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The Secret To Accepting Credit Cards Without A Merchant Account? Finding A Great Third-Party Payment Processor

    Hsin-Wei Luang
  • 4 comments
  • Updated on:
Advertiser Disclosure: Our unbiased reviews and content are supported in part by affiliate partnerships, and we adhere to strict guidelines to preserve editorial integrity.

So you’re all set to launch your new business and make your fortune (well, hopefully). Then you realize that it’s flat-out essential for most businesses to be able to accept credit cards. Without that ability, retail companies will lose out on sales, and eCommerce businesses will have a hard time making any sales at all.

You hear that you’ll need a merchant account to process your credit and debit card transactions. But every provider you talk to wants a ton of information about your business. Plus, they’ll all tell you that they have the lowest rates (without mentioning what they are) and try to pressure you into signing a lengthy contract before you’ve even had a chance to read it.

Then you hear about Square: no lengthy contracts, endless forms to fill out, or monthly fees. Rates are published right on Square’s website. What kind of sorcery is this? It all seems too good to be true.

Square — and other companies like it — are what are known as third-party processors. What is a third-party payment processor? In this article, we’ll cover that as well as:

  • Explain how third-party processors work
  • Show how they differ from traditional merchant account providers
  • Compare the advantages and disadvantages of using a third-party processor over a full-service merchant account
  • Recommend a few excellent third-party processors examples

Read on to find out the details!

Learn More About Our Top Picks

CompanyBest ForNext StepsBest For
Square

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Best for taking in-person credit card payments.
Best for taking in-person credit card payments.

Visit Site

Read More

PayPal

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Best for low-volume merchants.
Best for low-volume merchants.

Visit Site

Read More

Stripe Payments

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Best for international merchants who are tech-savvy or can hire a developer.
Best for international merchants who are tech-savvy or can hire a developer.

Visit Site

Read More

Shopify Payments

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Best for having the benefits of Stripe without the need for technical know-how.
Best for having the benefits of Stripe without the need for technical know-how.

Visit Site

Read More

Read more below to learn why we chose these options.

Can I Really Accept Credit Card Payments Without A Merchant Account?

Yes, you can accept credit card payments without a merchant account by using a third-party processor. Third-party processors work through a newer business model. In some ways, it’s easier to set up credit card processing with them than with traditional merchant account providers.

We’re sticking with the term third-party processor for this article, but these businesses are known by several other names, including:

  • Credit card aggregators
  • Payment service providers/PSPs
  • Payment facilitators
  • Third-party payment processors

Rest assured that they all mean the same thing.

How A Merchant Account Works

A merchant account is a bank account provided by a very specific type of credit card processor called a merchant account provider.

When you make a credit card sale, the cardholder’s bank pays you that money. But instead of sending the money directly to you, it sends the money to a special bank account called a merchant account. The merchant account temporarily holds the money but allows your credit card processor to access the account to take out their fees. Once the processor takes out its fees, the remaining money is released to your business’s bank account.

With a traditional merchant account provider, every business they work with has its own merchant account. With a third-party processor, the money from many businesses goes into one large merchant account controlled by the processor.

Here’s a more detailed article if you wish to dig into a little more on how merchant account providers run their businesses.

Accepting Credit Cards Without A Merchant Account: How Third-Party Payment Processors Work

Below is a quick summary of how the third-party processing business model works, how you can accept credit cards without a merchant account if you go through a third-party processor, and the typical characteristics of a third-party processor.

How Third-Party Processors Treat Risk Of A Bad Sale

Third-party processors pool a large number of its merchants into one merchant account. (They actually operate many such pools to segregate and contain risk even further.) As a result, the effect of one bad credit card sale is minimized.

This is why third-party processors can add merchants quickly and let them start processing fairly quickly. This is also why third-party processors are careful with the risk profile of their merchants after they’ve been added to the pool, so they don’t change the risk profile of the entire pool.

One caveat: Being able to take credit card payments almost instantly does not mean that you’ll get the money from the sale right away. The money will still take a while to get to your bank account. So if you need your funds right away, take a look at The Merchant’s Guide To Instant Credit Card Processing, Instant Deposits, & Getting Your Funds Fast.

