The dominance of cashless commerce means only businesses that ensure the seamless processing of in-store and online credit and debit card payments will remain competitive.
A PSP (Payment Service Provider) can equip your eCommerce and brick-and-mortar business with an all-in-one platform that supports multiple payment systems, including debit & credit cards, eWallets, and bank transfers (ACH).
The question is: how do payment service providers work and how can you choose the right one for your business?
Read on to find out.
TL;DR
- PSPs help businesses accept credit cards, digital wallets, ACH transfers, recurring payments, and other types of mobile payments, while also providing POS systems and the integrated software required for managing business financial operations.
- PSPs offer joint merchant accounts and flat-rate processing fees that make them ideal solutions for small businesses that only process payments occasionally.
- The best PSP is the one that provides the right package of payment options for your customer base, adequate fraud detection & prevention tools, scalability, robust customer care services, and charges affordable processing fees.
Understanding Payment Service Providers (PSPs)
A payment service provider helps businesses with the acceptance and processing of payments made via electronic payment methods, including credit cards, debit cards, digital wallets, ACH transfers, and payment apps.
The provider works behind the scenes with acquiring banks, card networks, issuing banks, and other financial institutions to ensure the seamless transfer of funds between buyers and merchants.
You can easily sign up for the services of a PSP because of the low barrier to entry.
Account application approvals are near-instantaneous, which is possible because they only offer access to a shared merchant account, unlike merchant account providers who offer dedicated merchant accounts with a much longer approval process.
As a business owner, the main advantage here is that you can start accepting card payments immediately with a shared merchant account, instead of going through a tedious account approval process.
Most PSPs provide necessary hardware like POS systems, card readers, and checkout registers required to safely and securely accept card payments.
These tools can be provided for free, leased out, or sold at a fixed cost, and they come with integrated software suites that help streamline day-to-day business operations.
For example, Stripe is a payment service provider that offers shared merchant accounts to its platform users. The company also provides a card reader and mobile POS app for free.
How PSPs Work
The whole process can take from a few seconds to a few days, but here is a simplified explanation of what it involves:
Step 1: Payment gateway integration
The service provider will provide a secure online portal (payment gateway) that will integrate with your business’s website or online app and connect you with the provider’s platform.
The payment gateway connection will be responsible for transmitting your customer’s payment information between your own customer-facing platforms and your PSP and other relevant financial institutions.
PSPs don’t usually charge monthly fees for access to their payment gateway and instead derive their revenues from the processing fees they impose on each transaction.
They set their charges and processing fees based on whether the transaction takes place online or in-person and the type of payment method used.
For example, the charges for a credit card payment online will be different from the charges for an in-person credit card payment.
Also, the processing rates for a debit card payment will be different from the processing rates for an ACH transfer.
Step 2: Payments initiation
This is the stage where your customer kickstarts the payment processing journey by using any of the available payment options on the online portal to pay for your products or services.
Any competent PSP will support the following payment options:
- Debit and credit cards: via in-person, online, and keyed-in payments
- eWallets: via Apple Pay, Google Pay, Samsung Pay, and other digital wallets
- ACH transfers: via online sales and e-invoices
The PSP should also make it possible for you to accept and record payments made using cash and paper checks.
Step 3: Authorization, settlement, and reconciliation
The payment gateway software will now send your customer’s payment information to your PSP to verify, authorize, and settle the transaction.
The PSP will first send the incoming payment data to the acquiring bank, which is a financial institution that accepts and verifies transactions on behalf of merchants.
The acquiring bank will check with the customer’s issuing bank to confirm that the customer holds sufficient funds to complete the transaction.
It will also communicate with the customer’s card issuer to verify the authenticity of the card details entered into your checkout page.
Once the details are verified, the acquiring bank will authorize the transaction, which gives your PSP the greenlight to facilitate the transfer of the funds from your customer’s account to your business account.
Also, your PSP can help with currency conversions for international transactions if you have a global customer base.
The best provider for you will be one that supports multiple currencies and lets you process transactions in the preferred local currency of your customers.
Compliance and security
Your PSP is responsible for ensuring that sensitive customer financial data is securely encrypted and stored according to the standards and regulations of the industry, such as PCI DSS (Payment Card Industry Data Security Standard).
PSPs share the credit costs for fraudulent transactions and chargebacks, which is why their platforms tend to come with advanced features for detecting and preventing fraudulent transactions.
