Information on Merchant Accounts,
Ecommerce and Credit Card Processing

August 30th, 2005 by Jamie Estep

The story of 3rd party processing…

Filed in: Ecommerce, Merchant Accounts |

There are 2 options for a business when choosing to accept credit cards on the internet; a traditional merchant account, and 3rd party processing. 3rd party processors are companies like Paypal,, and Ikobo. Both, merchant service providers and 3rd party processors essentially provide the same service of enabling a business to accept credit cards.

The difference between the two business types is that third party processors process the transaction for your business under their own name, but with a merchant account, the transaction is processed under your businesses name. Visa and MasterCard both have strict policies against having another company process your transactions for you.

So, why are these companies able to process transactions even though it is prohibited?

The easy answer to this question is money. 3rd party processors got very popular, very fast. Initially they started by finding loopholes in regulations, using offshore banks, and laying low in the media. After several lawsuits resulting from consumers loosing to fraudulent transactions, mainstream media got a hold of their stories and the industry of 3rd party processing was born and public. Paypal, the largest 3rd party processor, was a very useful ebay tool, and its clientèle grew into the millions in a very short period of time. Other systems grew quickly because of their easy integration with websites and their much lower startup costs compared to merchant account providers of the time. By the time that their businesses were closely scrutinized, they had the money to buy their way, legally, into credit card processing.

On the verge of collapse, always:
3rd party processors are always hanging in a balance of being shut down. They are watched very closely by credit card companies, processing banks, the FCC, the ETA, the FBI, and other regulating bodies in the US. Essentially, they are on the verge of being shut down at any moment. If you search the web, you will find a considerable amount of dissatisfied customers with 3rd party processors. There are huge websites built by dissatisfied users with thousands of members. With so much public scrutiny, it becomes hard to maintain a positive public image.

Third party processors almost completely remove the ability of a consumer to make a chargeback for any reason. 3rd party processors are also notorious for holding money from merchants without notice or reason. Because of these questionable practices, many 3rd party processors have been shut down, and it is extremely hard, if not impossible, for a new 3rd party processor to start-up.

Good for some, Bad for most:
I’ll admit that Paypal can be an excellent system. It ties seamlessly into ebay, and millions of ebay users are members. It simply makes buying and selling on ebay a much simpler process.

As far as using a 3rd party processor such as paypal for a business, I don’t recommend it for most businesses. For any online business that intends to stay in business, it is essential to setup properly from the start. You can always start with a third party processor and then switch to a more traditional solution later, but this tends to be a lot of unneeded work.

The drawback with a 3rd party processor is that they do not allow you to keep your customers on your website to complete a purchase. Visitors are redirected to another secure server to complete the transaction. It’s hard to maintain a solid, secure business image if you can’t even keep people on your own site to purchase from ‘you’. Also as previously stated, there have many dissatisfied people with 3rd part processors in the past, and many of these people will not use them under any circumstance.

Some 3rd party processors do have the benefit of no startup or monthly fees, but the savings becomes negligible from the high processing costs. 3rd party processors may also charge you to transfer money back to your own bank account. Some even require you to bank only with them. Money normally takes 3 – 4 days to transfer to your bank account with a 3rd party processor, whereas a merchant account will normally have your money in your account in 24 – 48 hours.

Lastly, why would you want another company, a 3rd party, to process your transactions for you when you can be doing it in your own name, without their markup in the cost.

Which of these charges would be more likely to be misunderstood?

Generally, your business will pay up wards of 3% and most likely up wards of 5 – 10% for processing with a 3rd party processor. For a traditional merchant account, expect to pay 2 – 2.5% per transaction.

For any long term online business prospects, I have to recommend against using a 3rd party processor. Systems like paypal are great for users of ebay, and work great as a supplemental means of collecting payment from a customer. But, they should not be the only or primary means of accept payments online.

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