What Is A Third-Party Payment Processor?

Other than the way a third-party processor uses a merchant account, these processors often have the following business characteristics:

  • Simplified Underwriting: Third-party processors typically approve a merchant’s application to process credit cards in just a few hours. The process can often be completed entirely online, and you won’t need to submit a large number of financial documents. This is why third-party processors are often a great choice for new businesses that don’t have an established financial history.
  • Account Stability: Third-party processors are vigilant in guarding the risk profile of their merchant accounts. They tend to hold, freeze, or terminate a merchant’s account whenever they detect any unusual activity, such as attempts to process a single transaction that’s much larger than what the merchant typically averages.
  • No Long-Term Contracts: Third-party processors generally don’t have long-term contracts that automatically renew or any early termination penalties. Instead, third-party processors tend to offer month-to-month contracts. While this lets you leave for another processor fairly easily, it also allows the third-party-processor to stop doing business with you on short notice (because the month-to-month obligations apply to both parties).
  • Pay-As-You-Go Billing: Third-party processors usually only charge you for the cost of processing your transactions. You usually won’t have to pay a monthly account fee, an annual fee, PCI compliance fees, or gateway fees. The tradeoff is that your processing rates will usually be significantly higher overall than the better merchant account providers.
  • Simplified Processing Rates: Most third-party processors offer simplified, flat-rate pricing for processing your transactions. This makes it much easier to know in advance what your overall costs will be so that you won’t get hit with sudden surprises on your monthly billing statement. However, at higher monthly processing volumes, a third-party processor typically is more expensive than a merchant account provider.
  • Customer Service Options: Third-party processors aren’t known for offering a full range of ways to contact customer service. Often, you’ll find yourself looking through online knowledge libraries or trying to contact them via email. However, some third-party processors are now offering telephone-based customer support where you can talk to an actual human being.

How To Process Credit Card Payments In-Person Without A Merchant Account

Yes, it is possible to process credit cards without a merchant account by using a third-party processor. When it comes to taking credit card payments in-person, some third-party processors have it figured out, but others do less well.

With most third-party processors, you can buy credit card readers that sync to mobile devices (such as smartphones and tablets) and take card payments that way. A few of them (e.g., Square) also sell entire point of sale systems to set up at your store’s checkout, including scanners and PIN pads.

Third-party processors also tend to have great software that integrates with the hardware. The software not only enables you to take credit card sales, but it also helps you run your business with, for example, inventory management functionalities.

Once you have the hardware, you simply take your credit card sales like you would with any credit card processor. Your customers won’t know that you’re accepting their credit card payments without a merchant account.

How To Accept Credit Card Payments Online Without A Merchant Account

Here is the heart of the matter: how to accept credit card payments without a merchant account. Third-party processors tend to be technology-focused companies, so they tend to give fairly robust tools for eCommerce businesses.

To take payments online, you’ll need a gateway and, often, a virtual terminal. The gateway connects your online store to the processor’s computer network. The virtual terminal is a secure page that lets you or your customer enter their credit card information manually. Third-party processors tend to provide a free gateway and virtual terminal once you sign up for their service.

Sometimes, integrating the processor into your online store can be easy. For instance, with PayPal, you can add a button at the checkout that will take your customer to a secure checkout page hosted by PayPal. With other processors (such as Stripe), you’ll probably have to hire a developer to add some code to your online store and follow cybersecurity requirements.

Once the gateway is integrated with your online store, your customers can check out through the shopping cart. They won’t be able to tell that you’re accepting their credit cards online without a merchant account.

Third-Party Payment Processors VS Merchant Accounts: The Bottom Line

Below are some high-level differences between using a merchant account provider and a third-party processor. Instead of going into the details, we intend to present high-level differences that can help you quickly decide which type of processor is right for your business.

