What are third-party payments?
Third-party payments are transactions processed by an intermediary that sits between the payer and the payee, handling the movement of funds on behalf of one or both parties. The payer and payee are the first and second parties; anyone else involved in facilitating the transaction is the third party.
The term is broad by design. It covers payment service providers (PSPs) that process card transactions for merchants, digital wallets that hold and transfer user funds, platforms that collect payments on behalf of marketplace sellers, and payroll providers that disburse salaries on behalf of employers. What these arrangements share is that neither the payer nor the payee controls the rails directly. A third party does.
How third-party payment processing works
The basic flow of a third-party payment involves the third party receiving a payment instruction, executing it over the appropriate rail, and delivering the funds to the intended recipient, minus any applicable fees.
In a typical merchant payment scenario:
- The payer initiates a transaction (a card payment, bank transfer, or wallet payment)
- The third-party processor authenticates the payer, checks for available funds, and routes the payment over the relevant network
- The network settles the funds with the processor
- The processor remits the funds to the payee, usually on a T+1 or T+2 basis after deducting its fees
The third party takes on several functions the payee would otherwise need to handle directly: payment acceptance, fraud screening, currency conversion, settlement, and in some cases, regulatory compliance and KYC/AML obligations.
Types of third-party payment providers
The third-party payments category covers a wide range of provider types, each occupying a different position in the payment stack.
- Payment service providers (PSPs) offer merchant accounts and payment processing under a single contract, aggregating multiple merchants under their own acquiring license. PSPs abstract away the complexity of direct acquiring relationships, making it faster and cheaper for businesses to start accepting payments.
- Payment gateways handle the front-end of the transaction: securely capturing payment details, encrypting them, and routing the authorization request to the acquiring bank or processor. Some providers bundle gateway and processing services; others operate the gateway as a standalone layer. Payment orchestration platforms extend this further, routing transactions dynamically across multiple gateways and acquirers to optimize approval rates and cost.
- Digital wallets hold user funds and facilitate payments between wallet accounts or out to external bank accounts. They function as a closed-loop system when both payer and payee are on the same platform, and open-loop when funds move to external accounts via ACH, SEPA, or wire transfer.
- Marketplace and platform payment intermediaries collect payments from buyers, hold them in escrow or pooled accounts, and disburse them to sellers or service providers, often after deducting a platform fee. The percentage the platform retains on each transaction is called the take rate. This structure is common in gig economy platforms, remittance services, and B2B marketplaces.
Regulatory considerations for third-party payments
Operating as a third-party payment intermediary typically triggers licensing requirements. The specific obligations depend on jurisdiction, payment types, and whether the provider holds client funds.
In the US, third-party payment processors that hold or transmit funds are generally classified as money transmitters under money transmission law, and must register with FinCEN as a Money Services Business (MSB), as well as obtain state-level money transmission licenses in each state they operate. In the EU, providers fall under the Payment Services Directive (PSD2), which established the Payment Institution (PI) and Electronic Money Institution (EMI) regulatory categories. In the UK, equivalent regulation is administered by the FCA.
The compliance burden scales with the nature of the activity. A gateway that routes authorization requests without touching funds faces lighter requirements than a provider that holds client money, converts currencies, or operates across multiple jurisdictions. Platforms that facilitate third-party payments without obtaining their own license typically do so by partnering with a licensed provider and operating under that provider's regulatory umbrella.
Third-party payments and cross-border transactions
Cross-border third-party payments add layers of complexity. The intermediary must handle currency conversion, navigate correspondent banking relationships or local payment rails in each corridor, and comply with sanctions screening and OFAC requirements in every jurisdiction touched by the transaction.
The traditional model routes international third-party payments through SWIFT and correspondent banks, which adds cost and latency at each hop. A payment from a European marketplace to a seller in Brazil, for example, may pass through two or three correspondent banks before reaching the recipient, with each bank deducting fees and adding 1-3 business days to the timeline.
Platforms managing cross-border disbursements at scale increasingly use local payment rail access and stablecoin settlement to compress this chain. Rather than routing through correspondents, funds move directly to local rails in the destination market, settling in minutes rather than days and at a fraction of the cost.
Who needs to understand third-party payments
The term comes up across a range of roles, each with a different stake in how third-party payment arrangements are structured, licensed, and operated.
- Merchants and online businesses encounter third-party payments every time they use a PSP or gateway to accept card or bank payments. The choice of provider directly affects transaction fees, settlement timing, and chargeback exposure.
- Compliance and legal teams need to understand whether their platform's role in a payment flow triggers money transmission licensing. Acting as an intermediary that holds or moves funds, even briefly, can classify a business as a money transmitter in the US or a Payment Institution in the EU.
- Finance and treasury teams deal with third-party payment providers when reconciling settlements. Because the third party nets and batches payouts, the amounts hitting the bank account rarely match individual transaction values. Maintaining an accurate flow of funds map and running clean payment reconciliation depends on understanding exactly how and when the third party settles.
- Platform and marketplace operators structuring their payment flows need to decide whether to route through a third-party processor or build more direct rail access. The third-party route is faster to market; direct access becomes more economical at scale and gives greater control over settlement timing and fees.
For platforms operating across multiple markets, Due's payment API provides direct access to local rails and stablecoin settlement across 80+ countries through a single integration, removing the need for separate licensing or correspondent banking relationships in each corridor.
