit card service provider is PayPal.

    With a third-party credit-card provider, when your customers make a purchase, they cross a payment gateway for a secure follow-through on the third party's end.

Third Party Credit Card Services

Here's a quick breakdown of how a credit card service works:
  • A customer comes to your site and selects a product.

  • The customer clicks on the "purchase" or "add to shopping cart" button.

  • Customer provides basic information, including name, billing and shipping information.

  • Customer reaches a checkout point, which passes them through the secure gateway and onto the third-party merchant's site. This is a seamless process.

  • The third-party company collects credit card information and makes verification through its financial network.

  • Once the transaction is verified and the money is cleared, the online business owner can transfer the specified amount, usually in batches, from the third party's account and into his business account.

The Costs of Using Third-Party Credit Card Merchants
A third-party credit card service typically levies fees in one or more ways:
  • flat fee per each transaction
  • monthly fees
  • percentage of purchase
  • one-time setup fee.

Setup fees can be as little as $50.00. If you're outside the United States or wish to deal with international customers, you can pay as much as $400. Per transaction fees vary. You might expect to pay as little as 30 cents, plus an approximate 2.5 percent to 5.5 percent of the actual purchase price.

Merchant Account vs. Third-Party Credit Card Service

It's critical to research the advantages of operating a company merchant account versus using credit card services from a third party. Each has its advantages and drawbacks. These depend on the size of your operation as well as the type of products you offer:
  • Merchant Accounts: Opening a merchant account can save a considerable amount of money for online business owners. When transacting in larger net amounts, a merchant account, which usually has a monthly fee, Web portal fee and low per-transaction fee, can actually save a merchant more money than a third-party credit card service.

    Merchant accounts do require monthly fees and specialized software. Yet they also offer comprehensive customer service and stat tracking that can allow you to see how your transactions are adding up. You can also set up recurring billing for repeat customers and can also charge for memberships and subscriptions on your site.

  • Third-Party Credit Card Companies: Third-party credit card services like PayPal have really opened up the lines of e-commerce, making it relatively simple for anyone to put together a start-up business. With third-party credit card services, business owners aren't faced with cost-prohibitive start-up fees and don't have to navigate potentially confusing security issues.

    For each transaction, third-party credit card services take a percentage of the total. For those working on a smaller scale, this can be an acceptable cost of doing business, as it saves them the trouble of having to set up a merchant account or Web portal with all of the attending security features. It can also be beneficial to have a limited third-party arbitrator to help customers and vendors resolve problems that may arise while doing business.

Resources

Smallbusiness.yahoo.com (2007). Credit Card Processing Buyer's Guide. Retrieved September 8, 2007, from the Yahoo! Inc. Web site: http://smallbusiness.yahoo.com/r-article-a-2018- m-1-sc-10-credit_card_processing_buyers_guide-i.

Tamingthebeast.net (1999-2007). Payment Gateways, Internet Merchant Accounts and 3rd party credit card processors. Retrieved September 8, 2007, from the Taming the Beast Web site: http://www.tamingthebeast.net/articles2/ back-end-ecommerce.htm.

Unpicked.com (2007). Ecommerce FAQ. Retrieved September 8, 2007, from the Unpicked Web site: http://www.unpicked.com/links/eCommerce/eCommerce-faq.asp.