Credit risks created by fraudulent activities are also the reason why most PSPs prohibit high-risk merchants from their platforms.
Benefits of Using a PSP
Simplified payment processing
A PSP will offer instant account approval provided you are not a high-risk merchant, which saves you time and resources, and allows you to start accepting payments on your website and applications immediately.
Enhanced security and fraud prevention
PSPs take on the full responsibility of ensuring a sanitized environment for secure payment processing, which frees you of the burden of providing the necessary infrastructure to detect and prevent fraudulent acts.
Access to multiple payment methods
A competent PSP will offer a wide range of payment methods on its platform, which gives your customers the options they crave and helps your business stay competitive. The provider should also offer the hardware to accept physical card payments.
Streamlined reconciliation and reporting
PSPs usually provide detailed post-transaction reporting and analytics to give you a real-time picture of your overall business performance and the spending patterns of your customers.
Predictable flat-rate pricing and billing
A flat-rate pricing model is simple and transparent, which makes it easy for you to calculate and monitor your payment processing costs.
PSPs vs Payment Gateways
Payment gateways are online portals that integrate with merchant websites and applications to securely collect and transmit customer credit card and digital wallet information for data verification and payment processing.
To ensure a secure transaction, the payment gateway will encrypt all the financial information the customer provides at the point of entry, which can be a POS terminal, card reader, website, or mobile app.
The role of the PSP is to process the verification and approval of the payment after accepting the transaction initiation request from the payment gateway.
Basically, the difference between payment gateways and PSPs is the extent of tasks they complete.
Payment gateways exclusively handle the secure transfer of information from the data entry point to the PSP and back. PSPs on the other hand, handle everything else in the payment processing process.
We should also add that, unlike some merchant account providers, most PSPs offer their own payment gateways to merchants, which will integrate with the checkout page on your eCommerce website.
PSPs vs Merchant Account Providers
Both PSPs and merchant account providers help businesses accept and process payments.
The main difference is that PSPs offer one joint merchant account to multiple businesses, while dedicated merchant account providers offer individual merchant accounts to each business owner.
Merchant accounts are specialized bank accounts that are used to temporarily hold money from credit card transactions and other forms of electronic payments before the funds are subsequently transferred to the merchant’s business account.
A dedicated merchant account provider will offer an exclusive merchant account with its own merchant ID (MID) and the option to customize its features to suit your specific needs.
Typically, these banks (merchant account providers) will impose a detailed vetting process before approving your account application.
They will check your business model, credit history, business risk, tax history, and more.
They do all these because of the credit risk they bear for processing electronic transactions on your behalf.
For you as a business owner, the main advantage of such a thorough vetting process is that the provider knows your business in detail.
This will ensure your account is always stable and free of the account freezes that usually plague the joint merchant accounts offered by PSPs.
Account freezes are in fact, one of the main drawbacks of PSPs, as well as processing costs that can become too high if you process high transaction volumes.
PSPs tend to unilaterally and spontaneously freeze accounts because of the nature of their business model.
They take on multiple merchants without any detailed knowledge of their individual businesses while bearing the credit risk for fraudulent transactions and chargebacks.
So, they act swiftly to protect themselves anytime there is a risk of financial loss.
That’s good for them, but not necessarily good for you as a business owner who needs constant access to your payment gateway to process customer transactions.
Flat-rate processing fees imposed by PSPs will also start to get more expensive as your transaction volume grows. Some PSPs even impose limits on transaction volume.
In contrast, dedicated merchant service providers like Stax offer robust and stable merchant accounts.
Its processing fee model is also highly beneficial to businesses that process high volumes of transactions each month.
With a monthly subscription model and zero interchange fees, you will save hundreds and even thousands compared to a flat-rate pricing model.
PSPs vs Acquiring Banks
An acquiring bank is a financial institution that processes electronic transactions on behalf of merchants.
Acquiring banks are a core part of the payment processing process, and they are usually registered with credit card networks (Visa or American Express) so they can accept and route card payments through them.
Merchant accounts explored above are also provided by acquiring banks, and this is done because chargebacks are common in electronic transactions.
The bank holds the fund temporarily in the merchant account so it can be easily rerouted to the customer if there is a refund, instead of going through the more tedious process of trying to recover the money from your business account.
That’s why electronic payments information is first sent to an acquiring bank for verification with the customer’s issuing bank and card issuer before the transaction is authorized.
