What Is a Third-Party Payment Processor?

A third-party processor allows businesses to start accepting card payments immediately, usually at flat-rate fees.

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

Updated Jun 30, 2023 · 1 min read

Written by

Lead Writer & Content Strategist

+ more

Edited by

Managing Editor

+ more

SOME CARD INFO MAY BE OUTDATED

This page includes information about these cards, currently unavailable on NerdWallet. The information has been collected by NerdWallet and has not been provided or reviewed by the card issuer.

A third-party payment processor is a provider that allows a business to accept payments without opening its own merchant account, a bank account needed for holding money earned from card payments. These processors generally offer fast setups, charge flat-rate fees and process transactions from several merchants into shared merchant accounts to reduce operational costs.

» MORE: How to accept credit card payments

Square Square

5.0

NerdWallet rating

Starting At

2.6% + 15¢

Read Review

Apply Now

on Square's website

How a third-party payment processor works

After a third-party payment processor processes a card payment, it deposits the funds into an aggregate merchant account, an account that's shared among several merchants. The processor then deducts processing fees and transfers the remaining funds to the small business’s bank account.

The primary difference between a third-party processor and a merchant account provider is how quickly funds are available to the business. With third-party payment processors, funds can take a few days to transfer, whereas businesses with their own merchant accounts have faster access.

How many merchants share a third-party payment processor’s merchant account is up to the processor. Some can have thousands of merchants sharing a single account. Regardless of the number, reputable third-party payment processors track your funds and ensure you're paid correctly for each transaction.

» MORE: Best small-business apps

Third-party processors vs. merchant account providers

While third-party payment processors aggregate merchants’ funds into a larger account, merchant account providers set up individual accounts for each merchant. These different options create distinct experiences for small businesses and affect aspects like the approval process and pricing structures.

Here’s how the two options compare in several areas:

	Payment service provider	Dedicated merchant account
Merchant account setup	Hundreds or thousands of merchants share a single merchant account.	One merchant per account.
Approval process	Typically instant approval.	Involves verification and compliance process that may take weeks.
Account stability	Higher risk of sudden holds, freezes or termination.	Stable with little risk of termination, holds or freezes.
Pricing	Typically fixed, some custom plans available.	Typically more flexible and customized to your business needs.
Processing volume	Strict limits on transaction size and processing volume.	Negotiable limits on transaction size and processing volume.

Pros of using a third-party processor

Third-party payment processors can offer businesses several benefits, including:

Easy setup. With no merchant account to worry about, all a business needs to do is set up an account with the third-party payment processor, which is often a simple process.
Fewer fees. Unlike individual merchant accounts, third-party processors generally don't charge setup fees or set monthly minimums.
Flexible terms. While merchant service providers often require contracts — sometimes month-to-month or even a few years — third-party processors often have better terms or require no contract.
All-in-one solution. Many third-party payment processors offer businesses the technology to accept payments in person and online and point-of-sale software to get going quickly.

Cons of using a third-party processor

Potential issues with using third-party payment processors include:

Higher costs, in some cases. Because third-party payment processors are paying other fees on your behalf, they often come with higher transaction fees than having your own merchant account.
Limited device choice. Many third-party payment processors have their own credit card readers and don't work with other brands’ devices.

Higher risk of frozen accounts. If a third-party payment processor suspects you have fraudulent transactions, it can freeze your account and hold your funds while it performs an investigation — and you’re stuck without your funds in the meantime.

Best third-party processors

Square

Square offers competitive pricing with a variety of hardware and a feature-packed POS, making it a good option for small businesses. Transaction fees start at 2.6% plus 10 cents for in-person swipes, taps and dips. You won't pay a monthly fee to use its basic services, which include POS features for reporting options and inventory management. The hardware options include hand-held readers and countertop registers.

Square Payment Processing

Learn more

on Square's website

Toast

Designed for restaurants, Toast's hardware makes it easy for servers to enter orders and take payment at customers’ tables and includes self-ordering kiosks for less traditional formats. There’s also an integrated kitchen display system. With online ordering options and a robust POS, it stands out as a great option for restaurants and cafes. The platform has starter kits available if you don’t want to build your own setup and tiered pricing for tacking on extra hardware or additional locations.

Toast POS

Shop Now

PayPal

PayPal’s commercial account includes its own merchant account, so you don’t have to set up your own separate account. Its fees start at 2.99% plus 49 cents for standard debit and credit card transactions, so slightly higher than Square’s; however, PayPal is a well-recognized and popular service that integrates well with many POS systems, including its own, PayPal Zettle. If you use its POS system, rates start at 2.29% plus 9 cents.

Stripe

Stripe is another common payment services provider that accepts virtually every payment type, integrates with other services like Shopify and offers 24/7 customer support. Its buildable plans are pay-as-you go, so there are no monthly fees. Pricing starts at 2.9% plus 30 cents for standard card transactions.

Stripe