Whether you’re selling goods online in an e-commerce store or simply processing customer payments remotely, you’re going to need a payment service provider.
These companies help facilitate the processing of electronic payments, allowing you to accept various payment forms while remaining compliant and secure.
In this article, we’ll explain what payment service providers are, what they offer, how they work, and the benefits they afford businesses of all sizes.
Definition of payment service providers
Payment services providers (PSPs) are companies that facilitate the processing of electronic payments for businesses. PSPs act as intermediaries between merchants (sellers), consumers (buyers), and financial institutions (banks and card issuers) to enable seamless electronic transactions.
Your PSP provides the infrastructure and services required to accept a wide range of payment methods, such as:
- Credit and debit cards
- Bank transfers
- E-wallets
- Other digital payment solutions
Key features and characteristics of PSPs
The typical payment service provider offers the following features and characteristics:
- Multi-payment method support. The ability to accept various payment methods, such as credit and debit cards, digital wallets, bank transfers, local payment methods, and Buy Now, Pay Later (BNPL) options
- Payment gateway integration. Facilitate secure online transactions via a payment gateway. This routes transaction data to acquiring banks for approval or rejection. PSPs often include APIs or SDKs for better integration with e-commerce platforms and mobile apps.
- Security and fraud prevention. Compliance with PCI DSS standards, encryption for sensitive payment data, fraud detection tools, and chargeback protection.
- Multi-currency support. Support for multiple currencies, currency conversion, and cross-border payment facilities.
- Simplified merchant account setup. PSPs often provide aggregated merchant accounts which movies the need for individual accounts in different currencies with acquiring banks.
- Analytics and reporting tools. Dashboards and reports with key metrics like conversion rates, payment method performance, sales volume, and chargeback rates.
- Regulatory and tax compliance. Compliance with local laws and regulations like PSSD2 and PCI standards. They also handle tax-related processes like VAT calculation and GST collection on international payments.
- Transparent pricing models. The best PSPs offer clear pricing models, which may include flat-rate, tiered, or subscription-based models.
- Customer support and maintenance. A good PSP has 24-hour technical support and offers regular updates to maintain uptime.
- Value-added services. The most advanced payment service providers include tokenization for enhanced security, dynamic currency conversion, and integrations with Buy Now, Pay Later services.
How payment service providers facilitate online transactions
Steps of how payment service providers facilitate transactions.
- Customer selects products, checks out, and enters payment details.
- PSP encrypts payment data and sends it to the processor.
- Payment processor forwards the transaction to the card/payment network.
- Network sends the request to the customer’s bank for funds verification.
- Issuing bank checks for funds and fraud, then approves or declines the transaction.
- PSP sends the bank’s response to the merchant’s site or app.
- If approved, the PSP handles the fund transfer between accounts.
- Merchant receives the payment, minus any fees.
Here’s a quick overview of the process involved when using a payment service provider:
- The customer initiates the payment by selecting products, heading to checkout, and entering their payment details.
- The PSP encrypts the payment data and sends it to the payment processor.
- The payment processor forwards the transaction details to the card network or relevant payment network.
- The network sends the transaction request to the customer’s issuing bank for verification of funds and approval.
- The issuing bank checks for available funds and fraud indicators, approves or declines the transaction, and sends the appropriate message back through the network.
- The PSP communicates the response to the merchant’s website or app.
- If the transaction is approved, the PSP coordinates the transfer of funds between accounts.
- The merchant receives the payment, minus any PSP or processing fees.
Benefits of using a payment service provider for your business
What are some of the reasons why you’d want to use a payment service provider?
Enhanced security and fraud prevention measures
PSPs provide advanced security measures like PCI DSS compliance, encryption, tokenization, and AI-powered fraud detection tools.
Streamlined payment processes
Payment service providers streamline payment acceptance by managing the entire payment lifecycle, eliminating the need for businesses to work with multiple institutions directly.
Improved customer experience
This streamlined payment process facilitates a seamless customer experience and features like one-click payments and mobile wallet integrations create further improvements.
Access to multiple payment methods
PSPs enable businesses to access a diverse range of payment methods without requiring a large stack of software solutions.
Scalability and flexibility
Payment services providers are able to handle large transaction volumes, making them a suitable option for scaling businesses that will require higher transaction loads and additional features as they grow.
Global reach and currency support
PSPs allow companies to take payments from international customers, facilitating cross-border transactions and improving localization by displaying prices in local currencies.
Analytics and insights
The best payment service providers provide deep reporting tools that allow businesses to monitor payment trends, generate detailed reports, and make more informed decisions to drive sales and improve operational efficiency.
Cost-effectiveness
By bundling services like the payment gateway, payment processing, and fraud prevention, PSPs provide cost savings to businesses, which they can then use to improve profitability or create a competitive advantage by lowering prices.
