Payment Service Provider: What It Is and How To Choose the Right One

Accepting payments isn’t as straightforward as just handing over cash. With credit cards, debit cards, and mobile payments, an entire web of interactions takes place in the background each time a card is swiped. Besides the basic transaction processing, this network of activity also works to inspect for fraud, authenticate the payment information, verify that funds are available, and encrypt data.

Some merchants rely on a payment gateway, processor, and merchant account to handle all of their payments. With a payment service provider (PSP), you can get the same setup in a single provider. All of these tools are bundled together, which simplifies your operational requirements and billing.

What is a payment service provider? And do you need one to manage your payments? To learn more, read on.

TL;DR

• A PSP is an all-in-one platform that helps you accept and manage payments. 
• Most PSPs bundle payment gateway, merchant account, and payment processor services into the same product, although some PSPs rely on external processors.
• Through PSP payments, you can accept debit cards, credit cards, bank transfers, digital wallet payments, and alternative payment methods.
• A PSP relies on a shared merchant account model. Basically, the PSP manages a central merchant account for receiving funds. Once the funds settle, the PSP can direct them to individual merchant payment accounts.
• For standard transactions, PSPs offer high approval rates, smart routing, and built-in retry logic. 
• In many cases, PSP payments are fast and can often occur on the same day or within a few business days.
• A PSP setup normally includes advanced fraud detection and monitoring, so your company can enjoy a heightened level of security. 
• If you’re dealing with a high transaction volume or complex needs, you may want to have a customized gateway, processor, and merchant account setup instead of a PSP. 
• No matter what payment setup you need, PayCompass can help you evaluate your existing operations and optimize the setup for your needs.

What Is a Payment Service Provider? 

So, what is a payment service provider? A payment service provider is responsible for giving businesses the tools they need to accept payments. Typically, PSPs help businesses accept digital wallets, credit cards, debit cards, and bank transfers. 

They use a payment gateway, payment processor, merchant account, and other tools to ensure money can move safely between buyers and sellers. Some PSPs are also the payment processor, while others rely on external processors behind the scenes. To do so securely, they must incorporate the right infrastructure, comply with key regulations, and adopt high-level security measures.

How PSP Payments Work for Merchants

To get a better understanding of how PSP payments work in practice, let’s take a closer look at the nuts and bolts of PSP transactions. The following list includes the major tasks that PSPs are responsible for.

• Payment Processing: The PSP is in charge of processing, clearing, and settling your transactions by sending the transaction to the appropriate payment processor. However, some PSPs also use their own branded processing stack.
• Payment Gateway: A PSP incorporates a secure online portal that is known as a payment gateway. This is necessary for securely transmitting payment information between the relevant parties.
• Merchant Accounts: At most PSPs, you’ll also find a shared merchant account model. This involves the PSP holding the main merchant account, and the individual businesses function as sub-merchants in the broader account. The funds are pooled and paid out to merchants, which allows for faster onboarding timelines and easier compliance measures.
• Currency Conversion: If you operate internationally, the PSP will be responsible for converting transactions between different currencies.
• Fraud Detection and Prevention: PSPs rely on advanced fraud-detection tools to identify and prevent security risks. For example, they are typically designed with machine learning algorithms and monitoring tools.
• Regulatory Compliance: A PSP must comply with the Payment Card Industry Data Security Standard (PCI DSS) and other applicable measures to ensure that sensitive data is transmitted and stored safely.
• Reporting and Analytics: PSPs feature reporting and analytics tools that let you understand customer behavior and transactions.
• Customer Support: A good PSP will provide customer support, so you can quickly resolve any problems.

Where PSPs Fit in Your Payment Flow

Let’s look at how a typical customer’s payment is processed with a PSP. 

1. The Customer Pays: First, the customer picks out the products they want and enters their credit card information into the online portal. Afterward, they push the “pay” button.
2. Information Is Captured: Then, the PSP’s payment gateway is responsible for capturing this payment information and relaying the request to the PSP’s acquiring engine. The request will include key payment information, such as 3DS data, card information, and transaction initiation.
3. The Request Is Forwarded to the Card Network: The acquiring engine forwards this request to the payment card’s network, such as Visa or Mastercard.
4. Information Is Relayed to the Issuing Bank: Next, the card network is responsible for sending the information to the issuer. The issuer can choose to approve or decline the payment.
5. The Decision Is Relayed: Then, the issuing bank’s decision flows back to the PSP. The PSP is able to provide a response to the merchant in real time.
6. Funds Are Held: The PSP is responsible for capturing and holding the funds in the master merchant account.
7. Settlement Occurs: From the master merchant account, the PSP can send the merchant’s funds to their bank account. Any fees involved are deducted before the payment is sent.
8. Reporting and Reconciliation Take Place: All of the transactions, payout details, and disputes are viewable through the PSP’s dashboard. 

What a PSP Normally Bundles

A PSP is responsible for bundling three core tools: the payment gateway, payment processor, and the merchant account. While the gateway is responsible for capturing, encrypting, and transmitting data, the payment processor feature routes the transaction to the appropriate processor for authorization, capture, and settlement. Finally, PSPs use a shared merchant account for pooling and distributing funds. It’s also important to note that PSPs can operate their own payment processor stack or use an external payment processor.

