What Are Third-Party Payment Processors? Pros, Cons, And How To Choose The Right One

Global businesses are able to receive payments from their customers online due to third-party payment processors. They handle the heavy lifting so businesses can start accepting payments without setting up a merchant account with a bank or even any coding experience.

With online transactions projected to reach 24% of total retail sales worldwide by 2026, third-party payment processors are now more important than ever.

What is a third-party payment processor?

A third-party payment processor helps businesses accept online payments without needing a dedicated merchant account. In other words, it facilitates fund transfer between customers’ bank accounts and the business’s bank account.

Are third-party payment processors secure?

Third-party payment processors generally invest heavily in security at a level that most businesses can’t achieve on their own. This is one of the main reasons why businesses rely on such providers.

Payment processors add multiple layers of security to every transaction through strategies like encryption and fraud detection tools. Furthermore, they tend to be compliant with PSD2, PCI Level 1, SCA, and 3D Secure 2.0, which makes transactions made through them safe, so businesses and their customers don’t have to worry about sensitive information being stolen or misused.

How does third-party payment processing work?

When a payment is made online, it might feel like it happens instantly. However, behind the scenes, there’s a complex chain of events happening in those few seconds.

1. Encryption – When a customer enters their payment details on the merchant’s website during checkout, the third-party payment processor collects and tokenises the information.
2. Bank communication – The payment processor then passes the data to the customer’s bank (the issuing bank) or card network (Visa, Mastercard) to confirm that funds are available and to get approval for the transaction.
3. Bank authorisation – If the bank approves, an authorisation hold is placed on the funds, and the customer and merchant see the “payment successful” message on screen.
4. Settlement – At the end of the clearing cycle, the funds move from the customer’s bank to the payment processor’s merchant account.
5. Payout – After deducting the processing fee, the third-party payment processor deposits the net proceeds into the merchant’s bank account, usually within 1-2 business days.

How fast do third-party payment processors process payments?

Third-party payment providers typically process payments in just a few seconds. Most transactions are approved or declined within 2-5 seconds, even if multiple systems and banks are involved.

Settlement times can vary depending on factors like the country, currency, industry, and payment method. In most cases, businesses receive payouts within a few business days.

Third-party payment processors vs. payment gateways

People often use the terms third-party payment processors and payment gateways interchangeably. Though they’re part of the same system, they play different roles in the payment process.

A third-party payment processor handles the movement of money between the customer’s and the merchant’s accounts.

On the other hand, payment gateways serve as the bridge between a business website and the payment processor. It securely collects payment details, encrypts them, and safely transmits the information to the processor to prevent fraud or data leaks.

Third-party payment processors vs. merchant account providers

Just like with payment gateways, people confuse third-party payment processors with merchant account providers. This is because, like at Unlimit, most third-party payment processors also offer merchant account services.

A merchant account provider gives businesses a dedicated account to receive payments. Whereas, rather than providing each business with an individual merchant account, third-party payment processors aggregate many businesses under one large merchant account. This way, merchants don’t have to go through lengthy setup processes and can start accepting payments quickly.

Here’s a quick look at the key differences between third-party payment processors and merchant account providers.

Pros and cons of working with a third-party payment processor

Working with third-party payment processors comes with a lot of advantages:

• Easier and faster to set up than traditional merchant accounts 
• No setup fees or monthly fees
• Handles compliance requirements such as PSD2, PCI Level 1, SCA, and 3D Secure 2.0 on behalf of the business
• Strong security features like encryption and AI-driven fraud detection tools
• Support a wide range of currencies and alternative payment methods (APM)
• Scales easily as the business grows without complex technical setups.

That being said, third-party payment processors also come with their own set of challenges:

• Higher risk of temporary holds on funds and account freezes if suspicious activity is detected
• Less direct control over funds and payment routing
• Higher transaction fees than merchant accounts
• Though not always the case, third-party processors may not offer the same level of customer service as a dedicated merchant account.

It is worth remembering that not all third-party payment processors have the same pros and cons. So, it is important to compare options and work with a payment processor that aligns best with individual business needs.

How to choose a third-party payment processor?

Choosing a third-party payment processor is an important decision that can greatly impact the success of a business. The right processor can simplify payment operations and even help businesses expand to newer markets, while the wrong choice can lead to higher fees, service interruptions, and issues with transactions.

Here are eight factors businesses should keep in mind to find the ideal third-party payment processor:

#1 – Cost of implementation

Complex integrations, unclear documentation, hidden onboarding fees, and long approval times can drain a business’s time and momentum. These delays can result in missed sales, frustrated customers, and unnecessary expenses.

