Payment service providers play a fundamental role in modern payment processing and facilitating seamless transactions between merchants and consumers.
A payments service provider (PSP) enhances business operations of all magnitudes by improving convenience, security and reach of transactions.
What is a payment service provider?
A PSP is a third-party company that seamlessly processes payments, allowing businesses to accept online transactions including debit and credit card payments.
Well known examples include PayPal, Amazon Pay, Stripe, Square and Ayden.
The main role of a PSP is to ensure sleek, streamlined, safe transactions between a buyer and seller on a global scale.
They do this by:
- handling payment processing using acquiring banks
- offering payment gateway services
- supporting traditional and new payment methods
- safeguarding sensitive financial information
- protecting against fraudulent transactions
PSPs can also be used for peer-to-peer transactions in a more informal setting, for example Venmo. They are widely used in a multitude of environments and have a variety of innovative services and features to offer.
What is an acquiring bank?
An acquiring bank is a financial institution that processes credit or debit card payments on behalf of a merchant.
A PSP relies on an acquiring bank to have sufficient funds to manage the transactions, including authorisation, settlement and fund transfers. They provide merchants with the necessary infrastructure to accept various forms of electronic payments, including a merchant account.
Payment service providers vs. merchant account providers
The services offered by payment service providers and merchant account providers often overlap. However, they both offer different distinct roles in payment processing.
Payment service providers offer a more comprehensive mix of services centered around online payment gateways and processing of bank-based payments.
They act as intermediaries between the merchants and payment networks, i.e. credit and debit cards, banks and digital wallets.
They streamline the payment authorization process and offer global multi-currency support. They can be simply integrated into digital platforms to accept online payments.
In contrast, dedicated merchant account providers work to arrange and manage merchant accounts.
They set up relationships with financial institutions and card networks, such as Mastercard, American Express and Visa to ensure that businesses can accept payments from these.
They focus primarily on the original establishment of the relationship, transaction authorisation and the payment processing facilities such as card terminals.
Therefore, merchant account providers are used more for in-person business, as opposed to online transactions. Although they can also be integrated into e-transactions. Examples of these include Worldpay and First Data.
Difference between a payment service provider and a payment gateway
A payment services provider handles and processes credit and debit card transactions, payment approvals and transfers of money between an on-site buyer, his credit card network and his seller.
Payment gateways are specialized websites where cardholder information can be gathered for payment authorisation.
Some payment services companies have their own payment gateways and secure integration with checkouts across multiple eCommerce platforms.
Types of payment services offered
Payments
Many payment service providers work to offer multiple payment options and methods that will keep their customers happy. These include:
1. Credit and debit cards
Businesses can securely accept credit and debit card online payments through a relationship with a PSP.
PSPs process transactions safely through tokenisation (where card information is replaced with a unique token) and offer robust fraud prevention measures.
They also analyze transactions to help businesses track purchase patterns.
Most importantly, PSPs ensure businesses comply with PCI (Payment Card Industry Data Security Standard). They also analyse transactions to help businesses track purchase patterns.
2. Digital Wallets
Apple Pay, Google Pay, Samsung Pay and Amazon Pay are all examples of digital wallets widely used for both in person and online payments.
Their popularity has risen quickly because they are so convenient—almost every mobile phone and smartwatch has them built in.
Stastista is forecasting the total market size of mobile wallet transactions globally will be nearly $9.5 billion USD by 2025.
3. Online bank transfers
Payment service providers enable businesses to accept online bank transfers as a payment method through payment gateway integration.
They help move money between a customer's bank and the business or customer's account.
An example of this is Klarna, who allows customers to pay in a way that suits them whilst supporting the business, so that neither party is out of pocket.
They can also integrate with multiple global banks to allow transnational and multi-currency payments, which enables business expansion across different markets.
An example of this is Ayden, who supports online bank transfer modes such as iDEAL (Netherlands, SEPA Direct Debit (EU) and Boleto Bancário (Brazil).
4. Recurring payments
Businesses that need to charge a monthly fee or offer subscription-based services can set up recurring transactions. This streamlines the process, making it easier for both the business and the customer as neither party has to worry about collecting/sending payments.
If a customer has a monthly subscription, like a gym membership, the payment service provider partners with the acquiring bank to establish a recurring billing agreement. This allows automatic monthly payments without needing authorization each time.
5. Cryptocurrency
Some other payment processors and service providers support cryptocurrency payments, such as Bitcoin, Litecoin, and Ethereum.
BitPay, a PSP, focuses on handling cryptocurrency payment processing. It converts payments into fiat currency or lets businesses get paid directly in cryptocurrency. This offers flexibility and alternative payment methods.
Payouts
Payment service providers assist businesses in making payouts to different parties like customers, suppliers and employees. They give businesses the tools needed to handle these payouts.
Hyperwallet is used by PayPal and offers a range of payout services including bank transfer, prepaid cards, digital wallets, checks and cash pickup. Hyperwallet uses online portals and APIs (application programming interfaces) to distribute payments easily worldwide.
