Before the online payment era, first- and second-party payments were dominant. The first-party is related to direct cash payments, while second-party payments are transfers, leveraging banks as intermediate. However, the boom of online shopping created a demand for new strategies to ensure security, flexibility, and agility.
3️⃣ Third-party payments
Third-party payments involve an additional player, usually a payment processor, to execute the transaction in addition to the seller and buyer. The payment processor receives the customer's payment information, reviews it, and uses anti-fraud systems before approving the transaction completion.
Paypal is an excellent example of a third-party payment player. It uses the information of a credit card provided by the buyer account to process the transaction. At the same time, the merchant has no contact with any sensitive information.
4️⃣ Fourth-party payments
The fourth-party payment actually involves six entities. The four main separated parties are:
▪️ Cardholder: The customer.
▪️ Merchant: Selects the gateways and the acquirer.
▪️ Acquire: Process the payment and ensure the money transfer.
▪️ Card-issuing bank: As the cardholder bank, it is responsible for confirming the card's validity and the existence of funds.
The other two entities, gateway and card scheme, share information and connect the four main parties:
▪️ Gateway: Collect and encrypt data to provide it to the acquirer.
▪️ Card scheme: It enables the communication between the acquirer and the card issuer. Popular examples are the Visa and Mastercard brands.
🤷🏽 ♀️ Which one should you choose for your business?
There is no golden rule when defining the checkout process or payment options you will make available for your customers. However, the available payment methods and security solutions, such as fraud systems, will determine the customer's confidence level in your e-commerce.
Are your business using third- or fourth-party payments? How has your experience been using them? Dive into the comments and let me know!
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If you want to learn more about the payment ecosystem, don't forget to follow me and @Yuno and hit the 🔔 on my profile.
FAQs
In a four-party model, the transaction fee relating to a merchant payment typically must be split among the issuer, the acquirer, and the payments network. In a three-party model, the payments provider doesn't need to share revenue with anyone else; it retains the entire transaction fee.
What does a 3rd party payment mean? ›
A third-party payment processor is an entity that enables merchants to accept credit card payments, online payments, and other cashless payment methods without setting up their own merchant accounts. Examples of popular third-party payment processors include Square, PayPal, Stripe, and Stax.
What are fourth party payments? ›
A four-party system describes a payment system (usually a card payment system) with the following four parties: the payer (often referred to as the cardholder), the payee (often referred to as the merchant), the payer's payment service provider (often referred to as the issuer) and.
What is 3rd party financing payment? ›
Third-party financing is a form of debt financing which is sourced from third parties, such as investors, banks and financial institutions. In developed EPC markets, third-party financing is the most common financing model for EPC.
What is the difference between a 3rd party and a 4th party? ›
A third-party vendor is a direct supplier, partner, external contractor or third party that your organization relies on or has a business relationship with. In contrast, a fourth party is an indirect vendor such as a partner, supplier, external contractor or other vendor of your third party.
What is third party and fourth party? ›
A 3PL's process mainly focuses on the execution of specific logistics operations. They provide the assets and infrastructure necessary to move products efficiently within the supply chain. On the other hand, a 4PL's process takes a more strategic approach, overseeing and managing the entire supply chain.
Is Zelle a third party payment processor? ›
Zelle doesn't report to the IRS for business or personal use of its platform. Technically, it doesn't count as a third-party payment network, so the usual reporting requirements don't apply to it.
What is an example of a third party? ›
Current U.S. third parties
Currently, the Libertarian and Green parties are the largest in the U.S. after the Republican and Democratic parties.
What are the different types of third party payments? ›
Each third-party payment processor is different, but you can accept several different types of payments, including credit card and debit card payments, mobile payments, contactless or touch-free payments, automated clearing house (ACH) payments, virtual terminal or card-not-present payments and e-commerce payments.
What is a third party payment plan? ›
Third-party financing is a financial arrangement where an external entity, typically a financial institution or a specialized financing company, provides funds for a transaction between a business and its customer.
A fourth-party is someone your vendor outsources to. Fourth-party vendors go by a lot of names. Some companies call them providers. Others call them strategic partners. They can provide bill pay, mobile banking, core processing, legal or other services.
What is a third party payment agreement? ›
A third party agreement is an contract between two parties that is used to add a third party to be governed under the terms of the original agreement. The third party agreement has more than one form and the characteristics of the contract depend entirely on the initiative of the parties.
What is a 3rd party payment example? ›
PayPal is one good example of an online payment portal that acts as a third party in a retail transaction. A seller offers a good or service, and a buyer uses a credit card entered through the PayPal payment service. The payment is run through PayPal and is thus a third-party transaction.
Why use third party payment? ›
Advantages of third-party payment processors
While banks charge service fees for merchant accounts, you can cut down on this expense by using a third-party processor instead. There's often no charge for setting up an account, nor are there any monthly contractual fees.
Why are third party payments risky? ›
Characteristics and risks
Customer identity is obfuscated. A perpetrator may be allowed to access these types of payment services, without disclosing their identity to the third party. Or they use a false name to circumvent the KYC screening.
What is an example of a 4th party? ›
Examples of 4th Party Vendors
An organization uses a cloud-based SaaS provider with a vendor to house server data. The vendor housing the data would be a fourth party to that organization. Your company contracts with a cotton supplier. The supplier utilizes a manufacturer based in India.
What is the three party payment model? ›
Three-party scheme
In this model, the issuer (having the relationship with the cardholder) and the acquirer (having the relationship with the merchant) are the same entity. This means that there is no need for any charges between the issuer and the acquirer.
What is a fourth party relationship? ›
Fourth parties are companies that contract with your third parties. For example, if your company contracts with a polyester supplier, that supplier would be classified as a third party. If your polyester supplier uses a manufacturer in Vietnam, the manufacturer is a fourth party.
