Third-Party Merchant Accounts: A Short-Term Boost with Long-Term Costs

Third-party merchant accounts and payment facilitators enable fast onboarding for businesses that cannot yet get a direct merchant account. They reduce underwriting friction but usually charge higher fees, may impose rolling reserves, and retain control of the acquiring relationship. Treat them as a temporary solution: compare terms, monitor chargebacks and cash flow, and plan migration to a direct account when feasible.

Why startups use third-party merchant accounts

Many new businesses need payment processing before they qualify for a direct merchant account with an acquiring bank. Third-party merchant accounts - often provided by payment facilitators (PayFacs) or aggregated processors - let a company accept cards quickly by operating as the primary merchant and onboarding the startup as a sub-merchant. They reduce underwriting friction and speed time to market.

Common trade-offs: fees, reserves, and control

Third-party arrangements typically charge higher fees than direct merchant accounts. Providers may apply higher transaction rates, monthly or onboarding fees, chargeback penalties, and longer funding delays. Some hold a rolling reserve or take a percentage of sales to protect against chargebacks and fraud. Those protections help the processor but can strain a young company's cash flow.

You also give up some control. The third party owns the merchant relationship with the acquirer, so they set the underwriting rules and can terminate or suspend the account if risk thresholds trigger. That makes it harder to manage disputes and can affect your ability to migrate to a different processor quickly.

When a third-party account makes sense

Use a third-party merchant account when you need to accept payments immediately, when your business model is new or seasonal, or when your credit history prevents direct approval. Many small businesses and marketplaces start this way because payment facilitators like Stripe, Square, and PayPal can onboard sub-merchants in minutes and handle PCI compliance and fraud screening.

How to reduce the long-term downside

Compare fee schedules and ask about rolling reserves, payout timing, and chargeback policies before you sign. Track chargeback rates and customer disputes closely. Keep clean books and reliable KYC documentation so you can qualify for a direct acquiring relationship later. When your processing volume and risk profile improve, plan to move to a direct merchant account or negotiate better terms with your provider.

Bottom line

Third-party merchant accounts offer a practical, fast path to accepting cards, but they come with higher costs and operational risks. Treat them as a transitional tool: use them to get established, monitor cash flow and risk metrics closely, and migrate to a direct account when your business can secure better terms.