On top of these three core activities, PSPs are often responsible for fraud prevention, compliance, data security, reconciliation, payouts, and funds management. From APIs and SDKs for developers to convenient checkout tools, PSPs make managing payments as simple as possible.

Breaking Down Common Payment Terms

To make understanding PSP payments a little easier, we’ll break down some of the most common terms you’ll hear. 

• PSPs: A PSP bundles different payment services into a single platform so that merchants can accept electronic payments.
• Payment Gateways: Payment gateways capture, encrypt, and transmit data between the payment processor and the bank. They are essentially a bridge between the checkout portal and the financial institution that must approve the transaction.
• Payment Processors: A payment processor processes transactions and moves funds between different banks. 
• Acquirers: Acquirers are responsible for sponsoring the merchant in the card network. They assume financial risk for transactions and allow merchants to accept payment cards.
• Merchant Account: The merchant account is a special type of bank account that accepts funds from customer transactions while they are being settled. Once settlement occurs, the funds can be paid into the merchant’s business bank account.

Payment Services Overview: A Side-by-Side Comparison

As a merchant, you’ve likely heard about payment gateways, processors, merchant accounts, and payment service providers in the past. Because these terms can sound similar, it’s important to take a closer look at how each term differs. With this information, you can decide which payment tools and accounts you need to support your company’s payment acceptance needs. 

	Payment Service Provider (PSP)	Payment Gateway	Payment Processor	Merchant Account
What Is It?	An all-in-one platform that includes the gateway, payment processor, and merchant account together.	The gateway uses software to transmit payment data from the customer to the processor.	The processor is a business responsible for moving funds between banks and processing transactions.	This is the account where the merchant receives card payments.
Who Provides It	Fintech companies, like PayPal or Stripe	Gateway providers	Payment processors or acquiring banks	Financial institutions or acquiring banks
What Is It For?	PSPs make end-to-end payment acceptance easier.	Gateways allow you to securely authorize and encrypt payments.	Processors let you carry out and settle each transaction.	The merchant account is responsible for storing and settling funds from card payments.
How Fast Is Setup?	Fast	Moderate	Slow	Slow
Is a Merchant Account Included?	Yes, often through a shared model	No	No	Yes
Underwriting Requirements	Low or automated	Not applicable	Full underwriting	Full underwriting
Customization Options	Low	Moderate	High	Very High
Standard Pricing Model	Flat-rate pricing	Monthly fee + per transaction fee	Interchange-plus or customized	Bank fees + processor fees
Fraud and Chargeback Risk	The PSP is responsible for mitigating most risks.	The merchant is responsible.	The merchant is responsible.	The merchant is responsible.

How PSPs Compare to Other Options

If you’re trying to decide which type of payment processing tools to use, it helps to understand what sets a payment service provider apart from other alternatives. Compared to other options, PSPs excel in a range of different ways.

Approval Rates

PSPs provide high approval rates because of their retry logic, smart routing, and acquiring relationships. While they have better approval rates for standard transactions, they may deliver more card declines and less flexibility for high-risk industries.

Payout Timing

Additionally, PSPs are known for having predictable, fast payouts. These payouts often occur daily or every few days, although they may be withheld if risk-control measures are triggered. 

Fraud and Chargeback Prevention Tools

PSPs are often designed with built-in fraud and chargeback prevention tools. From rule-based controls to risk scoring, PSPs require added security measures for high-risk transactions. Plus, chargeback dashboards make it easier to manage instances of chargeback disputes.

Supported Payment Methods

PSPs often support a wide array of payment options. Beyond the standard debit and credit cards, PSPs often accept digital wallets and alternative payment methods. In many cases, you can use a PSP to process subscriptions and recurring transactions.

Integration Options

You can integrate PSPs with e-commerce plug-ins, APIs, SDKs, and hosted checkout pages. Because of this feature, it is easy to scale your payment services as your company grows.

Total Cost

A PSP typically charges a flat-rate or bundled price. This makes your billing easier, although it can be costly when you’re dealing with a high volume of transactions. For high-volume businesses, a direct merchant account may be a better option because it comes with a lower per-transaction cost.

How PayCompass Can Help Merchants Choose the Right PSP Setup

Whether you want a custom setup or a payment service provider, it helps to have a trusted expert on your side. At PayCompass, we partner with merchants as they select the right PSP-style setup for their needs. We optimize the setup so that you can continue to use it as your business scales.

Your basic option is to choose between a PSP or a blend of a gateway, processor, and merchant account. Our team helps you decide by assessing your business model, transaction flow, growth plans, average order value, geographic reach, and normal payment methods. With this information, we can recommend a setup that provides a perfect balance of control, approval rates, and cost.

Final Thoughts

If you don’t want the hassle of finding the right merchant account provider, payment processor, and payment gateway, opting for a PSP may be a good choice for your company. With PSPs, merchants can accept payments quickly and securely. Each payment can be processed through one platform, which significantly reduces your operational complexity. 

However, PSPs aren’t right for every company. Because they have fewer customization options, you may want an alternative payment system as your company’s operations become more complex. Similarly, high-volume businesses can often save money by using alternative payment setups.

To find the right payment structure for your business, you need to evaluate your risk profile, business model, and plans for the future. By partnering with PayCompass, you can get professional insights into your payment optimization goals and existing infrastructure.

To learn more about whether a payment service provider is right for your company’s needs, reach out to the experienced staff members at PayCompass today.