09.17.03
 By
Mel Davey
3rd party processing is a service provided by a third party for facilitating
a credit card transaction between customer and merchant. Before the
Internet, third party processing was seldom used. With the lure of
the Internet, small and home businesses going on-line have had to
find ways to take credit cards in order to remain competitive.
Rather than going to the expense and hassle of getting a
merchant account from an acquiring bank, Internet merchants frequently
use a third party to provide the credit card transaction part of their
business activity. The third party collects the funds from the customer’s
credit card account and at some subsequent time makes them available
to the merchant.
There are advantages, disadvantages, and pitfalls to using a third
party processor. The major advantage is cost. It’s only reasonable
for new on-line merchants, facing an uncertain amount of business
activity, to avoid overhead until seeing how things go. Third party
processing offers this opportunity. Add to cost the daunting tasks
of setting up a financial gateway, providing a customer credit card
information form with error checking, implementing secure storage
of sensitive information, and integrating all of this with the storefront,
and for many new merchants, getting a merchant account isn’t a viable
alternative. |
Typically, the monthly out of pocket fixed expense with a merchant
account will be around $50.00 at the low end and can run to several
hundred dollars. This includes statement fees and a gateway charge.
In addition, there will be a per transaction fee of about 35 cents
and a discount charge on sales of around 2.9%. Make 100 sales for
a total of $5,000 each month and your out of pocket cost of taking
credit cards will be at least $230. That’s about 5% of sales. You
should expect to pay a third party processor a little more because,
after all, you’re avoiding all of that nasty administrative and maintenance
stuff. A good, reasonably priced, third party processor will make
sense on sales up to about $10,000/month and in some cases, much more.
It’s common for a merchant to stay with a third party processor even
though the business grows beyond the level that would justify getting
a merchant account.
The disadvantage of using a third party processor is entirely dependent
on the level and quality of service that the processor provides. Every
card transaction involves a merchant account at an acquiring bank
and a customer’s account at the bank that issued the card. This is
no different when using a third party processor; you are using the
processor’s merchant account. Before going further though, it’s instructive
to review one of the hazards of taking credit cards.
As a card holder you probably know that it’s pretty easy for you to
call your bank and question or dispute a charge. If you dispute a
charge, for instance you claim the charge wasn’t authorized or you
claim the merchandise was never received, was not merchantable, or
was misrepresented, and your bank thinks your claim is reasonable,
your bank will immediately reverse the charge, deducting the amount
from the relevant merchant account before the merchant account owner
even knows there is a dispute. This is called a chargeback. The merchant
account owner must dispute this claim in order to get their money
back. Disputing the claim will require documentation in the form of
a purchase order, a shipping invoice, proof of delivery, and possibly
product data sheets. If this evidence isn’t forthcoming, the merchant
account owner is out the money and a chargeback fee of around $18.
On Internet transactions, many banks will not even entertain a dispute
response where a claim of “charge not authorized” is made and there
was no address verification in the credit card process.
You can probably see where this review is leading. The cards are stacked
in the customer’s favor in credit card transactions. If you are processing
ten or more orders a month and haven’t had a chargeback yet, over
the next ten months you will! It is incumbent on the owner of a merchant
account to have available good and complete records of every transaction
or else face the consequences of a disputed charge.
This means when you select a third party processor and use their merchant
account, you want to be darn sure that they are able to and will dispute
claims because you know that they are not going to eat the loss. They’re
going to deduct the sales amount and fees from any monies owed to
you and possibly freeze your account. You’ll be out the money and
the merchandise. If this sounds familiar, you might want to take a
second look at your processor. Here are some of the services to look
for.
- Availability of a good and complete record of all credit card
transactions
- Where available, a verification of the address given when taking
a customer’s credit card information: This is an automatic service
provided by the major financial networks during a card authorization
in the US and Canada.
- A facility for allowing the merchant to respond to chargeback
claims or a service that responds for you
- A virtual terminal on-line where you can make returns related
to a credit card charge: This ability can quickly head off potential
chargeback claims.
- A two stage system for processing a credit card: Credit cards
are always processed by first obtaining a charge authorization
where no monies have yet changed hands. Subsequently, the funds
are captured; that is, transferred to the merchant account owner’s
account. Capture is usually done on command from the merchant
when the order is shipped. The ability to process cards in two
stages gives the merchant a chance to look over the order and
avoiding charging a credit card for orders not shipped, bogus
orders, and orders paid for by an unauthorized use of or a stolen
card.
I know of few entrepreneurs and small business owners that don't find
record keeping an enormous waste of time and energy that should be
spent on more productive endeavors. Simply put though, maintaining
records of any business activity is just a given part of the business
environment. If you don’t have your own merchant account, you want
to make sure that someone is keeping transaction records for you.
PayPal is a third party processor, albeit indirect, service that I’m
sure maintains good transaction records but, doesn’t provide the merchant
access to a simple process for resolving claims. In many instances
it may be less expensive for PayPal to simply allow a chargeback and
deduct the money from your account. Don’t get me wrong; PayPal can
be a very good and efficient service when used for the intended purpose:
to facilitate a person to person transfer of funds for the occasional
sale, where both parties are intent on successfully concluding the
transaction. Still today, PayPal remains the lowest out of pocket
cost, third party processing services on the Internet. However, one
chargeback claim a year can change that out of pocket cost dramatically.
So be sure to look around for a service that best suits your needs
and provides access to records essential to a professional business
operation. Go to Google and do a search on “3rd party processing”.
You’ll find a lot of choices. One group of 3rd party processors will
be very expensive because they take high risk subscription accounts
such as pornography sites. Some processors will only work with credit
card sales for shipped merchandise while others specialize in downloadable
products.
Need Info on Paysystems
I am getting ready to activate a new web site and need to sign up with a service to accept credit cards. I am sure the sales on the new site will be slow initially as I work to get the traffic built up.
As a purchaser, I have never liked to use PayPal, so am looking for someone else at the moment...
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Most third party processors will redirect a customer to their own
site to make payment on orders. This can impede sales because it confuses
the customer who is leery of giving their credit card information
to yet another company. Legitimate processors, however, will be very
careful about protecting this information and will not use the info
to promote other goods and services.
Some third party processors provide a turnkey system that includes
the storefront. These processors serve a more general function and
are know in the trade as ASPs (Application Service Providers) where
third party processing is only one part of their service. Here you
can expect tight integration between storefront and payment processing
as though you set up the whole system yourself. Your customer won’t
be redirected to make payment so you’ll look like any of the big retailers.
The disadvantage with an ASP is that you may have limited storefront
choices and there will usually be a subscription fee. On the other
hand an ASP, because of the tight integration, has the ability to
provide much higher levels of service, including a variety of business
records, statistical reports, and a virtual terminal for conducting
subsequent credit card transactions.
Again, be sure to look around. You want a provider that you can expand
your business with while not breaking the bank. This is a growing
field of service so you should have no trouble finding someone suitable.
About the Author:
Mel Davey is the creator of ImagineNation (http://imaginenation.com/)
everything E-Commerce, Storefronts, Back Office Utilities, Credit
Card Processing, and Merchant Accounts.
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