Table of Contents
Looking for a one-stop solution for info on third-party payment processors? Here is a guide on its advantages, disadvantages, features and how to choose.
Here’s a statement you might agree with. Running a business is a strenuous task. Handling the payment processing of your business is arguably the hardest.
Digital payments are taking the payments industry by storm. After all, the global transaction value of digital payments was $5.2 trillion in 2020. 63% of those payments are sourced from digital commerce. Resultantly, choosing between a merchant account or a third-party payment processor becomes imminent for merchants.
Setting up a merchant account for a small business with limited transactions might not be the best way to go. It can be cumbersome and expensive to handle. Instead, opting for a third-party payment processor can be a better alternative.
Pro Tip: What is Payment Gateway?
This article discusses the meaning of third-party payment processor and their features. We will also be uncovering how you can choose a 3rd party payment processor suited to your needs.
What is Third-Party Payment Processor? Third-Party Payment Definition
To decide if your business needs a payment processor, you first need to understand what they are. Moreover, you need to know how they operate.
In layman’s terms, a third-party payment processor eliminates the need for your business to set up a merchant account. It gives you easy access to your card-based incoming payments.
Let us dive deeper.
Suppose you are a small business. Using a merchant account for a small set of transactions won’t bode well for your finances. Instead, you can resort to outsourcing. More specifically, a 3rd party payment processor for handling your monetary transactions.
It will allow you to receive online payments effortlessly without setting up your merchant account.
How Does Third-Party Payment Processor Work?
A third party payment processor does not send money to your merchant account. Instead, it uses its merchant accounts to receive funds. Thereafter, they deposit it into your bank account.
This means you can use a merchant account even though you don’t own one.
Let us understand how a third-party payment processor works in detail.
Authentication of Card
The payment processor starts by authenticating the cardholder’s account number.
This is to verify if the card is valid and a part of a 3D secure platform. Here, the merchant server software contacts the card network for confirmation.
Now, the merchant plug-in sends the Payer Authentication Request/Response (PAReq/PARes) to the Access Control Server (ACS) to start authentication. The ACS is a server deployed by the Issuing bank.
Here, the cardholder’s CVV is verified.
If the authentication is successful, an Accountholder Authentication Value (AAV) is generated. The AAV is sent to the merchant within the PARes message. Consequently, this AAV is sent to the acquirer by the merchant. Thereafter, it is forwarded to the Issuing bank. It is sent as a part of the authorization request.
ACS providers have to present AAV values for all attempts.
If the Authentication determined by Issuer’s ACS is successful, the transaction Status is Y. (PARes = Y)
If the authentication determined by Issuer’s ACS fails, the transaction Status is N. (PARes = N)
However, it is possible that the authentication could not be performed due to various reasons. Maybe the ACS was not able to handle the authentication request message. Alternatively, it is possible that there was a system failure. Here, the transaction Status is U. (PARes = N).
Once the authentication is successful, the payment authorization is carried out. The merchant sends a request to the acquirer or the 3rd party payment processor. For instance, Cashfree. Thereafter, the third-party payment processor submits the request to the credit card issuing party or the account holder’s bank.
If funds are sufficient, authorization is made and funds are deducted. In the case of a debit card, the credit line is adjusted for the amount of the sale.
After authorization, the card network informs the Issuer bank and Merchant plug-in that the card is authorized. Thereafter, funds are transferred from the customer account to the merchant account.
As mentioned above, during authorization, funds are deducted. So, the respective amount is deducted from the credit line/account balance and transferred to the merchant’s account.
The time frame between authorization and capture might vary from one PSP (payment solutions provider) to another.
Third-Party Payment Processor Example: Third-Party Payment Processors in India
India houses a wide range of entities offering third-party payment processors. Some examples are Cashfree, Billdesk, PayPal, CCAvenue, and Payu. Most of these provide a maximum settlement time of 3 days and support all major payment options prevalent in the country.
Now that we’ve covered the concept, let us take a look at the advantages and disadvantages.
Benefits and Limitations of Third-Party Payment Processors
Incorporating a 3rd party payment gateway costs a fraction of setting up a merchant account. But that is not the only benefit you get by partnering with them. Let us list some of those benefits.
Advantages of Third-Party Payment Processors
Here are the benefits of utilising a third-party payment processor for your business –
No PCI Compliance Fee
With tpp third-party payment processors, you need not worry about the safety of your payments.
They maintain the highest security measures to keep customer data safe. Hence, do not have to stress about PCI compliance or any other fees on a standalone basis.