Convenience & Ease Of Access

  • Third-Party Processor: You can typically open an account and start accepting credit cards without a merchant account within hours. The process is automated, and you won’t have to provide too much financial documentation. They typically offer month-to-month contracts, so you can cancel the service at any time and go to another processor.
  • Merchant Account Provider: It usually takes a few days to a few weeks to sign up and get approved for a merchant account. You’ll have to provide quite a few financial documents, and sometimes that includes your personal financial records. While the industry is moving toward month-to-month contracts with no early cancellation penalties, there are still processors that will tie you up contractually for several years. Be sure to read your contract and understand the length of your commitment.

Costs

  • Third-Party Processor: Third-party processors usually have flat-rate charges. This way of charging gives you more predictability. Sometimes, the fee is subdivided into an in-person payment (card-present) amount and an online payment (card-not-present) amount. These charges are typically not the lowest rate, but they’re still fair because the account comes with a lot of “free” software and services. There are some per-instance charges (such as chargeback fees) that fall outside the flat-rate fee.
  • Merchant Account Provider: A merchant account provider’s charges can be lower than a third-party processor’s, depending on the pricing model, the level of risk of your business, and your processing volume. Typically, you’ll find better pricing if the processor offers an interchange-plus or membership pricing plan and if you process $10,000 or more per month.

Reliability Of Service

  • Third-Party Processor: A third-party processor’s service is less reliable than a merchant account provider’s. Because of their ask-questions-later business model, some higher-risk merchants slip through the application process. So third-party processors tend to be hyper-vigilant on their merchants’ processing activities. Sudden large purchases or even the hint of a high chargeback rate can trigger account holds and/or sudden terminations.
  • Merchant Account Provider: Processing with a merchant account provider is much more stable than with a third-party processor. The provider assesses your business’s financial history and risk level before deciding to do business with you, so they tend to be more tolerant to changes in activity levels to your account. That doesn’t mean holds and terminations won’t happen. They will just happen less, and you’ll probably get more advanced warning.

Quality Of Service

  • Third-Party Processor: With third-party processors, customer service tends to be automated, online knowledge-library based, and maybe even crowdsourced. It’s not a bad thing if you’re the tech-savvy type who hates to talk to live people and tends to solve problems on your own, but others might like it less.
  • Merchant Account Provider: While many merchant account providers have automated customer service and knowledge libraries, they also provide live humans to help solve issues. Some processors will even assign a specific account executive to your business, so you’ll be talking to a person who’s familiar with issues and pain points specific to your business.

How To Accept Credit Cards Without A Merchant Account: Your 4 Best Options

When it comes to how to accept credit card payments without a merchant account, there are four third-party processors that provide an excellent product, each in its own way. Square is strong in taking in-person payments, PayPal is global in its reach, and both Stripe and Shopify (powered by Stripe) are great at online processing.

1. Square

Square



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Square is probably the most feature-rich and advanced mobile processing (mPOS) solution you can find without a monthly fee. The mostly-modular hardware can be easily turned into a countertop POS system, so taking payment cards in-person is basically built into Square’s DNA.

Square typically charges:

  • 2.6% + $0.10 for swiped/dipped/tapped transactions
  • 3.5% + $0.15 for keyed transactions
  • 2.9% + $0.30 for online transactions

There’s no monthly fee, statement fees, or monthly minimums.

While Square is best for in-store purchases, it’s no slouch for online payments either. Square provides its merchants with a free online store that syncs with inventory, including inventory counts and eCommerce integrations. There’s a virtual terminal, stored card capability, invoicing, recurring billing, online ordering option, customer management, advanced analytics, tons of third-party app integrations, plus an API for developers.

If you’re having trouble choosing between Square and a merchant account, we do a detailed comparison in this article.

Pros

  • Predictable flat-rate pricing
  • Ideal for low-volume merchants
  • Impressive feature-set
  • Affordable chip card readers
  • All-in-one payments system

Cons

  • Account stability issues
  • Not suitable for high-risk industries

Get Started with Square

Read our in-depth review

Jump back to comparison chart

2. PayPal

PayPal



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Read our Review

As of August 2, 2021, PayPal has changed its pricing for online payment processing, affecting new and existing merchants. The new rates are complicated and not easy to summarize, so we recommend reading our article on PayPal's pricing to understand how the new prices will affect your business.

