Third Party Payment Processors
If you’re looking for a merchant account, you’ve probably heard the term “third party payment processors”.
Third party payment solutions like PayPal and Stripe offer reduced fees over partnering directly with a merchant account, but you may be wondering if it’s worth the trade off, or even what the trade-off is.
Either way, it’s important that you know what you’re getting and how it works before choosing to set up your merchant services with a third-party payment processor.
- Rates and fees range between 1.4% and 3.5%
- Monthly fees average at £0-£20
- Credit card terminals are available from £15-£75
- Third-party payment processors typically skip fees, dramatically reducing costs for small business
Whether you’re already considering a third-party payment provider like PayPal or iZettle, or are still looking into your basic options, there are plenty of reasons to choose (and not to choose) a third-party payment processor.
A standard payment processor means setting up a merchant account with an acquiring bank, and handling credit card transactions through that processor. A third-party payment processor allows you to process credit card transactions without having a merchant account of your own, by processing it through your third-party payment processor instead. This allows you to skip steps and therefore fees when accepting payments.
Third-party payment processors allow you to sign up and start accepting payments immediately, providing you have a card terminal. With no merchant account required, you won’t have to wait for a credit or background check, won’t be hit with high risk fees, and won’t have to worry about PCI compliance unless you have physical terminals.
In short, you’ll be bypassing an actual bank of your own, and your third-party payment processor will handle the security, transaction management, and other details. This typically reduces fees, removes monthly fees, and greatly reduces the complexity of your contract. Startups and sole traders that cannot afford a traditional merchant account can greatly benefit from third-party payment processors.
The only real disadvantage of third-party payment processors is that you will likely pay a higher processing fee than with some other accounts. For example, PayPal charges rates starting at 3.5% while Elavon offers 2.75% for small business. If you’re processing debit cards, Barclays offers rates as low as 0.60% per card, but PayPal will charge the same flat rate. That’s a huge disadvantage as your transaction volume goes up.
However, many third-party payment processors offer competitive rates for small business. Stripe offers 1.4% + 20p for online sales, and iZettle and Square each start at 1.9% + 20p, which is lower than most very small businesses can get from traditional merchant account providers.
In most cases, your customer will be billed from your processor, not from your company. This means that if you’re using PayPal, your customer will see PayPal and your business name and email address on their bank or credit card transaction rather than just your business. This can be a disadvantage if you’re trying to brand your business.
Third party payment processors typically offer lower monthly and account fees but higher processing fees – making them ideal for small businesses but a poor fit for big business. In most cases, the smaller your business, the more you’ll benefit from using a service like PayPal or Stripe over partnering directly with a high-street bank or merchant account provider.
|Fees||Third-Party Payment Processor||Merchant Account|
|Transaction Rate||1.4% + 20p – 3.9% + 20p||0.75% + 20p- 3.5% + 40p (standard 3.7% + 20p)|
|Account on File Fee||£0||£0-£5 per month|
|Terminal Setup Fee||£0||£150-£300|
|Terminal Maintenance Fee||£0||£4.75+ per month|
|Minimum Monthly Charge||£0||£15-£30|
|PCI Non-Compliance Fee||£0||£15+ per month|
|Paper Statement Fee||£0||Yes (Varies)|
|Terminal Replacement Fee||N/A||£150+|
|Terminal Restocking Fee||N/A||£250|
|Customer Service Fee||£0||£0-£10 +|
|Early Termination Fee||£0||£0-£1,800|
|Chargeback Review Fee||£0||£250|
The more transactions you process, the more likely you can benefit from a traditional merchant account over a third-party payment processor. However, it’s still important that you request quotes from any merchant account service so you can compare options and ensure that you’re getting the best deal.
Third-party payment processors charge widely differing rates depending on the company, its offerings, and its clientele. The most popular third-party payment processors in the UK include Stripe, Square, iZettle, Paylane, and PayPal (and PayPal’s subsidiary, Braintree).
|Transaction Costs||1.4%-2.9% + 20p||2.9% + 20p||1.75% – 2.9%||2.8% + 20p||1.9%-3.4% + 20p|
|Payment Processing Time||7 Days||1-2 Days||1-7 Days||3-7 Days||0-2 Days|
|Set Up Fee||£0||£0||£0||£0||£0|
|Chargeback Fee||£15||Insured to £250||Insured to £250||£25||£14|
Both third-party payment processors and traditional merchant account services have pros and cons, but the smaller your business, the more likely you can benefit from services like PayPal, Stripe, and Square. Startups, high-risk businesses, and businesses with fluctuating income will also benefit from the no-fee structure offered by third-party payment processors. However, as your business grows, it is important to track your total costs, renegotiate your rates where possible, and move to a merchant account when necessary.