What is a Payment Service Provider?

A Payment Service Provider (PSP) plays a vital role in a merchant's payment ecosystem. By offering a range of services, PSPs enable merchants to accept payments from customers using various payment methods.

In this article, we'll cover the basics of what a payment service provider is and explore important considerations when choosing one. We'll also shine a light on a new evolution in payment processing that can help you optimize your business.

What is a payment service provider?

A Payment Service Provider, often called a PSP or merchant service provider, provides a variety of payment capabilities that allow merchants to accept payments from customers using a credit or debit card or Alternative Payment Methods (APMs) it supports.

In a nutshell, the core function of a PSP is to facilitate the safe and efficient transfer of money between a buyer and seller. It does this by providing a range of services to a merchant, including a payment gateway, payment processing, and merchant accounts.

Let's explore this in more detail.

What services do payment service providers offer?

Processing payments is complex and involves various solutions at every step. Not long ago, merchants needed to acquire the tools to facilitate each step in the payment lifecycle separately. As you can imagine, that created a ton of complexity, and, more often than not, was wildly inefficient.

Solving this issue for merchants is the genesis of the PSP. These providers began to build offerings that provided gateway, processing, and acquiring services, allowing merchants to process a payment end-to-end with one integration. Just think about Stripe’s promise of allowing merchants to accept payments with just seven lines of code.

Over the last decade, as the payment processing ecosystem has dialed up in complexity, PSPs have added more services to their offering to provide even more value to merchants.

Let's explore some of the key services provided by payment service providers today:

Payment processing: PSPs oversee the movement of funds from a customer's account to the merchant’s account. Payment processors manage transaction authorization, clearing, and settlement.

Payment gateway: A payment gateway facilitates the transfer of information between a customer and a merchant’s acquiring bank.

Fraud prevention: Fraud detection and prevention tools help safeguard transactions against fraudulent activities and illegitimate chargebacks.

Currency conversion: Currency conversion services are crucial for global businesses that must accept and/or make payments in multiple currencies.

Reporting and analytics: Payment data is increasingly valuable for businesses to help them track and optimize the payment process. Payment Service Providers typically provide transaction reports, financial analytics, and insights.

Payouts and disbursements: Some PSPs facilitate payouts and disbursements, meaning businesses can send money to vendors, affiliates, or service providers using the same provider they use to accept payments.

How do PSPs process a payment?

The role of PSPs slots into the broader online payment transaction lifecycle.

Let’s look at this in detail.

1. When Jennie purchases a new watch online using her credit card, she enters her details during the online checkout and clicks 'pay.'
2. The PSP's payment gateway captures this information and sends an authorization request to the PSP's acquiring engine. This request includes crucial transaction details such as card information, 3DS data, transaction initiation, recurring payment status, and network token usage.
3. The acquiring engine then forwards this request to the card network associated with the card used for the transaction.
4. At this stage, the PSP steps back as the card network directs the information to the issuing bank, which assesses whether to approve or decline the payment.
5. The card network overseeing card transactions communicates the issuer's decision to the PSP's acquiring engine.
6. Upon approval, a temporary hold is placed on the customer's account until the payment is captured, indicating the funds transfer from the customer's bank to the merchant's account.
7. When the merchant chooses to capture the payment, the PSP oversees the funds transfer between the customer's bank and the merchant's account. Additionally, it may conduct reconciliation.

Payment service providers: Some key players

There are a lot of PSPs in today’s market. Here are a few of the key global players you may have encountered:

• Adyen
• Braintree
• Checkout.com
• Stripe
• Worldline
• Worldpay

What are the benefits of using a payment service provider?

The primary advantage of employing a PSP is its consolidation of most, if not all, essential payment services into a single package. This situation contrasts with a decade ago when merchants had to establish integrations with separate payment gateways and processors.

This streamlined approach not only offers convenience but also can deliver significant performance benefits. Leveraging a PSP for managing the end-to-end payment flow generally results in improved performance metrics across key payment Key Performance Indicators (KPIs).

Also, as previously discussed, PSPs extend their support beyond payment processing. They may assist in various areas such as fraud management, reporting, reconciliation, and compliance, providing comprehensive solutions for merchants.

How do you choose a payment service provider?