If you’re interested in using PayPal, please be sure to read our in-depth review. PayPal offers such a vast array of payment-related services that the short summary here isn’t enough to cover them all. We’ve also compared PayPal with a generic merchant account if you’re interested in a more focused comparison.

PayPal claims 305 million active consumer accounts and 22 million merchants, so if you use PayPal, you’ll already have a ready-made user base. Setting up and using PayPal is easy. You can be up and running nearly instantaneously. You can use PayPal as your exclusive payments processor or as a supplemental payment option.

PayPal has some pay-by-month features, but taking credit cards with PayPal typically means you pay for each transaction. Here are some of the costs:

  • 2.9% + $0.30 for online sales
  • 2.7% for mobile and in-store transactions (PayPal Here)
  • 3.5% + $0.15 for keyed-in transactions
  • 3.1% + $0.30 for virtual terminal transactions

With PayPal, there are no contracts to sign and no early termination fees to worry about. PayPal offers countless integrations, so you’ll have plenty of options for syncing it with your shopping cart, your accounting service, or your shipping software.

Pros

  • Trusted by consumers
  • Predictable flat-rate pricing
  • Ideal for low-volume merchants
  • Extensive integrations
  • All-in-one payments system

Cons

  • Account stability issues
  • Inconsistent customer support
  • Not suitable for high-risk industries

Read our in-depth review

Jump back to comparison chart

3. Stripe

Stripe Payments



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Read our Review

If you’re investing in a sophisticated online store or wish to take in-app purchases, Stripe might be the right processor for you. You’ll most likely need the help of a developer to be able to use Stripe to its full potential.

Stripe is worth serious consideration if you wish to:

  • Build an online store or in-app purchasing interface from scratch with top-tier developer tools
  • Operate a subscription-based business
  • Use powerful fraud prevention tools
  • Access affordable business intelligence
  • Take payment from customers around the world

What’s more, Stripe has very simple flat-rate pricing and charges:

  • 2.9% +$0.30 per transaction
  • +1% if an international card used
  • +1% if currency conversion is needed

Other additional charges (such as a $15 chargeback fee) are assessed per occurrence.

Since you’ll need coding help to implement Stripe, if you only need a simple eCommerce site, we recommend going with other processors that are less complicated to integrate. For such businesses, check out our brief Shopify summary in this article. Shopify’s service is easier to use but still powered by Stripe in the back end.

Pros

  • Predictable flat-rate pricing
  • Advanced reporting tools
  • Ideal for international merchants
  • Multicurrency support

Cons

  • Account stability issues
  • Not suitable for high-risk industries
  • Needs technical skill to implement

Get Started with Stripe Payments

Read our in-depth review

Jump back to comparison chart

4. Shopify Payments

Shopify Payments



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Read our Review

Shopify isn’t a third-party processor. Instead, it’s an online shopping platform with an easy-to-use interface that helps merchants build a professional-looking website, with or without a coding professional.

Shopify has an in-house payment processing unit called Shopify Payments. Shopify Payments is powered by Stripe, which is a third-party processor that typically requires a developer’s help to implement. Shopify simplifies things for its merchants, so folks with no coding training can build a beautiful web store and take advantage of Stripe’s processing prowess without having to deal with any techy fuss.

Shopify’s pricing model is simple: pay to access the platform and then pay for each transaction made through the platform. You can use your own payment processor, but you’ll get a hefty discount if you use Shopify Payments services.

There are five pricing levels, but we’ll only highlight a couple here:

Basic Plan

  • $29/month
  • Access to an online store
  • Shopify Payments rates:
    • 2.9% + $0.30 for online
    • 2.7% for in-person transactions

Shopify Plan

  • $79/month.
  • Access to an online store
  • Shopify Payments rates:
    • 2.6% + $0.30 for online
    • 2.5% for in-person

Shopify is open to merchants worldwide, but restrictions may apply, and available services may vary, depending on which country your business resides in.

Pros

  • Easy to use
  • Numerous integrations
  • Attractive templates
  • Advanced design tools

Cons

  • Add-ons often necessary
  • Variable customer support

Get Started with Shopify Payments

Read our in-depth review

Jump back to comparison chart

Other Concerns For Credit Card Processing Without A Merchant Account

Below are some miscellaneous issues/questions that we often see about using a third-party processor. If you have additional questions, please leave us a comment below, and we’ll do our best to answer.