For this reason, it is important to work with a third-party payment processor that is easy to implement and requires minimal technical effort. This means features such as:

• Comprehensive developer documentation with clear error codes, integration guides, and troubleshooting support
• Transparent pricing with no hidden onboarding or integration fees
• Ready-to-use APIs and SDKs with sample code and sandbox environments for testing
• Pre-built plugins for major e-commerce and CMS platforms such as Shopify, WooCommerce, Magento, and Wix
• Dedicated onboarding support, including integration managers or technical specialists
• Fast, compliant, KYC/KYB verification to reduce approval times.

At Unlimit, our flexible API and plug-and-play solutions make integrations quick and seamless. Additionally, our seamless onboarding process, along with dedicated tech and support managers, ensures businesses can start accepting payments quickly without needing a large technical team.

#2 – Transaction fees and pricing models

Different third-party payment processors have different fee structures. Some charge a flat fee per transaction, while others take a percentage of the transaction value. While these may be beneficial for businesses with a lower transaction volume, they can quickly add up as sales grow.

So, it’s important to compare pricing and also inquire about any hidden fees or unexpected add-ons, such as account setup fees, monthly fees, processing fees, or issuer’s fees, as they can impact the bottom line.

At Unlimit, we tailor our pricing models to suit individual business needs. Meaning, we optimise costs, tailor margins, and offer volume-based discounts, making sure businesses get a plan that’s as cost-effective as merchant accounts.

#3 – Payment options

Customers these days expect choices when it comes to payment methods, such as debit cards, credit cards, e-wallets, and local payment methods.

If a shopper in Brazil is only allowed to pay using a debit card, they’re far more likely to abandon their purchase than if they could pay with their preferred method, whether that’s PIX, Mercado Pago, or something else.

To prevent customers from abandoning their cart, businesses should make sure the third-party payment processor they choose to work with supports the payment options their customers trust and use daily.

Unlimit supports over 1,000 payment methods in 50+ currencies and 200+ locations. This includes even super-region-specific choices like Mercado Pago, PIX, MPESA, SPEI, UPI, and more. By giving customers more ways to pay, businesses can remove friction at checkout and thereby improve conversion rates and drive higher revenue.

#4 – Integration with other business tools

A third-party payment processor should integrate smoothly with the existing business tools, such as the CRM, accounting software, analytics dashboard, or e-commerce platforms. If not, it can create inefficiencies, increase errors, and slow down operations.

Working with a solution provider, like Unlimit, that can be effortlessly integrated into Magento, WooCommerce, OpenCart, Prestashop, and more, helps save time by streamlining operations and also reduces errors by keeping all business data in one place.

#5 – Customer support

When it comes to payments, even the slightest issue can snowball into lost sales, frustrated customers, and a damaged reputation if it’s not resolved promptly.

Look for a provider that offers 24/7 support (ideally on a variety of channels, like email, chat, phone, etc.), fast response times, and dedicated account managers who understand the business.

At Unlimit, we have a multilingual support team that works around the clock to help resolve any issues quickly. Additionally, our dedicated regional experts provide localised insights and guidance to help businesses navigate specific market needs.

#6 – Fraud detection and compliance

Beyond the immediate financial loss, a fraudulent transaction can tie up valuable time and resources, delay payouts, and damage customer relationships. When security issues become common practice, they can quickly snowball into lost revenue, operational headaches, and reputation damage.

A trusted processor must comply with global standards like PCI DSS and have strong anti-fraud systems in place to protect both merchants and customers. It should also use encryption and other security measures, like AML and KYC.

#7 – Settlement timeframes

Settlement times can vary widely between third-party payment providers. In some cases, they can be surprisingly long, which can directly affect cash flow and growth.

When comparing providers, assess how long it takes for funds to reach the business account after a successful transaction.

For example, Unlimit is a direct acquirer with licenses across LATAM, Africa, India, and APAC, which allows us to offer faster and direct settlements without relying on intermediaries. 

#8 – Scalability

If a business grows quickly or plans to expand into new regions, it needs a payment processor that can keep up with the growth. Otherwise, it can lead to slower payments, lower conversion rates, and compliance issues, which can slow growth and impact sales.

So, ensure the third-party payment processor can scale with the business. In other words, it should be able to handle higher transaction volumes, work smoothly in new markets, and support new payment methods without major system changes.

Go borderless with Unlimit

At Unlimit, we believe that rather than just processing transactions, a payment processor should scale with the business as it grows. 

This is why our solutions are designed to cover everything from payment gateways to payment processors and merchant accounts, making it easier for businesses to start with one and then add on more as their operations grow.

We also have more than a decade of local payment experience in established and emerging markets, such as LATAM, Africa, India, and APAC, which means businesses can accept payments from anywhere in the world effortlessly, regardless of transaction volumes, new payment flows, and cross-border expansions.

Watch a quick demo to learn what it feels like to enjoy the flexibility and performance businesses need at every stage of growth.

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