The third-party payment processor market is growing at a huge rate; it is expected to reach $71.1 billion by 2031. Known as TPPPs, these have completely changed how businesses not only handle transactions but move through their entire payment processing journey.
It’s important to learn about TPPPs to have a strong grasp of what they can do, whether they’re the right option for your business, and overall payment processing costs. In this guide, that’s exactly what we’ll cover, giving you all the information you need to make a solid decision regarding third party payment processors.
TL;DR
- Third-party payment processors (TPPPs) simplify transactions between businesses and customers by handling payments securely and efficiently.
- Choosing the right TPPP requires careful evaluation of business needs, integration capabilities, and risk tolerance.
- While TPPPs can reduce infrastructure costs and speed up implementation, hidden fees, contract terms, and operational trade-offs must be carefully assessed.
- Emerging trends like embedded finance, AI-driven fraud detection, and real-time payments are reshaping the TPPP landscape.
- Compliance with evolving global regulations is crucial. Businesses must balance innovation with legal obligations and data protection standards.
- TPPPs now offer broader services beyond payments, including analytics, customer insights, and financial products, forming a complex digital ecosystem.
The Evolution of BNPL in E-commerce
First things first, what is a third party payment processor, or TPPP? This is a financial entity that acts as an intermediary and allows businesses to accept electronic payments without having their own merchant account. As we live in an increasingly digital world and economy, TPPPs offer a streamlined payment approach and handle all the complicated operations so businesses can focus on their regular day-to-day functions.
In effect, TPPPs are a connection between merchants, banks, and card networks, transferring funds easily and smoothly. They generally have a ‘shared merchant account’ model, so they have several businesses under just one master account. In addition to this core service, TPPPs usually offer other services, such as chargeback prevention, reporting tools, and fraud detection measures.
From Layaway to Digital Instalments
It’s useful to understand how TPPPs work, so you can decide whether this is the right route forward for your business. However, third party payment providers usually have complicated structures, along with connections to other financial entities. This complex structure is deliberately designed to handle a large amount of transactions not only efficiently, but also securely.
There are many big-named TPPPs that you may not know about, such as Stripe, yet these are highly restrictive to high-risk merchants. So, if you are in the high-risk category, PayCompass is a smooth and stress-free Stripe alternative.
Aggregator Model
When exploring how third party payment systems work, the aggregator model comes into play. This allows processors to onboard businesses as quickly and efficiently as possible. However it also has its challenges, particularly in terms of managing risk and ensuring compliance.
The table below gives some useful information about the pros and cons of the aggregator model.
Aggregator Model Pros | Aggregator Model Cons |
Quick merchant onboarding | Increased regulatory scrutiny |
Simplified account setup | Higher potential for fraud |
Lower entry barriers for small businesses | Limited control over individual merchants |
Shared risk across merchant pool | Potential for account instability |
API Integration
Many third party credit card processors utilize API integration to ensure a smooth connection between e-commerce platforms and the payment processor itself. This can also be used to connect with business management software. Such integration is key for real-time payment processing, boosting the general efficiency of the business, and for data synchronization.
If you are looking to choose a TPPP, it’s vital that you do some research beforehand and understand how they deal with recurring payment processing. This can often be a challenge, and if your business uses this model, it should be a first port of call in making your choice.
Risk Management in the TPPP Ecosystem
Third party credit card processors must have robust risk assessment procedures.
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We’ve already mentioned that the aggregator model has challenges in terms of identifying risk. To overcome this, many third party payment processors have developed in depth risk management strategies to not only identify risks but overcome them with greater ease.
Machine learning algorithms are key here, helping to analyze transaction patterns and quickly detect any potential anomalies in real-time. Multi-layered fraud detection systems are also used, combining both rule-based filters with predictive models and AI. Of course, the types of fraud constantly evolve, so systems need to do the same to regularly update and recognize emerging threats.