Did you know that if you invest $1 in UX, you can get results for $100? That’s a 9900% ROI!
A Tpp payment processor usually offers optimised checkout pages. In most cases, they are light for slow internet connections and work well on mobile. This results in a faster checkout experience and lower drop-offs.
Handling Disputes and Refunds
Disputes and refunds are a part of everyday business life. More importantly, they are essential for a good customer service strategy. In fact, 95% of consumers believe that customer service dictates their choice and loyalty to a brand.
A 3rd party payment processor handles monetary transactions on your behalf. It also includes managing disputes and refund requests raised by customers. Their efficiency in managing customer grievances well helps your business prosper.
Online transactions involve an element of risk since buyers and sellers don’t know each other.
Tpp payment processors handle high transaction volumes on a daily basis. Moreover, they have engines to detect potentially risky transactions. Flagging and declining such fraudulent transactions insulates your business from risk and financial loss.
Faster Turnaround Time
A business needs to start accepting payments as the earliest. But setting up a merchant account is a lengthy and complex process. If the vendor considers you risky, he may even reject your application. In contrast, a 3rd party payment processor ensures hassle-free setup and takes a fraction of the time incurred otherwise.
Moreover, it ensures the approach is holistic and seamless. In fact, some online third-party payment processors (like Cashfree) don’t charge setup and annual maintenance costs, further enhancing the overall value of the business.
Everyone likes to partner with trustworthy organisations. It not only works this way for businesses but for customers too. If they find their most trusted payment partner listed on your website, there is a higher chance of trusting you and your offerings.
With online third-party payment processors, you benefit from partnering with the best players in the payment landscape without shelling out exorbitant charges.
Diverse Modes of Payment
It will allow you to accept payments through diverse modes. After all, customers prefer to pay with diverse modes of payment. This can be cards, UPI, wallets, EMI, Pay Later, etc. In fact, recent reports state that the preferred globally preferred modes of payment are eWallets (36%), credit cards (23%) and debit cards (12%). In India, UPI is increasingly becoming the preferred mode of payment beating debit and credit cards.
International Payment Support
The support for international payments is one of the major advantages. It enables you to sell without thinking of location restrictions and cater to a broader audience. With Cashfree, you get support for over 30 international currencies, allowing you to sell to a global audience.
Faster Payment Settlement Cycle
A Tpp payment processor takes a while to transfer the customer’s funds to your account. This is known as the settlement cycle. Choosing a third-party payment processor would ensure a faster payment settlement cycle compared to the traditional method.
A lot of online 3rd party payment processors provide 24*7 support to their partners. This ensures the timely resolution of issues and an improved customer experience.
Furthermore, they seamlessly integrate with your existing software.
They also have the inbuilt ability to provide you with payment analytics to improve business decision-making and better cater to your customers. For instance, you can get reports of your previous transactions and set filters like transaction volume, date and time, mode of payment etc.
Personalised Checkout Experience
80% of consumers agree that personalized experiences increase their chances of making a purchase. Each payment processor offers a unique experience. This is one of the critical factors in improving the overall customer experience. It enables you to create a personalised checkout experience and enhance the value quotient for the client.
High Payment Success Rate
Third-party payment processors usually have in-built rerouting capabilities. Basically, they have multiple acquiring banks (acquirers). Now, various acquirers might have downtimes due to maintenance or high traffic. The processors route the transaction to the best-acquiring bank to ensure maximum payment success.
Limitations of Third-Party Payment Processors
Every coin has two sides. Partnering with a third-party payment processor is no different. These come with disadvantages, which you must keep in mind before drawing up a contract with them.
Less Scope for Customisation
A dedicated merchant account may enable you to make the minutest of tweaks. Partnering with third parties leaves less scope for customization. There are constraints pertaining to the checkout pages, pricing, and other integrations you seek.
Higher Setup Cost
A 3rd party payment processor entails a high setup cost compared to the traditional way. However, it saves you about a year of testing and choosing all the tools you would require for your payments.
Using Multiple Third-Party Payment Processors
A lot of merchants choose to use multiple third-party payment processors for their payment needs. One of the biggest advantages of using it is payment routing.
Payment routing means that transactions are forwarded to the acquirer that is most likely to approve them. Moreover, the transactions go to the acquiring bank that supports “failover transactions”. Hence, if one acquirer declines a transaction, another bank might approve it.
This results in higher payment success rates and a higher percentage of approved transactions.
However, every business has specific needs according to which they may want to route their transactions. Here are some of them.
