A third party is an individual or entity that helps facilitate a transaction but is not one of the primary parties involved.
Learn more about how third parties work, the different types, and their pros and cons.
Definition and Examples of a Third Party
A third party is an individual or entity that is involved in the facilitation of a transaction but is neither one of the primary parties. Third-party examples include mediators, mortgage brokers, and employment agencies.
- Alternate definition: In politics, a third party can refer to a political party outside the Democrat and Republic binary, such as the Libertarian Party or Green Party.
Let’s say a buyer is making a purchase from an online retailer. The retailer cannot take cash over the internet but will accept a credit card payment. The online retailer uses a credit card processing company to facilitate the transaction.
When the buyer completes online checkout, their payment information is submitted to the third-party payment processor. The payment processor verifies the transaction with the cardholder’s issuing bank. If approved, the transaction is completed and the business receives payment. The third-party payment processor is not one of the primary parties—customer and seller—but it is involved in the completion of the transaction.
How Does a Third Party Work?
Third parties operate across multiple industries, including the housing market, e-commerce, and finance. Third parties are often recruited when their objectivity or expertise is needed to facilitate a transaction.
A real estate escrow company, for example, is a third party that provides security and minimizes risk during a real estate transaction. Any essential documents or funds are held in trust by the escrow company and are released only when both parties in the transaction fulfill certain conditions.
There are various pricing structures that third parties use to make money.
- Commission-based: The third party makes money based on whether the customer buys or sells an item, like trading a stock. The fee may also be contingent on a desired result, such as a collection agency successfully collecting funds from clients with outstanding balances.
- Hourly: A fee accumulates based on how much time the third party spends working.
- Flat fee: The client pays a predetermined amount for certain products or services.
Here’s an example. Let’s say a company hires a third-party employment agency to recruit talented employees for them. The primary parties in the “employment transaction” are the employer and potential hiree. The employment agency is in the middle, acting as a third party to facilitate the “transaction” of hiring a talented employee.
If the employer makes a hire, they pay the employment agency a percentage of the applicant’s starting salary. The employment agency’s pricing is both commission-based and contingent—they are paid only if the applicant is hired.
Types of Third Parties
Third-party services can be found across multiple industries and specialties. Some common ones include:
- Real estate escrow company: This neutral and disinterested third party holds essential documents, funds, or other essential items in trust until the conditions set by the property buyer and seller are fulfilled.
- Collection agencies: Some companies may use a collection agency to contact customers on their behalf to collect overdue payments.
- Insurance brokers: Insurance brokers are individuals or companies that help people find the right insurance plan with the right insurer.
- Mortgage brokers: Mortgage brokers help connect individuals with mortgage lenders and may help walk them through the loan process.
- Payment processors: Payment processing companies, like PayPal and Stripe, are used to facilitate card payments between customers and businesses.
- Investment brokers: These financial professionals execute buy or sell orders on securities on behalf of their clients. Investment brokers may also offer consulting services, recommending certain financial products to their clients.
- Employment services: Employment agencies help connect businesses with qualified job applicants.
- Mediators: These lawyers act as a third-party neutral that helps two different parties arrive at a resolution.
- Delivery services: Many restaurants partner with third-party delivery services, such as DoorDash and Postmates, to deliver food orders to their customers.
- Logistics partners: Some companies might outsource some of their business operations, such as warehousing and delivering, to a third-party logistics provider.
Pros and Cons of Third Parties
Objectivity and neutrality
Risk of scam or fraud
- Objectivity and neutrality: A disinterested third party who remains objective is sometimes needed to complete a transaction. Escrow companies, for instance, hold critical documents and funds in trust until each party fulfills their requirements.
- Increase efficiency: Individuals and companies can outsource time-consuming tasks and operations, such as finding a mortgage lender or fulfilling customer orders, to a third party.
- Convenience: Payment gateways, for example, allow a business to accept several types of payments, including credit and debit cards.
- Cost: The costs of upfront payments and ongoing fees for high-quality or convenient products and services can add up quickly.
- Privacy concerns: Some third parties, like payment processors or financial brokers, require sensitive financial information, such as your card and bank information. This can leave your private information vulnerable in the event of a data breach.
- Risk of scam or fraud: Not all third parties are competent or credible. Working with suspicious third parties can expose you to potential scams.
- Third parties are individuals or entities that help facilitate a transaction but are not one of the primary parties.
- Common examples of third parties include mediators, payment processors, real estate escrow companies, and delivery services.
- Types of pricing structures a third party might use are commission-based, hourly rates, and flat fees.
- Individuals and businesses often use third parties for their objectivity, to increase efficiency, and for convenience.
- Some disadvantages of third parties: They can be costly, your personal information can become vulnerable, and you may be exposed to scams.