Dedicated Merchant Accounts vs. Third-Party Payment Services

There are two distinct types of services to enable e-commerce businesses to accept credit card payments: dedicated merchant accounts and third-party merchant accounts. Both types can come in different shapes and forms and the processing rates can vary widely, based on a variety of factors, but the main characteristics of each are listed below:

• Dedicated merchant account. With this type of service, the whole transaction cycle takes place on the merchant’s website. Once the customer selects the items to be purchased, he is taken to the check-out page, which is SSL-secured on the server hosting the merchant’s website. Then the merchant’s payment gateway gathers the transaction information, encrypts it again and sends it to the card issuer for authorization. The authorization response (approval or decline) is routed back to the merchant through the gateway and the transaction is completed.
• Third-party merchant account. With this type of service, the merchant outsources the payment processing part of the transaction cycle to a third party. Once the customer selects the items to be purchased, he is taken to a check-out page hosted on the third-party service provider’s server. The merchant does not have to worry about purchasing and installing SSL certificates and payment gateways, as all sensitive personal information is entered on the third-party provider’s server and it is responsible for securely handling it. PayPal, Google Checkout and Amazon Payments are a few well known third-party service providers.

The above descriptions make it evident that setting up a dedicated solution is a much more involving process, requiring a certain level of technical knowledge to put all the pieces together. Moreover, once the account is set up, it requires continuous maintenance and constant attention. Additionally, merchant account contracts typically last two or three years. So it is a legitimate question to ask what benefits you get from your dedicated service that can justify the investment of time to set one up and then to maintain it, rather than just outsource the whole thing.

Well, the answer would depend on your circumstances. If your business is more like a side project, with small credit card processing volumes and you don’t seriously intend to put in the effort required to grow it, you would probably be better off using a third party solution (one of the PayPals of the world). If, however, you are fully invested in the project and it is your primary occupation, you should consider setting up a dedicated solution when you first build your online store or just as soon as your processing volumes grow large enough to justify it. By that I mean that there is a break-even point, which is different for every business, beyond which the lower processing costs, associated with dedicated services, fully offset the investment required to set up the system. The main benefits of operating a dedicated merchant account are:

• Professional image. A dedicated merchant account is seen as a sign that the business is of a certain size and it is committed to providing a complete shopping service to its customers. In this case at least, perception is reality. Before they are allowed to set up a dedicated merchant account, businesses must go through a strict application process, through which the processing bank verifies the legitimacy and credit worthiness of both the organization and its owners.
• Lower processing costs. The difference in processing rates between direct merchant accounts and third party solutions are significant and can add up, even for smaller businesses. A comparison between an average e-commerce merchant account, with rates of 2.15% plus $0.25 per transaction, and PayPal, with rates of 2.90% plus $0.30 per transaction, shows that the difference can be as high as 0.75% + $0.05 per transaction for merchants that process less than $3,000.00 per month. For a small business that processes $3,000.00 per month with an average transaction amount of $25.00, the dedicated solution would provide savings of $342.00 per year.
• Control over your account. With a third party solution, your processor has a complete control over your payment processing activities. In fact, the whole transaction process is conducted on their server. With direct solutions you get your money within a day or two, while third-party processors can hold it for longer and are much likelier to frieze your account in a case of a dispute over a particular transaction.

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