Payment Processing

Should I Work with A Third-Party Processor?

Third-party processors, like PayPal, Square, and Stripe, are companies that provide payment processing to clients by pooling all client payments through their own master merchant accounts. For example, if you sign up with PayPal, you do not get your own merchant account. Instead, whenever you accept a credit card payment, that payment is processed through PayPal’s merchant account (along with every other transaction from every one of their members), and you are then paid out, in turn, by PayPal. 

That arrangement has some notable benefits, the most significant of which is that it’s simple. Anyone can sign up with PayPal and begin taking payments almost instantaneously. But that means PayPal is essentially taking on all the risks associated with the payments, and that doesn’t come without a price. Third-party processors build that risk into their pricing models in the form of higher transaction processing fees. That means that you, as a merchant who does everything right, are essentially paying for the bad behavior of the ones that don’t. Even still, third-party processors can be the right choice for certain merchants, depending on factors like the size and volume of transactions processed. 


Who do third-party processors work best for?

PayPal, for instance, charges a flat rate of 2.9% + $0.30 on all transactions. That’s a lot, and those high fees make third-party processors impractical for most merchants doing any significant level of business. But third-party processors do work for some sellers – namely smaller ones who are handling a low volume of transactions or selling goods that are neither so expensive the higher percentage fee will hurt them nor so low that the $0.30 per transaction will hurt them. That makes third-party processors ideal for hobby businesses. They’re also good for businesses just getting started that want to dip their toes into the market before committing to a more robust payment processing solution. 


What is the alternative to third-party processors?

Once a company becomes established and finds itself doing a healthy monthly sales volume, there is almost no circumstance in which staying with a third-party payment processor makes sense. The alternative option that almost all established merchants choose is to sign up for their own merchant account. That process is not nearly as simple or easy as signing up with PayPal or Square, but it offers some significant benefits – namely, much lower transaction fees. 

There are various pricing models available across the different merchant account providers, and while the vast majority of them will be better than what any third-party processor can offer, they aren’t all created equal. So, it’s important that merchants looking for a new account do a little research before choosing a payment processor. BAMS, for instance, is a merchant services company that uses interchange-plus pricing, the most transparent and arguably cheapest pricing model in the industry. With interchange-plus pricing, transaction fees are based on the actual interchange fees associated with each payment, determined by the card type and industry the payment is being made in. As a result, when a low-interchange payment is made (like with a Visa Debit card), the merchant is charged an accordingly low fee. Compare that with a third-party processor, who might be charging 2.9% on a transaction with an actual interchange rate of only 1.0%, and the difference is clear. 


For more information on how your business can save money with an interchange-plus-based merchant account, visit today and get started on your free five-step price comparison. We’ll show exactly how much you could be saving off of your existing monthly bills!