Banking as a Service (BaaS)
Banking as a service (BaaS) refers to a payment processor or service provider that provides banking services like accounts and cards, traditionally limited to licensed banks.
BaaS providers work with banks to offer these services. Businesses use BaaS APIs to integrate banking functions into their platforms.
Stripe provides Banking as a Service (BaaS) through API integration, enabling businesses to programmatically access banking services via its platform.
Businesses can use their Stripe Account to create and manage accounts, process transfers and retrieve account balances.
Ayden offers BaaS through white-label solutions, which is where businesses can brand online banking services as their own. Ayden offers account opening, credit card processing issuance, payments and account management. They also customize the platform to match the business's brand.
Fraud prevention
Payment service providers use advanced online strategies to prevent fraud, detect suspicious activity and minimize financial risks.
More companies are manipulating the use of AI by using algorithms and machine learning to analyze real-time transaction details and data.
This helps flag any anomalies or unusual transactions such as abnormal purchase sizes, amount of failed payment attempts and quick excessive spending through transaction monitoring and velocity checks.
As AI develops and becomes smarter, so do hackers and their fraudulent technology.
Device fingerprinting captures and tracks the unique device characteristics, such as IP address and browser configurations. Authentication protocols are also implemented which involve multi-layered security.
Common examples include having to verify transactions in portals that are protected by passwords, biometric authentication, or sending a one-time password to email addresses or phone numbers.
This includes banking apps, Mastercard SecureCode, Verified by Visa and American Express Safekey.
By safeguarding against fraudulent activity, payment service providers protect businesses and customers and the integrity of online payment processes and systems.
Platform integrations
Platform integrations refer to adding payment processing features to existing software platforms.
In terms of payment processors, this involves connecting processing with a business's online store, platform and presence. This allows businesses to accept online payments from customers through multiple systems, including websites, phones or apps.
They complete this through a variety of sophisticated software strategies including API, software development kits (SDKs), plugins, extensions and certifications.
Not only does this enhance the customer experience by improving the convenience, but streamlines the payment process itself for businesses. This makes it safer and more economically feasible.
What is payment orchestration
Payment orchestration involves integrating and overseeing the entire payment process. This includes authorizing payments, routing transactions and handling settlements. This enables smooth and efficient transactions.
Payment orchestration involves integrating multiple merchant service providers themselves to optimize payment efficiency into merchant accounts.
Integration comes in different forms, like pairing with credit card companies or by a merchant linking an e-commerce site with a payment service provider's platform.
Benefits of using a payment service provider
Using a payment service provider can boost a business by improving customer experience and fostering growth.
As they support a wide range of payment methods, a merchant is able to expand its customer base and increase convenience by catering to multiple needs.
They can further expand their business on an international scale due to the global reach and multi-currency options available. This allows a business to indulge in new markets and increase revenue.
A payment service provider streamlines the checkout experience and transaction process, saving time, energy and costs.
It also reduces the need for multiple technological pathways, which reduces the risk for technological errors and potential cybersecurity risks.
This provides both the customer and the merchant with data security and fraud protection. They can also offer customer support for any issues that either the merchant or customer is experiencing.
They are dynamic as they are able to work with small, independent business as well as global corporations, adjusting their services to accommodate the merchant's needs.
For smaller businesses, this can help them kickstart their revenue and clientele. For larger businesses, this can save time and costs.
By providing real-time monitoring, transaction reporting and analytical tools, merchants can easily track payment flows, transaction trends and purchasing data.
This gives insights on future business decisions, allowing them to optimize for business growth.
How to choose a payment service provider
It is important to understand your business' needs before choosing .
To determine your processing needs, consider the platforms you want to accept (like Google Pay or credit cards), your target audience (local or global), expected transaction volume and payment types (like recurring subscriptions).
It is recommended to read reviews and contact customer support to assess the level of service provided. It is also important to consider the fees, including set up fees, transaction fees, monthly fees and termination fees. Compare this to your expected revenue as a business to see which provider you will be able to accommodate. This is key for younger, small businesses as revenue may fluctuate.
PSP Pricing and Fees
Payment services provide comprehensive solutions that bundle payment processing costs, account features and related charges.
Payment processing fees vary among providers but typically depend on the type of sale rather than the brand or type of card used. Account fees for a payment service provider (PSP) can help streamline costs.
Conclusion
Payment service providers (PSPs) are pivotal in modern payment processing, fostering seamless transactions between merchants and consumers.
By offering comprehensive solutions, PSPs enhance business operations, improve convenience, security and global reach of transactions.
They streamline payment processing, ensure compliance with industry standards like PCI and safeguard against fraudulent activities.
PSPs offer a wide array of payment options, from credit/debit cards to digital wallets and cryptocurrency, catering to diverse customer needs.
Banking as a Service (BaaS) further expands their capabilities, enabling non-bank businesses to offer banking services.
Using a PSP improves customer experience and fuels business growth by offering real-time monitoring, transaction reporting and analytical tools for better decision-making.
PSPs adapt to businesses of any size, providing customized solutions to meet individual merchant needs and drive success.
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