Even the most successful businesses have to deal with the usual issues that come with running a prosperous company. One of the many concerns that small and medium-sized businesses face is payment processing.
For many businesses, using a third-party payment processor outside your point of sale can help simplify your revenue stream but they aren’t for everybody. Instead of having a merchant account, which can come with setup fees, your business would utilize a third party that has a relationship with a merchant services provider, such as Square.
However, just because third-party processors are available, that doesn’t mean they’re the right choice. For most smaller businesses, the negatives can easily outweigh the positives. The biggest negative with processing through a third-party payment processor is the lack of security.
When you have your own dedicated merchant account, your company has gone through the process or underwriting and you are protected against fraudulent transactions. You also know exactly when the funds will hit your account. If you’re using a third-party payment processor, though, you won’t have the benefit of this security. Transactions can be held whenever the processor might feel the payments are fraudulent, which makes it impossible to accurately show your cash flow. This, for many businesses, is the reason they veer away from a third-party processor.
Using a third party for a merchant account to process credit cards can also cause other issues. Now armed with a manual pin pad to swipe cards, businesses scan the items, choose pay, then the software will give the order total before the clerk manually punches in the dollar amount via the pin pad before the card is swiped. Once the sale is approved, the clerk must return to the point of sale and choose which credit card the customer used. All of these steps double the checkout time and can also create errors as clerks can sometimes mistakenly invert numbers.
Another issue? At the end of the day you now have two systems to run your Z out store close on and the pin pad has to be manually batched to send the sales to the bank. All in all, you could be losing money and time by using a third-party processor.
Many fledgling business owners may think a third-party processor is the way to go because they’re told it’s easy to sign up for and they won’t have to pay any startup or monthly fees. While that might be true, we encourage you, however, to tread lightly and remember that with a third-party processor money still has to be made somewhere, most often in their per transaction percentage fee. This fee is considerably higher than it would be with a dedicated merchant account, which means if you are processing high volume, a third-party payment processor would be more expensive.
Many budding entrepreneurs, especially those who are just starting out, wonder whether a third-party payment processor is the right fit for them. After all, they hear that sign up is easy and they won’t have to pay any fees. However, it’s important to dig a little deeper to understand who third-party payment processors truly work for and when they are necessary.
There are a variety of reasons a merchant might choose to go with a third-party payment processors. Some companies might not be able to afford the monthly fees associated with dedicated accounts. Similarly, SMBs processing very low volume can often not afford the setup costs of such an account. This makes a third-party payment processor a good solution for your business when you are just starting out and do not anticipate processing a high volume of credit card transactions.
It is important to remember, however, that while you do not pay startup fees or monthly fees with a third-party payment processor, they still have to make money somewhere. They make up for their lack of fees in their per transaction percentage fee. This fee is significantly higher than it would be with a dedicated merchant account. This means that if you are processing high volume, a third-party payment processor will more expensive for you.
Do I Need a Third-Party Payment Processor?
Just because third-party payment processors are available doesn’t mean they’re necessarily the right choice. For most small and medium-sized businesses, the negatives can outweigh the positives when it comes to a third-party payment processor. If your company is at the point where the startup costs are negligible and your stream of clients is large enough to quickly outweigh those costs, a merchant service provider that offers a dedicated merchant account is probably your best bet. Additionally, working with a provider such as Fattmerchant means you will never see any startup costs and the 0% markups will counteract the monthly membership.
The biggest downfall with processing through a third-party payment processor is the lack of security. When you have your own dedicated merchant account, your business has gone through the process of underwriting and you are protected against fraudulent transactions and you know exactly when to expect the funds in your account. If you are processing with a third-party payment processor, however, you do not have this security. Transactions can be held any time the processor feels that the payments might be fraudulent. This makes it impossible for you accurately depict your cash flow and for many SMBs this is a deal breaker.