Merchant Vetting
Another process that all third party payment providers use is merchant vetting. This ensures the payment ecosystem remains intact and helps with regulatory compliance. To do this, automated systems are used to cross-references information from merchants with data included on countless watchlists and databases. On an advanced level, this also includes analyzing individual merchants’ online presence and their social media activity, also extending to customer reviews. Additionally, some third party payment processors also use predictive models which help them to quickly identify the possibility of future chargebacks or any fraud based on the characteristics of each merchant.
Transaction Monitoring
A 3rd party processor is also likely to use continuous transaction monitoring. This is a vital tool to help in detecting and parenting fraud, and money laundering and any other nefarious activity by criminals. However, it’s an extremely complex process and machine learning algorithms are used to analyze huge amounts of data in real-time.
At PayCompass, our merchant accounts all include real-time transaction monitoring, helping to provide an additional layer of fraud protection.
The video below is an interesting watch, giving in-depth information on how transaction monitoring works.
The TPPP Selection Process: A Strategic Approach
From everything we’ve talked about so far, it’s probably unsurprising that choosing third party payment systems requires careful thought. This isn’t a decision to simply jump into without first having all the information to hand. After all, not all third party payment processors are the same, and some may be more suited to specific types of business than others. Additionally, if your business works across borders, understanding the nuances of multi-currency payments can be crucial when selecting a TPPP.
Compatibility Assessment
Before settling on a third party payment processor, you must do a compatibility assessment. This is a crucial step as it helps you understand whether or not the processor sifts your needs and how they align with not only who you are now, but who you’ll be in the future as you grow.
Look closely at the TPP’s supported payment methods and the currencies they allow. This will give you key information on whether it supports your target markets. You should also look closely at their reporting and analytics capabilities to ensure they can give you all the information you’ll need. Finally, does the TPPP integrate with all the other business tools you currently use, such as a CRM system or your accounting software?
The table below simplifies all of this into an easy checklist:
Compatibility Factor | Questions to Consider |
Payment Methods | Does the TPPP support all payment types your customers use? |
Currencies | Can the TPPP handle multi-currency transactions if needed? |
Integration | How easily does the TPPP integrate with your existing technology? |
Scalability | Can TPPP handle the expected transaction volume growth? |
Analytics | Does the TPPP provide the level of reporting detail you need? |
Technology Stack Evaluation
The third party payment processor’s technology stack is something else to look at as this goes a long way in ensuring long-term scalability and compatibility. This means understanding the TPPP’s use of emerging technologies, its overall infrastructure, and how it uses new innovations.
Cloud computing is something to look at first, as this can give you details about reliability and scalability. However, you should also investigate how it implements machine learning and AI to protect against fraud. Next, do they use blockchain technology? This has many potential uses in payment processing and it’s key to understand how each TPPP implements and uses it.
Additionally, if you’re a high-volume merchant, it’s also important to look at how each TPPP deals with a high number of transactions.
Business Model Alignment
Does your business model align with the TPPP? Understanding this is key to creating a solid partnership now and in the future. Look at pricing structure, growth strategy, and revenue model to inform you on this subject. Each third party payment gateway will have slightly different information here and clarity is key. All of this needs to be in alignment with where your business is now and where you see it going.
Regulatory Compliance and Security
Third party payment processors should help businesses follow industry-specific regulations.
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Every industry has a range of regulations businesses must follow and this is a key aspect for every single business. In addition, security is critical too, so when you choose between third party payment processors, these are two aspects you must consider carefully.
PCI DSS (Payment card Industry Data Security Standard) is one regulation that you should certainly look at in terms of compliance efforts. Assess each TPPP and how it approaches data protection, including how it uses encryption and how it handles data breaches. It’s also useful to look at historical information regarding compliance and regulatory changes. For healthcare businesses, another additional consideration is how each TPPP handles HIPAA-compliant credit card processing.