  • International Transactions: Third-party processors are just as capable of handling international transactions as merchant account providers. PayPal and Stripe, for instance, take international payments regularly.
  • Businesses Not Based In The US: If your business is not US-based, you might have trouble finding a third-party processor that will do business with you. But you’ll have the same difficulty with merchant account providers.
  • PCI Compliance: With PCI compliance, it’s probably easier to work with a third-party processor than a merchant account provider. Because third-party processors own their merchant accounts, they are responsible for keeping these accounts PCI compliant, thereby relieving you of these duties.
  • Equipment/Software Portability: You do have to worry about equipment and software portability when you sign up with a third-party processor. The most prominent example is Square, which provides its users with free but proprietary software. Their hardware runs on their software, so the hardware can’t be used with other processors. Make sure your information is transferable, and invest in hardware selectively before you tie yourself too closely to the proprietary hardware and software.
  • Price: Generally speaking, if your business is a startup or a seasonal business, it’s probably a money-saving idea to use third-party processors. As a rough rule of thumb, if you process under $10,000 per month, it saves you more money to use a third-party processor. If you consistently process over $10,000 a month, getting a merchant account is likely better.

Should My Business Accept Payments Without A Merchant Account?

Whether your business should accept payments online without a merchant account depends on your business’s unique situation. For some businesses — especially startups — the answer is likely, “Yes, you should use a third-party processor…for now.” But if you already have an established business (or you just bought an on-going business), then you probably should review your sales numbers before making a decision.

If you want to investigate merchant account providers, here are our top recommendations for the year for you to consider. We also have the complete list of the merchant account providers we’ve rated so that you can take a quick look as well.

Let us know about your experiences by leaving us a note below.

In Summary: How To Accept Credit Cards Without A Merchant Account: Your 4 Best Options

  1. Square: Best for taking in-person credit card payments.
  2. PayPal: Best for low-volume merchants.
  3. Stripe Payments: Best for international merchants who are tech-savvy or can hire a developer.
  4. Shopify Payments: Best for having the benefits of Stripe without the need for technical know-how.
Hsin-Wei Luang

Hsin-Wei Luang

Hsin-Wei is a freelance writer focused on small business and technology writing. Before becoming a writer, she worked as a techie lawyer for many years until she came to her senses. Now, in her spare time, she plays frisbee with her Mini Australian Shepherd dog.

Sources

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4 Comments

Responses are not provided or commissioned by the vendor or bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the vendor or bank advertiser. It is not the vendor or bank advertiser's responsibility to ensure all posts and/or questions are answered.

    Lawrence

    What about bad card history?
    Does that affect the third party processors?…

      This comment refers to an earlier version of this post and may be outdated.

      Emily Hale

      Hi Lawrence,

      In general, you face much fewer “hoops” to jump through when you sign up with a third party processor. Companies like Square, for instance, don’t run any credit checks before approving your account. However, I would urge you to read and understand the merchant terms. Accounts that have higher than normal chargeback rates or very inconsistent volumes may face account stability issues. Take a look at our post, What Is Square And How Does it Work? if you’d like to learn more about the risks and benefits of using a third party processor like Square.

        This comment refers to an earlier version of this post and may be outdated.

        Seth

        This is a very useful distinction. I see the examples of aggregators are PayPal Here and Square, which leads me to believe you’re talking just about the dongles. How would Stripe or Braintree fit in? Are they also aggregators who have a merchant account themselves on the back end (e.g., Chase doing the processing for Square)?

          This comment refers to an earlier version of this post and may be outdated.

          Dr Vincent McIntyre

          This is great information. I was about to sign a contract for mobile processing service with Bank of America for my business. Your knowledge and posted reviews has given us the ability to identify certain hidden clauses and omissions by the sales rep concerning the contract.

          Needless to say, your honest reports has helped us avoid a potental disaster!!

          Thanks so much
          Dr McIntyre

            This comment refers to an earlier version of this post and may be outdated.

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