Path 2: Using a third party merchant account

Ideal for small businesses that do not want to open a merchant account or are having trouble opening one. Third party merchant account providers use their own merchant account to clear the transactions. They also act as a payment gateway. In simpler terms they provide both a payment gateway and a merchant account.

This process works in the following manner:

A customer goes to your website, adds some item(s) to the shopping cart and goes to the checkout page of your website. There he enters his credit card information. This information is sent to the third party merchant account provider, who acts as a payment gateway. At this stage the third party merchant account provider performs the verification process. Upon successful verification, the financial institution that issued the credit card, transfers the amount charged to the third party merchant account provider's merchant account. After a fixed interval which varies based on the provider, the sum of all the transactions minus the transaction fees is send to the individual or the company operating the website. The form of payment also varies based on the provider. Usually most of the providers mail a check after a fixed interval.

Fees charged by the third party merchant account providers – Fees vary based on the third party merchant account provider. Below are some of the most common types of fees charged by a third party merchant account provider:  

Discount Rate – discount rate is a fixed percentage charged by the provider on the amount of each transaction.

Transaction Fee – fee charged on each transaction.

Pros:

•  No hassle of opening a merchant account

•  Simple fee structure – no separate fee structures for a payment gateway and a merchant account.

•  Takes less time to set up the whole system

•  The whole process is automated. There is no need for extra human resources for credit card processing.

•  The whole process is instantaneous. It only takes a few second for the verification process to complete and to allocate funds from the customer's credit line.

Cons:

•  Slightly higher discount rate on third party merchant account as compare to the discount rate on ones own merchant account.

•  Have to wait for a fixed time period to receive the payments.