Choosing Between a 3rd-Party Payment Processor and a Merchant Account for Ecommerce

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Choosing Between a Third-Party Payment Processor and a Merchant Account for Your Ecommerce Website

When setting up an ecommerce website, one of the most crucial decisions you'll make is how to accept payments from your customers. Two common options are using a third-party payment processor or setting up your own merchant account. Each choice has its own advantages and disadvantages that are important to consider.

Third-Party Payment Processors: Quick and Easy, but Higher Fees

Third-party payment processors like PayPal, Stripe, and Square offer a fast and convenient way to start accepting payments online. The setup process is simple and can often be completed within hours, with no lengthy underwriting or verification required. These services also handle payment security and fraud protection, so you don't have to worry about those aspects of running an ecommerce business.

However, third-party processors come with some drawbacks. Transaction fees are typically higher, usually around 2.7% or more per transaction. Accounts are also less stable, with a higher risk of sudden holds, freezes, or termination if suspicious activity is detected. You also have less control over the account and may face customer support issues if problems arise.

Merchant Accounts: Lower Fees and More Stability, but Longer Setup

Setting up your own merchant account takes more time and effort upfront. The verification and compliance process can take days or weeks to complete. Merchant accounts may also require longer contracts, sometimes up to 3 years, and have additional fees like monthly minimums.

However, merchant accounts offer several advantages that make them worth considering. Transaction fees are often lower than third-party processors. Accounts are more stable, with little risk of termination or fund holds. You also have more flexibility to negotiate pricing and terms that fit your specific business needs.

Examples of merchant account providers include Chase Merchant Services, Bank of America Merchant Services, and Authorize.Net.

Choosing the Right Option for Your Business

The best payment processing solution for your ecommerce website depends on your specific needs and growth plans. If you value quick setup, have low processing volume, and don't mind higher fees, a third-party payment processor may be the way to go. If you have higher volume, want lower fees, and prioritize long-term stability, a merchant account is likely the better choice.

Ultimately, both options can work well for ecommerce businesses. The key is to carefully evaluate your needs, compare pricing and terms from multiple providers, and choose the solution that aligns best with your goals and budget. With the right payment processing in place, you'll be well on your way to success in the world of online retail.

Key Pros and Cons

Third-Party Payment Processors
Pros:

• Easy and quick setup, often within hours
• No monthly fees, annual fees, or long-term contracts
• Ability to accept international payments with automatic currency conversion
• Payment security and fraud protection handled by the processor
• Fewer fees, no setup fees or monthly minimums

Cons:

• Higher transaction fees, typically around 2.7% or more per transaction
• Less stable accounts with higher risk of sudden holds, freezes, or termination
• Less control over the account and potential customer support issues
• Strict limits on transaction size and processing volume

Merchant Accounts
Pros:

• More stable accounts with little risk of termination or fund holds
• Lower transaction fees in many cases
• More flexible and customized pricing based on your business needs
• Higher processing volume limits
• Payments go directly from customer to business account without third-party

Cons:

• Longer setup process, often taking days or weeks to complete verification
• May require longer contracts, sometimes up to 3 years, and have more fees like monthly minimums
• Merchant account providers set up individual accounts for each merchant, rather than aggregating funds

In summary, third-party payment processors are best for businesses that value quick setup, have low processing volume, and don't mind higher fees. Merchant accounts are better for businesses with higher volume, who want lower fees and more stability long-term. The right choice depends on your specific business needs and growth plans.

What do you use for your ecommerce website? Does it work well?