PSP 101: What Is a Payment Service Provider?

Payment Service Provider

What is a payment service provider (PSP)?

A payment service provideAccording to Wikipedia, the definition of a  (PSP is a company that “offers shops online services for accepting electronic payments by a variety of payment methods including credit card, bank-based payments such as direct debit, bank transfer, and real-time bank transfer based on online banking.” 

Basically, it is a third party that allows merchants to accept a wide variety of payments through a single channel. The PSP works with acquiring banks (payment processors) to manage the entire transaction process from start to finish. This means that the PSP is responsible from the moment a customer inputs their credit card details, to the moment the funds appear in the merchant’s bank account.

Merchants that work with a payment service provider will save money, as the fees for using a PSP are much less than the cost involved in integrating individual payment types. This is because the PSP receives bulk processing discounts and is already set up to deal with many payment options.

What services does a PSP offer?

Now we’ve answered the question “What is a PSP?”, let’s talk about the services a PSP offers. A PSP offers many services for accepting, processing, and managing payments securely. A true turnkey payment solution will include the following services in one integrated payment solution:

1. Opening merchant accounts, or providing access to aggregated accounts, at the acquiring bank.

To accept credit/debit card payments, a merchant needs to open a merchant account at an acquiring bank. To open an account, the merchant first needs to apply and wait for approval. This process can take a few weeks. A PSP can help with the application process and can even save the merchant time and effort by applying on their behalf. Some PSPs offer access to aggregated merchant accounts. These are sub-accounts created for each merchant under the PSP’s preexisting account with the acquiring bank. This is a much quicker way of getting payment services up and running, as the PSP’s account is already approved.

2. Support for multiple payment methods.

Every payment method has a different set of requirements when it comes to acceptance and authorization. The PSP provides support for a wide range of payment methods, all though one simple integration. Merchants don’t need to set up payment methods individually, when working with a PSP.

Accepting multiple payment methods is one of the keys to customer satisfaction. A recent study by Fiserv showed that 43% of customers were more satisfied when offered multiple billing and payment options. With a PSP, a merchant can easily accept payments from credit cards, debit cards, mobile wallets, mobile money, and more.

Another benefit of an integrated system is that the merchant can view and manage all transactions using a PSP’s online payment platform.

3. Support for multiple currencies.

Not only do PSPs support multiple payment types, but they can also support multiple processing and settlement currencies. This facilitates quick and easy cross-border and global payments.

This is possible if the PSP has a partnership with acquiring banks that offer processing services for the desired currencies. (Not all acquiring banks allow processing for all currencies.)  Merchants may need to open separate merchant accounts for each currency, unless the PSP offers an aggregated payment solution.

Accepting multiple currencies is crucial for merchants looking to break into the global market or export goods to neighboring countries.

4. Security services, such as risk management and PCI DSS compliance.

Security is paramount when it comes to online transactions. In fact, recent research performed by Bizrate Insights found that over a third of buyers are reluctant to make online purchases because of fear of credit card and personal information theft.

purchase reluctance

Purchase Reluctance (Bizrate Insights)

PCI DSS is a compulsory certification for all businesses handling credit card information. It requires that the business has a secure network and protects cardholder data through a variety of different measures. Merchants can meet these requirements by using a payment page hosted by a PCI DSS compliant PSP. This way they can keep their customers’ data safe and secure, giving them peace of mind.

When using a PSP, what path does an online credit card transaction take?

When a customer submits credit card details online, the PSP carries out a process known as ‘authorization’, on behalf of the merchant. Here are the steps the transaction takes during the seconds between when a customer presses “confirm order” and receives the order confirmation on his screen:

  1. Tthe transaction details are sent to the acquiring bank’s processor.
  2. The information is submitted to the credit card network. Popular credit card networks include MasterCard and Visa.
  3. The network then sends the transaction details to the issuing bank - this is the bank that issued the card to the customer.
  4. The issuing bank decides whether or not to approve or decline the transaction.
  5. It passes its decision back to the credit card network, which passes this result onto the acquiring bank’s processor again.
  6. The processor then communicates these details to the PSP.
  7. The PSP will then share the results with the customer and merchant.

When using a PSP, what path do the funds to be paid to the merchant take?

If the card payment transaction was authorized, as described above, the funds now make their way to the merchant. This is a process called ‘settlement’:

  1. The issuing bank sends the funds to the credit card network.
  2. The network passes them on to be deposited in the merchant account at the acquiring bank, or the PSP’s merchant account.
  3. If passed on to the PSP, the merchant may have a choice as to how to receive the funds. Possible options include receiving funds to a prepaid card or e-wallet.
  4. If the merchant has its own dedicated merchant account at the acquiring bank, it will receive the funds from the merchant account to its company bank account (“settlement”) each month in arrears. If it has an account under the umbrella of the PSP, then the settlement period can be more flexible – even 24 hours, in some cases.

As you can see, using athe benefits of a payment service provider are abundant. Using a PSP makes it much easier for a merchant to accept and manage many different payment types. A good PSP will also offer merchants unparalleled security services and convenient multi-currency functionality.

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