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Third Party Merchant Accounts Described

What is a 3rd party merchant account?
A 3rd party merchant account can provide anyone with a means to pay others via credit cards. These accounts are not real merchant accounts but they act similarly.

How do 3rd party payment services work?
In this payment method the internet purchases are charged as if the 3rd party payment service is the seller. Though the actual merchant sets up his store with products and pricing, it is the 3rd party processor that is technically the seller. The actual merchant then becomes a supplier and drop shipper.

The differences
The main difference between 3rd party merchant accounts and a regular merchant account are that the merchants funds are processed through a large bank account and then dispersed to the individual merchants. This method of clearing and settling transactions skirts the rules established by Visa and MasterCard as well as state and federal bank regulations. Because of these practices 3rd party providers face potential challenges from state banking regulators. During the past two years, some states have questioned whether 3rd party providers are operating an unauthorized bank.
The second difference is that 3rd party merchant accounts require the shopper be sent away from the shopping cart for a short while during which the ordering will take place. Usually the 3rd party processor will put their logo and branding on the payment page which takes away from the overall flow and professionalism of the shopping cart.
The third difference is that 3rd party merchant accounts generally distribute funds only once a week or once a month versus merchant accounts in which this is done nightly.

What are the benefits of 3rd Party merchant accounts?
Generally third party merchant accounts are easier to get started with. The processor requires less personal information and generally have less strict acceptance criteria. In addition the startup fees are generally less and there is usually no monthly fee. The absence of a monthly fee makes these accounts attractive to smaller businesses which are unsure of monthly volumes.

What are the drawbacks of 3rd party merchant accounts?
Generally third party merchant accounts have higher transaction and discount fees. You should expect to pay about 5% of each sale for a 3rd party account versus as little as 2.19% for a regular merchant account. Buyers are less sometimes less confident in paying a 3rd party company that they know little or nothing about and they wonder why the store can't do their own credit card acceptance.

Is this right for my business?
If your business is located outside of the US, you sell risky items or you have had trouble getting approved for other merchant accounts this may be your only option to accepting credit cards. In this case go for it. If your business is brand new and your not quite sure if you can afford to pay a monthly fee you might want to try out payquake which offers a real merchant account and no monthly fee.

Final thoughts
Third party payment processors are a good alternative if all other options fail but they should not be your first choice simply because you may lose sales and consumer confidence and in the long run you will lose business.
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