Recurring payment support
For businesses operating under a subscription model, PSPs offer automated invoices, retry mechanisms, and tools that allow customers to easily update payment details.
Fast transaction settlements
PSPs offer faster settlement times than manual payment methods, improving cash flow.
Seamless integrations
Payment service providers typically integrate smoothly with CRMs, e-commerce platforms, and POS systems, making it easy for organizations to create unified systems that minimize disruptions.
Payment service provider vs. merchant account provider
Payment service providers and merchant account providers often get mistaken for the same thing, but they are in fact different services.
Understanding the differences between payment service providers and merchant account providers
Here are the main differences between payment service providers and merchant account providers (MAPs).
- PSPs offered share accounts used by multiple merchants. MAPs give each business its own dedicated account.
- PSPs are quick to set up with minimal application processes. MAPs require a more complex setup with more detailed applications and underwriting.
- PSPs bundle services like payment gateways, fraud detection, and reporting into a single platform. MAPs offer just an account but provide more flexibility and control. MAPs also require the merchant to manage more aspects of payment operations.
Pros and cons of each option
Which option is suitable for different types of businesses
PSPs and MAPs serve different needs.
Generally speaking, payment service providers are a better fit for:
- Small business with low transaction volumes
- E-commerce stores that need quick and easy international payments
- Seasonal businesses that want a low financial commitment
- Low-risk industries with minimal fraud concerns
Merchant account providers, on the other hand, tend to be more suitable for:
- Large enterprises with high-volume transactions
- Businesses that need faster payouts
- Companies in high-risk industries like gambling or forex
- Merchants that need more control, customization, and specific integrations
How to select the right payment service provider: 6 factors to consider
Considering bringing on board a payment service provider? Here are 6 factors to consider as you make your decision.
1. Cost structures and transparent pricing model
Look for a PSP that offers transparent pricing and is upfront about setup fees and transaction rates.
Low-volume businesses should look for flat-rate pricing, while high-volume businesses can take advantage of tiered or volume-based discounts.
2. Supported payment methods
Make sure the PSP you sign up with supports the preferred payments your customers use, and has support for multiple currencies.
3. Integration capabilities with existing systems and platforms
Check the PSP’s compatibility with your website or e-commerce platform. Look for APIs if you’re planning on creating custom integrations.
4. Security features
Prioritize a provider that is PCI DSS compliant and offers fraud detection, encryption, and tokenization.
5. Payment speed
Ask about how quickly a PSP makes payouts. Some hold funds for several days. If cash flow is critical for your business, choose a PSP that offers faster payout times.
6. Customer support and reliability
Look at reviews from previous customers to assess service uptime and the responsiveness of their customer support team. Opt for a provider with 24/7 support that is available across multiple channels (e.g. phone, chat, and video).
Best practices for seamless integration and setup
Want to make the integration process as quick and painless as possible?
Follow these best practices:
- Choose the right PSP for your needs to avoid setup and implementation issues.
- Confirm that the PSP’s APIs and SDKs are compatible with your website, ecommerce platform, or mobile app.
- Test the integration in a sandbox environment to verify the functionality before rolling it out to real customers.
- Design a customized payment page that matches your brand’s look and feel, ensuring it loads fast and is mobile-friendly.
- Prioritize security during the integration, implementing SSL certificates and adding fraud prevention features like 3D Secure to further protect buyers.
- Configure notifications for successful transactions, payment errors, and chargebacks.
- Educate your team on how to use the PSP’s dashboard, identify fraud, and resolve payment disputes.
Common challenges and how to overcome them
Getting a PSP set up can come with some technical challenges. Here are the three most common, and some tips on how to overcome them.
1. Integration issues
API errors and platform incompatibility can slow down the integration process.
Collaborate with the PSP’s support team, use their developer resources where needed, and test extensively in a sandbox environment before you deploy.
2. High decline rates
Card issues and fraud prevention measures can both lead to high decline rates.
To solve this, optimize retry logic for failed payments, enable multi-currency support, and consider working with the PSP to fine-tune fraud detection settings if this appears to be an issue.
3. Scaling challenges
As your business grows, increased transaction volumes can cause delays and even downtime.
This demonstrates the importance of choosing a PSP with scalable infrastructure that offers redundancy measures to handle peak traffic.
Streamline customer payments with BILL
Payment service providers are a critical part of receiving funds from your customers.
They facilitate multiple payment methods, communicate with payment processors and financial institutions, and help to improve customer trust.
If you’re set on improving the way you receive payments from customers, you’ll need a good PSP on your side.
You’re also going to want an accounts receivable automation platform like BILL.
With BILL, you can:
- Automate and schedule invoicing
- Track payment statuses in real time
- Receive payments right in your bank account by ACH or credit card