Cross-Border Compliance
Many businesses trade across borders thanks to the online world, so choosing a TPPP that makes this easy is another important step. Even if you don’t trade internationally yet, question whether you will in the future as this is important in terms of growing with your chosen processor.
Ask yourself how the 3rd party processor navigates international regulations that often vary from country to country, and how they handle currency conversions. For businesses that trade within the EU, GDPR is one regulation that must be adhered to. So how does the TPPP handle this? Looking at each processor’s experiences in dealing with payment regulations and tax requirements from country to country gives key insights.
The Hidden Costs and Benefits of TPPPs
When choosing between third party payment processors, another aspect to consider is hidden costs. However, you should also explore any hidden benefits too. At PayCompass, we don’t believe in hiding anything; we’re upfront and clear about our fees and costs, and we communicate any changes with each business ahead of time.
Opportunity Costs
It’s true that using a third party payment processor can affect your ability to negotiate with banks or card networks directly. Over time, this could mean higher long-term costs or even missed opportunities for solutions to problems. This is one potential issue you should consider carefully and weigh it up against the benefits of using a TPPP.
A good place to start is by analyzing the potential cost savings that may come from directly negotiating interchange rates with card networks. Will it save you considerably or is the difference negligible? Then, look at the value of building direct banking relationships in terms of any future financing options. Does it leave you less options in the future? Finally, understand the level of flexibility you may lose in terms of customizing payment flows and settlement processes. This information will help you decide whether that particular TPPP is the right choice for you.
Pricing Flexibility
Many third party payment providers have specific pricing models and these may not be suitable for every business. For instance, if your business deals with high volumes or you have a particular type of transaction pattern, such as continuity subscriptions, you may find pricing inflexibility a barrier. However, this may not be the case for everyone.
Brand Control
For some businesses, relying completely on a TPPP may give less control over the entire payment experience. Over time, this could impact your brand perception and ultimately affect customer loyalty. When making a decision, think carefully about how much control you’re willing to give up to have the convenience of using a third party payment processor.
Ecosystem Benefits
Many third party payment systems offer many features and services that go beyond regular payment processing. Understanding what each TPPP offers helps inform your decision and understand how much benefit will come to your business.
Data Analytics
Many TPPPs offer advanced data analytical tools that can give you key insights into many areas of your business, including sales trends, customer behavior, and operational efficiency. You can use this information to make changes and improve performance.
Marketplace Access
Many third party payment processors also give access to their whole merchant ecosystem, which can create new opportunities. It can open up partnership chances and new sales channels that could be potentially profitable over time.
To understand whether this is possible from your TPPP, look at their merchant ecosystem and evaluable its size and relevance in relation to your business. Think about the potential for upselling or cross-selling within their marketplace and whether there is the option for partnerships and collaborations.
The Future of TPPPs: Trends and Innovations
Third party payment providers are evolving as new technologies appear, as well new trends in customer preferences. It’s useful to understand these patterns as it can help you choose a TPPP that will suit you over the long-term.
New technologies can change the future of third party payment systems.
Source: unsplash.com
Blockchain and Decentralized Finance (DeFi)
Blockchain technology and decentralized finance (DeFi) are two technologies you should look for when choosing a TPPP. These both offer opportunities for increased security, cross-border transactions, and transparency. Many TPPPs are already looking at how these can be implemented, so it’s useful to look at current or planned uses of these technologies.
Smart Contracts
Within the blockchain sphere, smart contracts can be used to automate and streamline several different parts of the payment processing arena. Not only can smart contracts reduce costs over time, but they can also make the entire process much more efficient and less error prone compared to manual options.
Tokenization
Another key part of the blockchain technology subject is tokenization and these can boost security significantly. When choosing a 3rd party processor, look at whether they currently use tokenization or if they’re planning to.
