Often shortened to PSP, a payment service provider is a company that helps businesses to accept credit and debit card payments, and other electronic payments. They sit as a third party in the middle between those who make payments and those who receive them.
What does a payment service provider do?
A PSP will work with payment processors to manage any transaction from end to end. The first step is for a customer to initiate a payment, using their credit card for example.
At this point, the details of the transaction are sent to the credit card network, who sends the details on to the bank who has issued the card to the customer. The bank will accept or deny the transaction, and send this information back to the credit card network. The decision is shared with the payment service provider, and the customer and merchant gets a notification of a successful or failed transaction.
The payment service provider’s role is to connect with a wide array of different card and payment networks, to streamline the process for both merchants and customers. Merchants don’t need to connect individually with specific banks in order to take a wide variety of payments.
How do payments work with a PSP?
PSPs usually don’t charge monthly fees. Instead, the payment model for a payment service provider is usually one of two options:
- Price per transaction: This will be a transparent single cost for each transaction. It could be a good fit if the business has high-value items for sale.
- Percentage of each transaction: If the business model is reliant on a bulk of lower cost transactions, it might make more sense to pay a percentage of each transaction.
In many cases, a PSP might price based on a mixture of the two models. One common example is 2.9% of the transaction plus a $0.30 fixed fee.
Is a payment service provider the same as a merchant account provider?
There are significant differences between a PSP and a merchant account provider. The main similarity is that they both allow businesses to accept online payments. However, a merchant account provider will work directly with a single merchant, providing them their own custom account.
In contrast, a PSP holds all of their businesses under a single account and a single identification number, streamlining costs and processes. As a result, working with merchant account providers can take a lot longer in terms of approvals and payments when onboarding.
The ongoing risk is more difficult when working with a PSP compared to a merchant account provider. Once a business has been vetted and authorized, working with a merchant account provider is fairly straightforward. However, with a PSP, as the company uses a collective risk model, they are more likely to make dynamic decisions about whether accounts are risky, and freeze or hold transactions, or even terminate accounts.
If a business is looking for an out-of-the-box solution that can be onboarded quickly, a PSP could be a good choice. For something more bespoke, a merchant account provider may be a better fit.
What are the pros and cons of using a PSP?
The best feature of using a payment service provider is probably the turnkey nature of the relationship. Almost immediately, a business can have access to a robust suite of payment tools, including invoices, reporting, marketing options, and even an eCommerce store. This is usually offered at a transparent and fairly low cost, without transaction minimums and often without a monthly fee to maintain the relationship.
Businesses can trust that compliance like PCI-DSS is included in the PSPs offering as standard. PSPs will allow businesses to accept many currencies and many different payment methods, including credit and debit cards, e-wallets, and online banking.
However, a business might want to think about the increased risk of the model where many businesses are held under the same umbrella. PSPs have an increased risk of frozen or terminated accounts, which could put business on hold for days or even weeks. There are also often volume limits with how many transactions can be processed, so it’s important to consider scale as your business expands.