A Merchant's Guide to Payment Service Providers
Payment options keep getting more complicated, and it can be hard for merchants to keep up. Gone are the days when credit card acceptance was all an e-commerce site needed. Whether they’re into digital wallets, cryptocurrency, short-term financing, or peer-to-peer bank transfers, customers are looking for merchants who will let them use the alternative payment methods of their choice.
One simple way to satisfy this demand is to work with a payment service provider who can deal with the more challenging parts of payment processing for you. What do payment service providers do, and how can merchants decide whether or not they need one?
- What are Payment Service Providers?
- What's the Difference between Payment Service Providers, Payment Processors, Payment Gateways, and Acquiring Banks?
- What is a Merchant Account?
- What are the Pros and Cons of Using a Payment Service Provider?
From a global perspective, the sun is already setting on the era of the credit card. By 2025, credit and debit cards are only expected to make up 32% of e-commerce transactions, a distant second place to digital wallets at 53%. To accommodate the payment needs of today’s consumers, merchants need to think beyond Visa, Mastercard, and maybe PayPal.
The best thing for merchants to do is research their market, listen to their customers, and make sure they’re offering the payment options that are most likely to get used. For e-commerce merchants serving a diverse global marketplace, this can end up being quite a lot of different options.
Negotiating individual accounts with every different platform, and integrating them into your checkout system on an ad hoc basis, may be difficult. Payment service providers offer merchants an easy, one-stop solution for accepting a wide variety of payment methods across multiple regions. This can save a lot of time and hassle, but it’s important to know exactly how these providers work and what the pros and cons really are.
What are Payment Service Providers?
A payment service provider (PSP) is a business that assists merchants in accepting and processing payments. PSPs serve as an intermediary between the merchant and various payment platforms, simplifying a process that would otherwise require multiple business relationships with numerous individual platforms.
PayPal, Shopify, Square, and Stripe are a few well-known PSPs.
A PSP will typically support payments from credit and debit cards, digital wallets, ACH and other bank transfer methods, and various standalone payment apps. PSPs usually offer a flat or simplified fee structure, quick and easy onboarding, and convenient payment integration options for both e-commerce and physical point-of-sale.
What’s the Difference between Payment Service Providers, Payment Processors, Payment Gateways, and Acquiring Banks?
A PSP is a full-service payment solution that handles everything for the merchant. A payment processor directly negotiates transactions between the merchant and the banks, and a payment gateway provides the secure transaction interface. The acquiring bank provides the merchant account that receives the funds.
Many PSPs handle all of the functions of the processor, gateway, and acquirer, but by taking on all of these roles, they can limit some options for merchants.
For example, most PSPs will not assign you an individual merchant account.
What is a Merchant Account?
A merchant account is where the funds from credit card settlements are deposited. It is a specific type of commercial bank account that is allowed to receive funds from payment cards and other electronic payment methods.
Merchant accounts are essential, but they can be put into jeopardy by excessive fraud and chargebacks. Acquirers monitor merchant activity on behalf of cardholders, and they have the ability to terminate merchant accounts that attract too many payment disputes. This can leave a merchant stuck without the ability to process credit cards, unless they pay a premium for a “high risk” payment processor.
When a PSP holds your merchant account, you are insulated from this risk. You may still be held liable for fraud and disputes, and a PSP can potentially kick you off their platform, but you can take advantage of their built-in fraud protection tools and dispute resolution processes.
What are the Pros and Cons of Using a Payment Service Provider?
There are plenty of good reasons to use a PSP, but there are some downsides as well. First, here are the benefits:
- PSPs usually approve new accounts quickly, with less vetting and fewer fees than traditional payment processors.
- Because they serve a large number of clients and process an enormous transaction volume, PSPs are able to negotiate favorable rates with their upstream providers, and they can pass those savings on to merchants in the form of flat, reasonable processing fee rates.
- PSPs will provide you with all of the hardware and software you need to implement their solution.
- Internal dispute resolution processes can protect you from the added costs and risks of credit card chargebacks.
- PSPs rarely require long-term contracts or termination fees, giving you the option to switch to a better solution at any point.
And these are some of the disadvantages of using a PSP:
- Flat fee structures mean you might end up paying more for certain types of transactions, such as debit card payments.
- In general, merchants with a high transaction volume may be able to find better processing rates on their own.
- Many PSPs disallow “high risk” sales, such as gambling or adult entertainment.
- Internal dispute resolution processes may not always be advantageous for merchants fighting fraudulent disputes.
- Freezes and holds on funds are more common on PSPs.
- You can’t expect the same kind of personalized support and attention from a PSP that you would get from a smaller, more specialized provider.
For small merchants, or those who are just starting out, PSPs can be a great boon. They can get you up and accepting credit cards and digital wallets immediately, for reasonable and predictable rates, and you can focus on making sales and growing your business instead of setting up a payment processing system with multiple independent vendors.
However, merchants who have been in the game for a while may find it advantageous to work with a handpicked network of partners. Doing things the hard way does give you more control over your business, allows you to obtain discounted high-volume processing rates, and gives you more freedom to go after friendly fraud and other illegitimate chargebacks.
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