What is a PSP – all you need to know

The invention of the Internet and spreading it among the masses has become a big leap all over the world, but especially in the world of business. Small businesses that decades ago couldn’t dream of expanding over the borders of their local market now can right away go selling stuff to people from another corner of the world. And the PSP is one of the things that make it available.

Through the years online payments are becoming more and more convenient for people. 

Statista states, that during 2020 only 3% of customers in Spain chose to use cash on delivery. 98% of users prefer different types of online and card payments. 

There are plenty of options one can choose: paying via debit card, credit card, e-wallet, cash card, etc. And one of the most important aspects of online payments, no matter what type of them you are using, is security. This is a vital part of any modern business that sells products or services. If you can’t guarantee the security and quality of your payments how can you ensure the quality and efficiency of your products or services? Payment is one of the first experiences your customer goes through before using the product and it is the essential part of the experience, that can ruin the impression in case something goes wrong. And in case everything goes smooth at this stage, it is much easier to retain current customers and acquire new ones. 

So, to be short, the more convenient and versatile ways of online payments you suggest, the more satisfied your customer gets, and the more customers will choose to stick with you. But maintaining a wide variety of payments can cost a lot including all kinds of support, infrastructure building, security issues, and labor. That`s where PSPs (Payment Service Providers) are entering the game. Let’s take a closer look at them, what they are, what they do, and how can they make your business perform better. 

What is a Payment Service Provider? 

A Payment Service Provider (PSP) is described as a third-party company that enables business owners to accept online payments securely.  Businesses that accept all types of online payments can be PSP users: from credit and debit cards to bank transfers and e-wallets. PSPs are responsible for assuring a safe and secure way of money transfer from the buyer to the seller. 

Each of these businesses could of course use a usual merchant account but that would be much more expensive due to constant support costs and other fees. While a merchant account would be separate for each merchant individual, PSPs act like an umbrella for numerous merchants. They all become a part of one single account, with a subaccount for each individual customer. As they all share one account, they also share all the costs and fees and it makes PSP much cheaper, while security and risk management remain at a high level.

Once you decide to stick with PSP and sign up for cooperation, you no longer need to worry about online payment transactions. All the responsibility is on the PSP side. From the moment the user initiates the payment to the moment the business gets its money through the payment gateway to their bank account — everything is secure and safe that is guaranteed by the Payment Service Provider. They connect a broad range of acquiring banks with multiple cards and payment networks, to get the smoothest and most secure payment experience for both sides.

To see how PSP works we will need to go through an example of a basic online transaction. We will start from its initiation and end with funds being transferred to the business merchant account. 

How does the PSP work?

It all starts with one button — PAY.

The client enters his card details and presses the button, and after that PSP enters the room.

Verification

PSP verifies customer card details, sends transaction requests to the payment gateway, and checks if the card has sufficient money on the balance to pay for the purchase. The payment processor is the tool that helps PSP go through this stage.

Initiation

Customer card details are verified and PSP knows he has a sufficient amount of funds on his account? Great. Now PSP initiates the transfer of funds from the customers’ bank to businesses acquiring bank onto the merchant account.

Notification

Once the payment is approved by both customer’s issuing bank and acquiring bank, each side will be notified about the completed payment.

But there can be problems in this flow. Card details could be invalid or fund insufficient. In these cases, PSP will terminate the payment and act as described above — send a status notification to both sides about failed payment. 

Each this step will not only facilitate the payment process but also ensure the safety and security of the transaction of funds. There are a lot more advantages of PSP than that, and we can dive deeper into them soon. 

Types of PSPs

There are three different types of PSP. They differ in fees, contracts, and payouts but still cat quite alike. Let’s take a closer look at them and discover which one suits better for which kind of merchant.

Distributing PSPs

Distributing PSPs build connections to variable payment methods and maintain them. Thus, they remove technical obstacles for e-commerce merchants. If you will choose this type of PSP, your business will have the facility to accept several types of payment methods.

Distributing PSPs will suit those merchants who want to offer their customers only a few payment options. 

Collecting PSPs

In a world where there would be no PSP, merchants had to receive a separate settlement for each payment method they accept, and each separate settlement would consume sufficient time and cost. Having a lot of separate settlements would be unprofitable and inefficient for a business. Thankfully we live in a world with collecting PSPs that can combine all payments from divergent payment methods into one settlement, reducing time and money consuming and simplifying payment reconciliation. 

Collecting PSPs are a great choice for businesses that offer a lot of online payment methods. 

Aggregating PSPs

Aggregating PSPs deviate a little bit from collectors and distributors in a different way. What differentiates them from collectors is the ability to contract with the payment companies on behalf of numerous merchants. And from distributors, they differ because of their ability to collect funds on their own internal account, power to settle the merchant’s bank account, and negotiate the terms of the payment. 

