The Complete Guide To Third-Party Payment Processors

Third-party payment processors are one of the easiest ways for small or first-time business owners to start accepting credit and debit cards.

Also called payment service providers (PSPs), these companies let you sign up online, skip the paperwork of a traditional merchant account, and start taking payments almost instantly.

In this guide, we’ll break down how third-party processors work, their pros and cons, and how they compare to full-service merchant accounts so you can decide which is right for your business.

What Is A Third-Party Payment Processor?

A third-party payment processor lets you accept cards without setting up your own merchant account. Instead, you share one large merchant account with other businesses.

For your customers, nothing changes — they still pay with their card like normal. But for you, this setup usually results in flat-rate pricing, fewer fees, and no long-term contracts.

How Does Third-Party Processing Work?

The basics of how payments move don’t really change. Your customer pays with a card, the processor runs the transaction through the networks, and you get the money in your bank account (minus fees).

The big difference is in the account setup. With a third-party processor, you’re part of a shared merchant account. With a traditional provider, you’d get your own Merchant ID tied just to your business.

For a small business, that distinction may not matter much at first. But as you process more transactions, having your own merchant account typically brings more stability and can even save you money over time.

Who Offers Third-Party Payment Processing?

While there aren’t as many third-party processors as traditional providers, the big names are widely recognized by both merchants and customers:

Why Are Third-Party Payment Processors Popular?

There are three reasons why third-party processing is so popular:

• Fast approval: Sign up online and get approved in hours, not weeks.
• Simple pricing: Flat rates with no hidden fees.
• Flexibility: No long-term contracts or termination penalties.

For many small businesses, simplicity and predictability matter more than chasing the absolute lowest rate.

Third-Party Processors VS Merchant Accounts

To make it easier, let’s stack third-party processors up against merchant accounts and see how they compare.

There’s no clear winner. What works for a startup may not fit a growing business, and vice versa.

Advantages Of Using A Third-Party Payment Processor

Here’s a look at the benefits of using a third-party payment processor for your business:

Disadvantages Of Using A Third-Party Payment Processor

Third-party processors also come with some limitations:

Risk Considerations For Third-Party Payment Processing

Any card processor can freeze or terminate your account, but the risk is greater with third-party providers since you skip full underwriting.

Here’s how to reduce that risk:

• Be honest about your business and products.
• Stay PCI compliant.
• Manage chargebacks and fraud proactively.
• Have a backup payment option ready (like Venmo or Zelle).

For most low-risk, small businesses, freezes are rare but still worth planning for.

Is A Third-Party Payment Processor Right For My Business?

Some third-party processors are among the best for small businesses, especially those processing under about $5,000/month. They’re affordable, simple, and flexible.

Larger or more established businesses usually save money (and headaches) with a traditional merchant account. Cutoffs vary — some say $1,500/month, others $10,000/month — but $5K/month is a good general guideline.

When deciding, ask yourself:

• Is my business year-round or seasonal?
• How much will I process monthly?
• Do I need specialized tools like POS or advanced reporting?
• Is my business in a high-risk category?

Bottom line: Third-party processors are great for getting started, but most growing businesses eventually outgrow them and move to a full-service merchant account.