in   CoveryFraud preventionPayment service providers

What is a third-party payment service provider?

Are you a startup or small-to-medium eCommerce business that needs to accept payments online? Then, you face two major challenges: the need to perform Customer Due Diligence checks for every transaction to avoid eCommerce fraud & money laundering — and the need to pay for setup, monthly maintenance, and transaction processing fees for your merchant account with a bank.  

While most businesses concentrate on the latter, the former (namely the fraud in eCommerce) can prove to be the bigger challenge and might ultimately lead to a merchant account closure and dire financial consequences for your business.

Keep on reading if you want to know how a third-party payment service provider can help you ensure reliable fraud prevention in eCommerce.

Let’s start with basic terms and definitions to ensure we are on the same page.

3rd-party payment service provider: what, why, when to use

You need to open a merchant account with a bank in order to accept payments online. This can be a lengthy process, as the bank will perform due diligence check on your business and will weigh a variety of factors, including former bankruptcies. Besides, for a startup or a small business that does not yet process thousands of online payments monthly, paying the registration and upkeep fees for a merchant account can be too costly.

This is where a 3rd-party payment service provider comes into play. It is a legal financial entity that already has merchant accounts registered with various banks and grants you access to them to enable you to receive payments and perform payouts. The most prominent payment service providers are PayPal, Stripe, Square, and Stax, but there are hundreds of smaller operators for local markets.

There are both advantages and disadvantages to working with third-party payment service providers. We briefly list them below.

Pros:

  • You can instantly begin accepting and issuing payments with simple integration
  • No account opening, background check, and underwriting costs
  • No monthly maintenance fees
  • No IRS fees
  • No PCI DSS compliance fees

Seems too good to be true? Well, while working with a 3rd-party payments service processor is not a mousetrap, it does have its disadvantages.

Cons:

  • The account is shared with other merchants, so its security can be compromised. This requires additional investment in eCommerce fraud detection platforms. Well, most providers either offer a selection of merchant fraud protection tools or provide API for integration.
  • You pay a transaction processing fee per each incoming or outgoing payment, which can amount to quite a hefty sum monthly.

Thus, the choice is quite straightforward and largely depends on the number of transactions your business has to process monthly:

  • You can go for free and instant access to online transactions with a 3rd-party payments service provider (and have to take care of eCommerce fraud prevention tools yourself) but pay considerable transaction processing fees
  • Alternatively, you have to dedicate time, money, and effort to underwriting your dedicated merchant account and pay much lower transaction fees, benefit from the bank’s merchant fraud detection functionality — but save a fortune on processing fees.

Thus said, opening a merchant account with a challenger bank like Genome, which has merchant fraud detection covered by Covery, is one of the best choices for a startup or a small-to-medium business with few transactions. While you pay per transaction, you’ve got your eCommerce fraud detection needs covered out of the box. Once the volume of your transactions grows, you and you can afford to have a dedicated account, Genome can help with transitioning to it easily, and you will still have Covery to protect you from fraud in eCommerce.