Aggregating PSPs would be favored by merchants who prefer not to contract with banks, financial institutions, and other companies that provide online payment methods.

Payment Service Providers vs Merchant Service Providers

One of the main differences between Payment Service Provider and Merchant Account Provider comes to risk. Let’s see how and why it works.

Both these tools have one aim — they make it possible for businesses to accept online payments. But merchant account provider creates a separate account for each merchant, while PSP collects hundreds of thousands of merchants under one account.

In providing online payment services there always is some risk. In the case of merchant account providers this risk is concentrated on one merchant — thus to be approved and start getting paid to this account may take days or weeks, as the vetting process is thorough and businesses individual risk is estimated. With PSP that collects a lot of merchants under one «umbrella», this risk on the approving stage spreads among all the merchants and thereby approval process becomes simple and almost instant. And the cost of the account maintenance is also divided among all the users and that makes PSP much more affordable, especially for small businesses and startups than maintaining a single merchant account. 

But, while approval goes smoothly and fast, some other problems can be raised with PSP later on. A designated merchant account is being verified with details and it results in a stable account that won’t be disturbed by any extreme circumstances. At that time, as PSP holds a collective risk of several merchants, they can from time to time terminate, hold or freeze accounts they decide are somehow risky. 

Another considerable difference between PSPs and merchant account providers are types of solutions they provide. PSPs usually have on their list turnkey solutions that have a set price and a set range of features. On the other hand, merchant accounts are more flexible and provide customizable solutions that may be changed according to businesses’ needs. 

Pros of PSP

There are a lot of pros as well as cons of using PSP for your online business. Let’s go through each one of them:

Flexibility

This one continues the topic of the differences between Payment Service Providers and merchant service providers and flexibility is the reason why one would choose the first over the second. Payment Service Providers are a lot more flexible than merchant accounts. They allow you to change the services and tools you use and explore different payment methods and options. That’s what you wouldn’t be able to do in case you choose to stick with the merchant service provider. Flexibility and availability to change decisions when needed are crucial to small businesses and those who are just at their start. 

Low cost

As we already discovered, PSP collects a lot of merchants under one account, that is what’s making it much more affordable. While being not at all an expensive tool without a monthly fee and a required minimum for transactions made monthly, PSP provides a lot of different tools, payment security, and other advantages. That is a perfect decision to choose for businesses that are growing. 

Easy and fast start

If you want to start fast Payment Service Providers are definitely a choice. Just fill in the application and you can start accepting payments for your acquiring bank account almost instantaneously. There is nothing to be intimidated with at the first stage: no contracts, underwriting processes, and no need to wait a few weeks until you are approved and go through vetting processes. Nothing can guarantee as easy and smooth start as PSPs can guarantee today.

Fraud prevention

Setting up the PSP makes your business comply with Payment Card Industry Data Security Standards (PCI DSS). The PCI DSS is vital for accepting online payments. 

What this compliance does is simply protects cardholder data and at the same time business data from fraud.

Also, PSP has safety limits on users’ accounts that can catch unusual transactions and deny them.

Multi-currency processing

PSP account allows accepting almost all kinds of currencies your clients might want to use while paying for your product. And Payment Service Providers work on staying abreast of new trends in the industry like new payment methods and multiple currencies and make them available for users as fast as possible. 

Accepting multiple online payment methods

Credit card and debit card, online banking and e-wallets, ACH payments, American Express, and more — all these payment methods are available via Payment Service Provider. You will have quick access to each of them as each account is already set up with all tools — you just need to choose from them what suits best for you. This is especially important for international businesses, that need to accept all types of payments that are popular in the most different and remotest corners of the world. 

Cons of PSP

Support

While merchant account providers are much more costly, they also provide a lot more support. With a Payment Service Provider, you don’t get as much attention as an individual user, as you share one account with a dozen other merchants.

Account stability

Once you’ve signed up for a PSP, you have full access to their merchant account. This means that you have to stick with the rules of the merchant account holder, acquiring banks and payment service providers. You are not obliged to be aware of those rules, but they do leave you with the necessity to process payments at the payment service provider’s discretion. This may cause problems with account stability as you process transactions via Payment Service Provider. 

Final thoughts

It is obvious that Payment Service Providers facilitate payment processing, provides a wide range of different payment methods and multiple currencies, and don’t take a big monthly fee for it. But indirect benefits that PSP may bring to your business are less obvious. It is the ability to shift focus from taking care of payment processing to issues with a bigger perspective: achieve business goals, scale, and drive sales. 

We recommend considering using PSPs first of all for small businesses. They get the most out of the advantages of PSP and, as they don’t have massive customer flow, don’t have to worry about disadvantages. You will be able to expand your business by accepting a big variety of payment methods like debit cards, credit cards, e-wallets, cash cards, and different types of currencies, allowing your customers to use the most convenient method and encouraging them to start a long-term relationship with you.