Third-Party Payments Explained

When accepting payments online, most businesses don’t handle payments directly with banks. Instead, they rely on third-party payment providers to handle different parts of the transaction, from capturing payment details to settling funds.

In this blog, we’ll explain what a third-party payment is in detail, look at the different types available, and cover how Australian businesses can set them up to process both domestic and international transactions.

What is a third-party payment?

A third-party payment is any transaction where an intermediary, such as a processor or gateway, handles the movement of money between a customer and a business.

Instead of the business dealing directly with a bank using a merchant account to accept payments, which can be complex and expensive, a third party steps in to manage the process instead. This includes things like collecting the customer’s payment details securely and making sure the funds are authorised and settled into the business’s account.

These third-party payments facilitate the transfer; they don’t hold or ‘own’ the money at any point, instead making sure it moves securely in line with regulations.

In practice, they typically sit between:

• The customer paying - entering card or bank details at checkout
• The business receiving the funds - the merchant selling goods or services
• The banks and card networks behind the scenes - approving, routing and completing the transaction.

Common types of third-party payments

Third-party payments cover a few different tools or tech that handle a specific part of the transaction. These include:

• Payment gateways - these sit at the front end of the transaction. They capture and encrypt customer payment details at checkout to authorise the credit card or bank transfer, then transmit them to the payment processor.
• Payment processors- these handle the movement of funds between banks, enabling businesses to accept a range of payment types, such as credit cards and bank transfers.
• Payment services - most providers bundle gateway and processing together as all-in-one offerings with extras like fraud protection and payouts. They are often called third-party payment aggregator services or platforms.
• Digital wallets - while not processors themselves, payment methods like Apple Pay and Google Pay sit within the third-party ecosystem. They store payment information securely so customers can make quick payments with a smartphone or other device.

How do third-party payments work?

Third-party payment processing covers all the mechanisms that route and secure payments after a customer has completed a checkout. It’s a chain of events that happens mostly in the background, with the end goal of making sure a transaction actually goes through securely. Here’s what it typically looks like:

Customer enters details

The third-party payment begins when a customer enters their payment details at an online checkout to complete a purchase. After filling out the form — name, card number, CVC, etc. — they click pay to officially kick-start the whole ‘chain’ of processing, which can only take a few seconds end-to-end.

Gateway encrypts

The third-party payment gateway is first up, securing the information and sending it safely to the payment processor. The encryption here prevents any sensitive information from being intercepted and exposed as it moves through different systems.

Processor routes

Next, the payment processor takes over and passes the transaction through the relevant card network (like Visa or Mastercard) en route to the customer’s bank. There might be a bit of back-and-forth here behind the scenes, but it happens almost instantly.

Bank approves

The bank then checks if there are enough funds available to complete the transaction, and flags any potential fraud if something looks unusual. Based on this analysis, it then either approves or rejects the payment. Again, this usually takes place within a second or two.

Confirmation is sent

That decision travels back through the same chain, and the customer gets a ‘success’ or ‘failed’ transaction message straight away. If everything has gone as planned, the payment is authorised and ready for the next stage.

Funds settle

The final step is settlement. This is where approved payments are processed and transferred from the customer’s bank to the business’s bank account, which takes a bit longer, usually 1-3 days. The exact times vary depending on the bank and the transaction type (domestic or international).

Function and benefits of third-party payments

Third-party payments offer a simpler alternative to traditional merchant accounts. Here are a few of the main benefits.

• **Fast setup and lower barriers **- you can start accepting payments quickly without setting up a traditional merchant account, which is useful for startups and micro businesses.
• Global reach with tailored checkouts - most third-party payment gateways support multiple currencies and payment methods, so you can sell internationally and still offer a localised experience.
• Security handled for you - platforms like Stripe have features like encryption and fraud detection built in, and comply with PCI DSS standards, which reduces your exposure to data breaches¹.
• Easier to manage - instead of mixing and matching different tools, a fully-featured payment processor usually lets you manage payments, refunds, reporting (and more) in one place. There’s no need to coordinate multiple systems.
• More ways for customers to pay - you can accept cards, bank transfers, digital wallets, and other payment methods. Offering flexible options at checkout improves the checkout experience and can boost conversions.

How to set up third-party payments for a business

To use a third-party payment processor or service, you’ll usually need to integrate it directly into your website using plug-ins or APIs. Here’s a step-by-step guide with practical steps for setting up third-party payment solutions for business transactions.