MDR: MDR or Merchant Discount Rate is the fee that the merchant pays when a customer makes a payment on his website using a card. A merchant may want to route the transaction based on the MDR offered by the third-party payment processor.
Balancing Load: A business might have multiple peak seasons in a year. So it becomes imperative for a merchant to route the transactions to a processor that can handle higher loads with ease.
Business Use Cases: Many payment processors offer unique solutions that cater to specific industries. Hence, a merchant may route transactions related to specific industries to the respective processor.
Downtime: Downtimes are a part of a payment processor’s operations. So, merchants need to consider a processor that has dynamic routing capability.
Payment Success Rate: The success rate of different processors may vary. The merchant may choose to route the high-volume transactions to the processor that has a record of success with a large number of funds.
How To Choose a Third-Party Payment Processor?
Here are the factors you should take into consideration before choosing a 3rd party payment processor.
Your software needs are directly proportional to the size of your business. The larger your organisation, the more sophisticated third-party payment processor you would require.
Volume of Transactions
Some businesses have few high-value financial transactions. On the other hand, others have a high volume of low-value ones. So, you can look for a processor capable of meeting your transaction volume needs easily.
3rd Party Payment Processor Policies
Every business software comes with its set of terms and conditions. You must garner an in-depth understanding of what the policy document states, before finalising a processor for your organisation.
A payment processor is an integral part of your online business. So seamless integration is an important criterion while looking for the same. It includes the ability to collate information from various sources and feed data into the accounting software.
Every business has specific needs. For example, you may need support for Pound-based transactions, or you may have a large amount of UPI transactions. Make sure that you choose a payment processor that is in sync with all your business needs.
Excellent Customer Support
Even when you sleep, your store is open to all online customers. So it is imperative for you to choose a payment processor that offers reliable support for its customers. It will enable you to reduce downtime and ensure that you can continue your usual business without any hiccups.
Most third-party payment processors have an upper limit on transactions per month. So make sure that your chosen processor is in line with your transaction limit requirements.
There are businesses that offer subscriptions or memberships to their users for exclusive perks. If your business is one of them, it becomes imperative for you to offer an automated billing facility to your customers. Look for a processor that supports recurring billing, UPI Autopay, and other related services.
Third-Party Payment Processor Regulation
The rules and regulations for a third-party payment processor vary from one country to another. In India, there are certain rules that have to be strictly adhered to.
We have mentioned them below.
Third-party payment processors are required to reach and maintain a specified net worth. Essentially, net worth is a sum total of free reserves, convertible preference shares, paid-up equity capital, etc.
In India, the existing payment processor has to achieve and maintain a net worth of at least ₹15 crores by March 31, 2021, and at least ₹25 crores by March 31, 2023.
For new entrants in the market, the rules are a bit relaxed. They need to have a net worth of a minimum of ₹15 crores at the time of application. However, they have to achieve and maintain a net worth of ₹25 crores after March 31, 2023.
Online payment processors are required to handle funds. So, they require authorization from RBI. They have to apply to the Department of Payment and Settlement Systems (DPSS) for the same.
Prevention of Money Laundering
Payment processors have to undergo risk assessment procedures. This is done to identify any threats to the integrity or confidentiality of assets from A business compliance prospect.
Moreover, they have to uphold the Know Your Customer (KYC) / Anti-Money Laundering (AML) / Combating Financing of Terrorism (CFT) guidelines issued by RBI. They also have to follow the Prevention of Money Laundering Act, of 2002.
Payment processors have to ensure compliance with Payment Card Industry-Data Security Standard (PCI-DSS) and Payment Application-Data Security Standard (PA-DSS).
They also have to run background checks on merchants before onboarding them. Most importantly, they have to ensure that these merchants do not have any intentions to sell fake products or dupe customers. Furthermore, they may organize security audits of merchant sites to make sure that they are not saving customer card-related data
They also have to prevent and detect fraud through proper data security infrastructures. Furthermore, they have an obligation to mitigate risks for the security of payment systems by following information security policies
They have to report any cybersecurity breach to DPSS and CERT-In (Indian Computer Emergency Response Team).
Head over to this blog for more information on regulations for third-party payment gateways and third-party payment processors.
Pro Tip: Know the Types of Payment Gateways!
Do You Need a Third-Party Payment Processor?
So what’s our verdict? A third-party payment processor is a way forward in your early business days. However, it is important to choose one that covers all your business needs. So, be aware of your requirements and the existing regulation, and consider all aspects before making an informed decision.
We hope this blog was one step forward in that direction. 🙂