Direct vs Third Party Merchant Accounts

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Direct vs Third Party Merchant Accounts

A merchant account is a type of bank account that you’ll need to open if you want to accept online credit and debit card payments. There are two types of merchant accounts for you to choose from: direct merchant accounts and third party merchant accounts. Which one you decide on for your business will depend on a variety of factors, which we’ll discuss later on.

Let’s take a look at the two different types of merchant accounts, how they work, how they’re different from one another, and which might be the better option for your business.

In this article:

  • What is a direct merchant account?
  • How does a direct merchant account work?
  • What is a third party merchant account?
  • How does a third party merchant account work?
  • Should you open a direct merchant account or a third party merchant account?

What is a direct merchant account?

A direct merchant account is a bank account opened for you, as a merchant, by your acquiring bank with assistance from a Payment Processing Provider (PSP). The PSP manages the account on your behalf so that payments are transferred and processed correctly, but ultimately, you own the account.

How does a direct merchant account work?

If you are PCI DSS certified (an industry standard for all companies that store, process, or transmit financial information), you can choose to host the payment page on your own website. If you aren’t PCI DSS certified, then your PSP will be, so they can host your payment page for you. Even if you are certified, you might still prefer for the PSP to host your payment page for convenience and optimal security.

Partnering with a PSP makes thepayment process easy for you. They are experts in payment processing and manage all the administrative details so that you don’t have to. They also take care of other important factors like fraud prevention.

Because a direct merchant account belongs to you, as the merchant you’ll be responsible and accountable for all transactions, including any chargebacks.

The alternative to a direct merchant account is a third party merchant account.

What is a third party merchant account?

A third party merchant account allows you to accept credit and debit card payments through an “aggregate merchant account”. In this situation, your chosen payment processor - like CardConnect - opens a sub-account for you and handles credit and debit card payments on your behalf. The major difference here is that you don’t own the account - the payment processor does.

How does a third party merchant account work?

The payment processor, which will be PCI DSS certified, hosts your payment page and manages all payment processing on behalf of your business. They become the merchant of record, and payments are sent into their own merchant account as an intermediate step, before they send the funds to your bank account.

Because of this, you’ll be considered a vendor rather than a merchant. This change of language will be reflected on your payment page - you’ll be referred to as an “authorized vendor” and the processor as an “authorized reseller”.

When a customer is ready to make a payment on your website, they’ll be forwarded to the third party merchant account provider’s website. Our CardPointe platform was built to address all of your payment processing needs, and one key feature is our Hosted Payment Page. It’s customizable so you can make it fit your branding, and that the customer will never realize they left your site.

Although the payment processor is officially the merchant of record, you’ll still be accountable for any chargebacks, but you’ll be paying the payment processor rather than the bank.

Should you open a direct merchant account or a third party merchant account?

Let’s take a look at the advantages of direct merchant accounts vs third party merchant accounts to help you decide which might be better for your business.

Advantages of a direct merchant account

A direct merchant account is a good option for larger businesses who have significant card processing history. It can work out a more cost-effective option in the long run, as transaction fees are typically lower compared to third party merchant accounts. With a direct merchant account, you may also get paid faster.

Advantages of a third party merchant account

Third party merchant accounts are a popular choice with start-ups and small businesses. One of the reasons is that they’re quick and easy to set up. A direct merchant account requires a lot of paperwork and verification, which can be difficult if you have no credit card processing history and your business is considered to be high risk. A third party merchant account is a good alternative as it offers a way of getting around the need to pass a credit check. This is because the third party merchant account - owned by the payment processor - deals with all payments.

They’re also a low-cost option. Opening a direct merchant account isn’t always financially viable for small and medium-sized businesses, whereas third party merchant accounts are a lot less expensive to set up and maintain. This is because you generally won’t pay a monthly subscription fee, which you do with a direct merchant account. There are no monthly minimum transaction requirements either, making them an ideal, flexible choice for smaller businesses.

Why choose CardConnect as your third party merchant account provider?

A payments platform of Fiserv, CardConnect helps thousands of merchants across the U.S. accept billions of dollars in card transactions every year. CardConnect’s mission is to grow commerce with simple, secure and integrated payments through our patented tokenization, secure gateway and omni-channel payment acceptance solutions.

Whether you’re setting up a new business or you’re looking into new options for your company, it pays to understand the different types of merchant accounts available to you.

Learn more about merchant services and how to choose the best merchant service provider for your business, or check out our merchant resource hub for more tips on setting up and running a business.

For more information on merchant accounts and to find out how CardConnect’s solutions can help your business, fill in the below form below!

Credit Card Processing / Merchant Account

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