PSPs aren’t created equal. Each provider has its strengths and weaknesses regarding its solution set and geographical coverage. That means choosing a PSP that meets the specific needs of your business is vital.

But with so much choice in terms of providers, how should you decide which PSP to use? Let’s break it down.

Four Steps to choosing a PSP

• Work out your requirements: Think about each of the considerations listed below and decide what you need. Ideally, you’ll have a list of must-haves and nice-to-haves.
• Research options: Identify potential providers and eliminate those that don’t cut it.

Tip: Don’t rely on online research–ask your network for recommendations and check out industry reports.

• Compare fees: Create a shortlist of potential PSPs and then compare setup fees, transaction fees, and additional charges. Be aware there are different fee structures available.

Tip: You’ll need to decide if you want a blended pricing agreement or use IC++ pricing. The former is simpler, but the latter gives more granularity and may provide you with more opportunities to optimize for cost.

• Make your decision: Whittle down your list of potential PSPs and reach out to them. Ask for references from businesses like yours that have successfully used that PSP. You should have a clear winner.

Considerations when choosing a PSP

• Payment methods: Verify if the PSP supports your customers’ preferred payment methods, including localized options. Assess the ease of adding new payment methods.
• Security and compliance: Ensure compliance with industry standards like PCI DSS. Look for robust security measures encompassing encryption, fraud detection, and chargeback management.
• Global vs. local: For international operations, seek a PSP with a global network of banks and multi-currency transaction capabilities.
• Integration: Evaluate the ease of integration into your platform using APIs or plugins to streamline the process.
• Customer support: Fast and efficient resolution of payment-related issues is vital to your revenue. Dedicated support is beneficial for small businesses with limited resources.
• Future-proofing: Determine if the PSP can support your business's future growth, adapting to new markets, emerging payment methods, and increased transaction volumes.
• Reporting and analytics: Optimizing your payment process can unlock revenue opportunities, so check what reporting tools and analytics you can access.
• User experience: Put yourself in your customers’ shoes. Does the PSP provide a user-friendly, seamless, and consistent payment experience?
• Redundancy and reliability: Payment outages impact your revenue and customer trust. Be sure to check the PSP's redundancy and uptime guarantees.
• Contract terms: Go over the contract terms with a fine-tooth comb, reviewing key aspects like the length of the agreement and any termination fees.
• Compliance and legal considerations: Do your homework to ensure the PSP complies with legal requirements in your industry and region.

Why you should use more than one payment service provider

The era of relying solely on a single PSP for payment processing has ended— or at least it should have. Consider this: relying on a single PSP means placing all your revenue eggs in one basket. What happens if they experience a significant downtime? Suddenly, your revenue stream grinds to a halt.

Even in the absence of such a nightmare scenario, finding a single PSP that covers all your service needs across every market without compromise is a challenging task. And even if you do find one, how can you be sure they offer the best performance and pricing without any benchmarks for comparison?

It’s for these reasons that leading merchants are adopting a multi-PSP strategy. But it’s hard work. Using multiple PSPs also involves upfront development costs and ongoing maintenance, making it resource-heavy.

Step forward payment orchestration.

Payment orchestration is one of the hottest topics in payments. That’s because payment orchestration platforms pull together different providers, allowing merchants to manage their payment flows through multiple providers across a single platform easily.  

In other words, it’s a control panel for all your payment needs, allowing you to:

• Boost authorization rates
• Optimize processing costs
• Recover more revenue
• Reduce payments fraud
• Uncover insights across your payment flows
• Remove technical complexity to scale globally at pace
• Minimize risk with global compliance
• Establish a test and learn mindset

These take the pain out of creating a complex payment stack in a cost-effective way.  

We wrote a whole blog post about why one PSP doesn’t cut it; take a look.

Final thoughts

In today's unforgiving digital economy, online merchants face high stakes and demanding circumstances.

Utilizing a PSP is a good start. However, for true success, merchants must move beyond the limitations of the single PSP model.

By embracing the integration of multiple PSPs within a Unified Payments Infrastructure, businesses can transcend the constraints of a singular approach. This integration allows merchants to construct a sophisticated payment stack without incurring the costly development resources and stress typically associated with keeping up with cutting-edge payment solutions.

Get our payment orchestration buyers guide to learn more.