What are third-party payment processors? How they work and choosing the right fit for your business

Key takeaways: 

• Third-party payment processors enable businesses to accept online payments from customers.

• Businesses can enjoy fast payment processing, support for multiple payment methods, and the convenience of accepting payments without setting up a merchant account with a bank.

• The right third-party payment processor offers transparent fees, global reach, seamless integration, and reliable support.

Revenue in the eCommerce market could reach US$4.32 trillion in 2025.¹ If you’re one of the lucky businesses riding that wave, you’ll need a payment setup that can keep pace with rising demand and rising customer expectations.

More sales mean more pressure on your checkout experience. Customers expect to pay in their local currency, using the method they trust, and to see the transaction go through instantly. If your setup can’t keep up, you’ll lose them before the sale is complete.

Many businesses try to manage this with a patchwork of gateways, plugins, and bank accounts. It works, until it doesn’t. Settlement delays, reconciliation headaches, and clunky checkouts start getting in the way of growth.

That’s where third-party payment processors can help. They take care of the heavy lifting so you can start accepting payments quickly, expand into new markets, and keep the checkout experience smooth and secure.

In this guide, we’ll explain how third-party payment processors work, what to look for in a provider, and how to choose one that supports your long-term growth.

What is a third-party payment processor?

A third-party payment processor helps your business accept online payments without opening a dedicated merchant account. It acts as the link between your checkout, your customer’s bank, and your own. The processor handles the payment in real time, so funds move from the customer to your business quickly and securely.

When someone places an order, the processor checks their payment details, confirms the funds, and completes the transaction. It also handles fraud checks, compliance, and encryption, so you don’t need to build that infrastructure yourself.

Airwallex is a third-party payment processor designed for global businesses. You can get started with simple no-code tools or build a more tailored setup using payment APIs. Our solution also includes enterprise-grade security features like PCI compliance, tokenization, and AI-powered fraud detection to keep your customers’ data safe and your business protected.

How third-party payment processors work

The path from clicking Buy Now to the payment confirmation page takes just a few seconds, but there’s a lot going on behind the scenes. Third-party payment processors handle that entire process for you, connecting your customer, their bank, your checkout, and your business account.

Here's how the process works:

1. When a customer initiates a purchase, the processor collects and encrypts their payment details.

2. The processor communicates with the customer’s bank and payment networks to verify funds and approve the transaction.

3. If approved, the funds are temporarily stored in a shared merchant account managed by the processor.

4. After deducting processing fees, the remaining funds are transferred to the business’s bank account.

With a shared merchant account, you don’t need to set up your own. This makes third-party processors a faster option for businesses that want to start accepting payments without delays. That said, payouts may take longer than same-day or next-day settlements available with a dedicated merchant account.

Third-party payment processors vs. merchant account providers

People often confuse third-party payment processors and merchant account providers because many third-party processors also offer merchant account services. Understanding the functions of each can help clarify the confusion and ensure that you choose the right services.

While third-party payment processors handle transaction processing and security, merchant account providers manage the funds and compliance. Here’s a breakdown of how each of them handles payments, costs, scalability, and security.

🟠 How funds are handled

Knowing how funds are handled helps you understand when the money will be available after a customer pays. Third-party payment providers process transactions using their own merchant accounts, which simplifies setup, lowers costs, and offers more scalability, but funds may take two to seven days to appear in your business account.

In contrast, merchant account providers require you to set up your own dedicated merchant account to accept payments which can be a complex process. Transactions are typically processed faster as each business has its own account, and funds can be available the same or the next day.

🟠 How they’re priced

Understanding how third-party processors and merchant account providers price their services helps you manage costs and plan for growth. While third-party processors typically use flat-rate pricing for simplicity and convenience, merchant account providers often use interchange-plus pricing.

Interchange pricing is more cost-effective for higher volumes because the total cost per transaction is fixed and is typically a small markup on top of the interchange fee. Flat rates are simple, predictable, and easy to set up but can quickly add up as your transaction volume grows.

🟠 How they help you scale

Third-party payment processors are designed for quick and easy setup, making them ideal for small businesses and startups that want to start accepting payments immediately. However, as your business grows and processes higher transaction volumes, you may see more of the limitations of pooled accounts and flat-rate fees.