1. Choose the right provider

Start by researching a few providers. Stripe, Square and PayPal are among the popular providers in Australia for taking cards and other payments online and in-store. Look out for:

• Where your customers are - some providers are better suited to domestic payments, while others are built for global reach.
• Preferred payment methods - providers have a different payment ‘mix’, too. Most cover cards, but support for digital wallets, bank transfers, and buy-now-pay-later (such as Zip in Australia) can vary.
• Transaction volume and size - startups might prefer simple pay-as-you-go pricing for smaller transaction volumes. Growing businesses could benefit from advanced features like custom checkouts and high-volume discounts.
• Fees - most providers charge a percentage plus a fixed fee per transaction. Check the true cost per sale by factoring in any extras like FX fees and chargebacks.

2. Integrate with your platform

After you’ve chosen a provider, you’ll need to connect it to your website or sales platform. Most third-party payment processors offer a few ways to do this:

• Plugins and integrations for platforms like Shopify and WooCommerce
• Hosted checkout pages you can link to directly
• APIs or embedded code for more customised setups

The setup should be fairly quick for most businesses, especially if you’re using a standard e-commerce platform.

4. Set up payouts

Next, decide how you want to receive your funds after it’s been processed. This involves:

• Choosing a payout schedule (e.g. daily or weekly)
• Linking your business bank account
• Deciding if you want to settle funds in AUD or foreign currencies

If you’re selling internationally, this is where you might want to start thinking about lowering the cost of currency conversions and handling global finances with a multi-currency account.

5. Test before going live

The final step is to run a few test transactions to make sure payments are being processed correctly. Most providers offer a ‘sandbox’ or test environment where you can simulate various scenarios, including successful payments and refund processes, without using actual funds.

Common challenges involved with third-party payments

Third-party payments are convenient, but they do come with a few trade-offs or challenges that you should be aware of.

• Transaction costs - Stripe charges 1.75% + $0.30 AUD per online payment, rising to 3.5% +$0.30 AUD for international cards². These costs can add up quickly if you’re processing a high number of transactions each month.
• Hidden fees and FX costs - any currency conversion fees (Stripe charges 2%)² and other hidden costs like multi-currency settlement charges that aren’t outlined upfront can eat into your margins, especially when selling internationally.
• Payment delays - cross border payments aren’t usually instant. Depending on the provider and currency, settlement might takes a few days, which can put pressure on cash flow if you don’t plan ahead.
• Account holds or freezes - if something looks unusual, provides may pause transactions or hold funds while they investigate.
• Less control - you’re working with the provider’s system, so you have limited control over how payments are processed or flagged.
• Regulatory complexity - International payments come with extra compliance requirements, in Australia and overseas. You might have to account for cross-border for additional checks or reporting.

Wise Business: Manage your global business payouts efficiently

While third-party payment processors make it easier to accept credit cards or digital wallets from customers worldwide, handling cross-border payouts can quickly become expensive due to forced currency conversions and hidden markups.

Expanding a business globally opens up exciting opportunities, but also new challenges like receiving payments across borders. Hidden foreign transaction fees and hefty currency conversions involved with international payments can eat into your profits and time.

Wise Business serves as a cost-effective solution where you can receive money from around the world at the speed and price of local payments.

Transform the way you receive payments with Wise Business:

• One-time fee of 65 AUD for local account details in 8+ currencies, including AUD, NZD, USD, and more—no recurring fees
• One account to hold, send, and convert money with no hidden fees or exchange rate markups
• Create and send professional invoices directly to your customers through Wise Business
• Create payment links to request money in specific currencies
• Seamlessly receive payments from customers, online sales, or PSPs like Stripe and Amazon.
• Wise is safe and secure - Trusted by 13 million people and counting

Sign up for the Wise Business account! 🚀

This general advice does not take into account your objectives, financial circumstances or needs and you should consider if it is appropriate for you.

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Third-party payment FAQs

1. What is the difference between a third-party payment processor and a merchant account?
Third-party payment processors let businesses accept payments without setting up their own merchant account. Instead, transactions are handled through a shared system, making setup much quicker and simpler. Dedicated merchant accounts are set up directly with banks, offering more control but with the caveat of stricter checks and higher fees.

2. How can I ensure the security of my third-party payments?
To secure third-party payments, choose a PCI-compliant provider that handles your sensitive data. Further safety protocols will also help, such as using tokenisation to keep card details off your servers, turning on multi-factor authentication (2FA) on your account, and keeping your website’s software and SSL certificates up to date.

3. What are the typical transfer times for international third-party payments?
A typical time frame for international-third party payments is 1-3 business days. However, it can vary depending on factors such as the provider and payment method. Some transactions can settle quite quickly (Wise completes 96% of transfers within 1 day), while others might take longer.

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Sources:

1. Stripe - Radar fraud detection
2. Stripe - Pricing