The role of the PSP is to facilitate the transfer of information and funds between the acquiring bank, the issuing bank, and the bank holding your business account.
We should add that the acquiring bank charges a fee for its services, which is usually a percentage of the per-transaction fee imposed by your PSP.
How to Choose the Right PSP for Your Business
Your choice of PSP will have a significant impact on your business performance, reputation, and customer experience, so it’s a decision you don’t want to get wrong.
Here are some factors to consider when evaluating the many PSPs on the market:
Available payment options
You must ensure that your PSP offers multiple payment methods, especially those preferred by your customers.
If you use a subscription model, you will want a provider that supports recurring payments and makes it possible to process recurring payments from alternate payment options like direct debit and PayPal.
The PSP must also provide tools that help your customers track their payment status in real-time and it must make it possible for them to use stored payment data to make repeat purchases.
Multi-currency support
If you are a global retailer operating internationally, you will need a PSP that supports multiple currencies and offers low or fee-free currency conversion services.
PSP currency conversion services are usually cheaper and much more stress-free than currency conversion services offered by traditional banks. They can save you money and help avoid headaches.
Integrations
You should opt for a provider that offers seamless integration with the software tools and apps you already use to run your business.
The provider should provide APIs, SDKs, plugins, and extensions that will let you integrate their online platform with your eCommerce solution.
Security and compliance
Safeguarding sensitive financial data according to industry regulatory standards is a non-negotiable requirement, and you should only opt for a provider that is PCI DSS compliant.
The provider must follow all industry security best practices including top-level encryption protocols and access controls.
Fraud detection and prevention
You should opt for a provider that offers robust fraud detection and prevention tools.
The financial risk from fraudulent activities is real and significant, and a recent study by Juniper Research shows that businesses stand to lose over $343 billion to fraud between 2023 to 2027.
A quality provider will use advanced tools to monitor transaction patterns and red-flag suspicious activities that could be fraudulent.
The rise of machine learning has also made it easier for PSPs and other financial institutions to spot such activities.
Robust tools for dispute and chargeback management are also desirable. There were 238 million chargebacks last year, and the average chargeback costs $191.
You can’t avoid them, but things will be a lot easier if your PSP provides the tools to help you manage such disputes more efficiently and reduce associated costs.
Reporting and analytics
Detailed transaction reports plus the data analysis tools you need to make sense of the information will help you better track your business performance and identify customer spending trends in real-time.
Identify the relevant reports you need based on your industry and business model, then evaluate the reporting and analytics tools offered by each PSP to see which PSP offers the most relevant package of tools for your needs.
Scalability
Your payment processing needs will change as your business grows, and you will need a PSP with a platform that can scale to accommodate your evolving needs.
Pay attention to the costs and requirements for expanded capacity.
For example, you want to increase your monthly transaction volume limit because of sales growth and your provider takes weeks to approve a threshold increase.
Such a delay can hurt your business and brand reputation and you will be better off avoiding that provider.
Pricing model and fee structure
Compare the payment processing fees of multiple PSPs and opt for the provider that offers the best balance of affordable fees and relevant platform features/hardware.
Some providers may also include additional charges like currency conversion fees and chargeback fees that may significantly impair your revenues if they accumulate over a period.
It’s important to consider such hidden fees when comparing the pricing models of different PSPs.
Customer support
You will need timely support to address payment processing issues when they inevitably occur.
You should opt for a provider that offers 24/7 customer support services, including live chat, phone support, and detailed online documentation.
If you process large transaction volumes, a provider offering dedicated account managers will be a more ideal solution.
Reputation in the industry
Go through online review sites to see what past and present customers are saying about the quality, reliability, and performance of each PSP.
Pay particular attention to what people have to say regarding the quality of the provider’s customer support services, payment solutions, and also the reliability of key tools you need to enhance your business like its currency conversion services or its recurring payment processing solution.
Making the Right Choice for Your Business Payment Processing Needs
You have learned that PSPs provide small businesses with the necessary infrastructure and services they need to securely accept and process online payments.
PSPs charge flat-rate fees and often provide free hardware, which makes them ideal for startups and sellers with low transaction volumes.
However, businesses and power sellers with higher transaction volumes may be better off with full-featured merchant account providers like Stax offering more economical payment processing fee models.
The best payment processor for your business will depend on the current status of its growth, your business model, your geographical reach, and your budget.
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