Merchant account providers provide more customised solutions and better pricing for businesses processing large volumes, but the longer approval process and complex setup can be a barrier if you need to start accepting payments quickly.

🟠 How they manage security and compliance 

Merchant account providers and third-party payment processors both ensure security, but they do so in different ways. Third-party payment can simplify the compliance process for you. They handle data encryption and tokenization, reducing your exposure to sensitive information. They also offer advanced fraud detection tools, which are typically absent with merchant account providers.

On the other hand, merchant account providers have a direct relationship with banks and can offer customised security solutions tailored to your needs. They store and manage sensitive data, which requires robust security measures, and bear direct responsibility for Payment Card Industry Data Security Standard (PCI DSS) compliance.

Key benefits of using a third-party payment processor

Third-party payment processors allow businesses to quickly accept payments without the need for a dedicated merchant account, making it easy to start processing transactions.

These solutions also simplify compliance and security requirements, helping you manage complex security and compliance requirements such as PCI DSS, data encryption, and tokenization. Many also provide security features like AI-driven fraud detection tools.

Limitations and challenges of third-party payment processors

While often cost-effective, third-party processors may charge higher transaction fees, especially for larger volumes or certain types of transactions. Because of the way they handle funds, you may not receive customer proceeds instantly, which can affect your cash flow.

And, since you’re working with a third-party payment service provider, you may face limitations like not being able to customise the customer experience or having integration options.

How to choose a third-party payment processor for your business

The right third-party payment processor is quick to implement, cost-effective, can work with existing tools, while supporting your business’s growth. Choosing the right one from the get-go, you can set good foundations for your business.

Evaluate ease of implementation

Quick implementation lets you start processing payments and generating revenue faster. The sooner you can start accepting payments, the sooner you can start making sales. Look for processors that have pre-built integrations, developer support, and plug-and-play solutions.

Look at transaction fees and pricing models

Compare processing fees carefully, considering factors like average transaction size and cost per transaction. Some providers charge a flat fee, while others take a percentage of the transaction value. Be sure to assess which pricing structure best fits your business.

Check if you can integrate with your existing business tools 

A good payment processor that can integrate with existing tools helps streamline your operations, so you aren’t working on fragmented systems. It can help to improve efficiency, reduce manual errors, and ensure data consistency. Look for processors that have pre-built integrations for your existing tools, well-documented and compatible APIs, and developer support.

Ensure your currency is supported and has global reach 

In the past, payment processors were often seen as a necessary but secondary aspect of business operations. Now, a good payment processor can be a strategic advantage. A good payment processor should enable you to handle a wide range of payment methods and currencies, which can help you gain a foothold in unfamiliar territories.

Choose a payment processor that grows with you

The right payment processor should do more than just handle transactions. It should support your business as it grows. Airwallex Payments is an all-in-one payment solution designed for global merchants. It combines payment gateway, payment processor, and merchant account, making it easy for you to accept payments quickly.

Airwallex can support your business expansion. Airwallex Payments is quick to implement and compatible with existing tools, while helping you to stay compliant with security protocols. Airwallex lets you accept payments from 160+ payment methods, and provide options forno-code checkouts or integrations with your eCommerce platform via plug-ins.

Additionally, Airwallex supports business growth by offering an end-to-end solution that scales with your global business. We also offer a multi-currency Business Account that gives you access to competitive foreign exchange rates, and Spend Management features like reimbursements and Bill Pay. This makes it easy for your business to have a consolidated view of all your financial activities.

Third-party payment processors FAQ

Are third-party payment processors secure?

Third-party payment processors that are PCI-compliant are secure. Reputable all-in-one payment solutions, like Airwallex, offer advanced security features like PCI compliance, encryption, tokenization, and AI fraud detection methods that help ensure transactions are protected and sensitive information is handled securely.

How quickly do third-party payment processors settle funds?

Payouts can take two to seven days, but the timeline will depend on which provider you work with.

What are the risks of third-party payment processors?

Third-party payment processors can charge higher fees, delay fund transfers, and offer less control over checkout customisation. Choosing a good provider can help mitigate these risks.

Sources:

1. https://www.statista.com/outlook/emo/ecommerce/worldwide