Artificial Intelligence and Machine Learning
AI and machine learning are two technologies that are currently used in the payment processing world and they’re showing great promise in even more aspects. AI and machine learning can be used in risk management and fraud detection, and it’s important to look at TPPPs and how they utilize these. Also look at how they use AI in their customer service approach, while also exploring how they plan to use AI in areas such as personalized recommendations or dynamic pricing.
Predictive Analytics
Many third party payment processors are using advanced AI models to help predict and then prevent fraud with a much higher degree of accuracy. This holds great promise in reducing false promises and ensuring a smoother process for customers.
When choosing a TPPP look at how they use AI in this regard and how they update and improve their predictive technologies. It’s also important to understand the explainability and transparency of their AI models.
Dynamic Routing
Machine learning algorithms can also be used to boost payment routine in real-time, taking into consideration things like speed, success probability, and cost. Using machine learning in dynamic routing creates a more efficient process and can save money over the long-term. When choosing a TPPP consider their approach to balancing the entire cost optimization picture and how they provide transparency in routing decisions.
The Human Element: Building Trust in a Digital Payment Ecosystem
In today’s digital age, technology is certainly important and it’s helping to reshape many parts of the payment processing world. However, that doesn’t mean the human touch is abandoned. There are many areas where the human element can play a part, especially in building trust in customer relationships. Let’s explore this interesting subject in detail.
Merchant Education and Empowerment
Many of the top third party payment processors are starting to utilize merchant education programs. This helps provide detailed training in financial literacy and business optimization. It’s a good idea to look at the available educational resources each TPPP has, such as tutorials, documentation, and webinars. Then, look at how they help businesses understand this information and use it to optimize their operations. For instance, a TPPP may offer training to businesses on how to reduce credit card processing fees or similar subjects that will allow for money savings over time.
Peer Learning Networks
Peer learning networks are another feature to look for when choosing third party payment providers. These are ideal for creating a community of knowledge sharing people within your specific industry.
Customized Growth Roadmaps
Many TPPPs are also choosing to use AI and human expertise to create a personalized plan to help merchants grow over time. This includes advice on diversification, expansion, and financial management.
Trust-Building in a Digital Age
As the world around us continues to digitize, it’s important for third party payment processors to build trust with merchants. While they’re using technology to do this in some ways, it still comes down to the human touch.
Transparency Initiatives
Transparency initiatives are increasingly used to provide access to fee structures, decision-making processes, and processing times to the highest degree of accuracy. This level of openness helps to develop trust and shows customers that there is nothing being hidden.
When examining this, look at dashboards or tools that show real-time processing times and fees. You can also look at each TPPP’s transparency around potential fee changes or pricing structures, while also assessing how they communicate about downtime and general system issues.
Human-AI Collaboration
Despite AI’s power, there is a place for collaboration and this hybrid approach is increasingly used in customer service. Many third party credit card processors use AI-powered chatbots alongside human experts, with the chatbot dealing with simple issues and referring more complex problems to in-person staff.
Learning Recap
Our guide to third party payment processors highlights the complex nature of these entities and that they offer far more than just payment processing services. It’s important to remember that just as every business is unique, TPPPs are too, and there is no ‘one size fits all’ option. It’s vital to take your time, assess each feature, and decide whether it aligns with not only where you are right now in your business approach, but where you’re planning to be in the future. When you do this, you go a long way to boosting your overall business survival rate and ensuring you grow.
Technology is playing a big role in exactly what third party payment processors can do, yet there is still a need for the human touch in building trust and maintaining relationships. When making a choice, look for examples of third party payment processors that combine both technology and solid features and weigh it all up to find a suitable solution for your needs.
At PayCompass, we offer tailored high-risk merchant accounts designed to solve the problems that high-risk merchants face on a regular basis. We’ve already talked about our chargeback prevention and fraud protection, along with some of the other features we offer. What’s clear is that we are committed to helping find the smoothest payment processing journey possible, leaving you free to do what you do best – running and growing your business.
