What is a payment service provider (PSP)?

A comprehensive guide to understanding everything you need to know about payment service providers (PSPs).

Payment service providers (PSPs) enable businesses to accept all types of payment methods from customers. This article explores how PSPs work, their benefits and how businesses can choose the right PSP to fit their needs.

In this article, we cover:

• What is a payment service provider (PSP)?
• How do payment service providers (PSPs) work?
• What is an example of a PSP?
• What are PSPs used for?
• What is a payment service provider (PSP) in banking and payments?
• What is the difference between a payment service provider (PSP) and a payment gateway?
• What fees are associated with using a payment service provider (PSP)?
• What payment methods do payment service providers (PSPs) support?
• How can a payment service provider (PSP) help your business?
• How do businesses choose the right payment service provider (PSP)? 

1. What is a payment service provider (PSP)?

Payment service providers, or PSPs for short, help businesses accept payments from customers.

This includes credit or debit cards, bank transfer payments, such as direct debits and direct credits, and so-called ‘alternative payment methods’. Examples of these include PayPal and popular, local payment types like BLIK in Poland, iDEAL in the Netherlands and Swish in Sweden.

PSPs take care of the mechanics of getting paid, including from customers overseas, freeing up businesses to focus on what they do best.

You may sometimes hear PSPs referred to as ‘payment processors’, ‘payment gateways’, ‘merchant acquirers’ or ‘merchant service providers’, depending on the context.

2. How do payment service providers (PSPs) work?

Basically, payment service providers (PSPs) offer connectivity. They connect businesses to others in the financial ecosystem, including banks, card schemes, national processing networks and others, for two main reasons.

Firstly, PSPs ensure that transactions are routed correctly and securely between the relevant parties behind the scenes.

So, imagine when you enter your payment details into an online checkout page. Or are standing in a shop buying something in person. PSPs send and receive messages to confirm that you are who you say you are (authentication), and that you’ve got the funds to make the purchase (authorization).

Secondly, PSPs ensure that everyone gets paid quickly and efficiently.

This may sound simple in theory, but in practice it’s more complicated, partly because there are so many different parties involved in a typical payment chain. What’s more, not all PSPs route transactions and settle funds themselves. They may outsource activities, depending on their license and the countries where they operate.

3. What is an example of a payment service provider (PSP)?

Adyen, Braintree, PayPal, Stripe and Worldpay are payment service providers (PSPs). Inpay is also an example of a PSP.

PSPs contract with, and are paid by, businesses to facilitate payment acceptance.

4. What are PSPs used for?

 Payment service providers (PSPs) are used for routing transactions and settling funds. These are the basics.

In addition, some PSPs may offer value-added services around currency conversion, transaction reporting, data and analytics, fraud detection, regulatory compliance assistance, access to credit and/or working capital and so on.

PSPs may also develop additional services to cater to the specifics of payment in particular industries, such as airlines, hotels, car hire, iGaming or marketplaces.

A business, sometimes known as a ‘seller’ or ‘merchant’, may work with several PSPs, who specialize in different industries, geographies or business models.

5. What is a payment service provider (PSP) in banking and payments?

A payment service provider (PSP) in banking and payments enables businesses to accept payment for goods and services. They offer connectivity to card, domestic bank and/or alternative payment networks. And use a combination of IT, risk management and customer service operations to make payment happen.

The specifics of how they do this is as broad as the scope of the activity. This is partly because card and bank payments work differently behind the scenes. Different parties are involved. Different licensing arrangements may mean PSPs outsource or partner with other organizations to deliver part of the service.

6. What is the difference between a payment service provider (PSP) and a payment gateway?

Payment service providers (PSPs) help businesses accept payments from customers. This is primarily through routing transactions and settling funds. Whereas a payment gateway is responsible for a narrower set of activities. This is typically capturing and transferring payment data between businesses and their PSPs.

It may be helpful to think of a payment gateway as like a card terminal in a shop. Or the equivalent logic that sits behind the checkout page for an online shop.

Payment gateways capture and transmit customer and financial data securely, using a variety of technologies. These include tokenization and encryption.

7. What fees are associated with using a payment service provider (PSP)?

Businesses contract with and pay payment service providers (PSPs) to facilitate payment acceptance on their behalf.

It’s difficult to give an exact breakdown of the fees charged as there are so many variables, including nature of the services provided, geographic coverage etc. PSPs also have their own commercial terms and ways of pricing, for example offering discounts based on volume or other considerations.

Generally, businesses pay set-up fees or may incur costs related to the initial integration, ongoing fees based on activity, and fees for value-added services, such as fraud detection.

When it comes to card payments, you may hear the terms ‘blended’ and ‘unblended’ rates. There are different charges for accepting different types of cards, for example debit, credit and commercial cards.

Blended rates or pricing makes no distinction between the different card types accepted. Whereas unblended pricing itemizes each card type accepted and charges accordingly.

Somewhat confusingly, the cards world also has the concept of ‘bundled’ and ‘unbundled’ pricing. The ‘merchant service charge’, namely what a business pays their provider for card acceptance services, is made up of three main components: the interchange fee, the provider’s fee or mark-up for their services, and card scheme fees.

Simply put, bundled pricing is when a provider gathers all components and charges the business accordingly. Unbundled pricing is when a provider breaks out each component, displays them on a statement individually, and charges for each separately.

8. What payment methods do payment service providers (PSPs) support?

Payment service providers (PSPs) enable businesses to accept various payment methods. These include payment cards, bank payments such as direct debit and direct credit transfers, PayPal, mobile and crypto payments. But also cash, cheque and voucher payments in the physical and online worlds.

9. How can a payment service provider (PSP) help your business?

The right payment service provider (PSP) can help businesses sell into new countries, sectors and customer groups more easily. They can also help with higher approval rates, for example Inpay has transaction success rates of 99%. But also, help with better data to drive better business insights, simplified reconciliation, fraud prevention and more targeted marketing.

10. How do businesses choose the right payment service provider (PSP)?

Before thinking about what you’re looking for in a payment service provider (PSP), consider your own business. What’s important, and what kind of partner are you?

Your business should be clear about its strategic aims and direction. This will help determine what questions to ask during a request for proposal (RFP) process. Plus, how to weight the answers.

Next, consider what type of client or partner you are. Partnership chemistry is essential. And your business contributes at least 50% towards making this a success.

That being said, here are four areas to consider when choosing potential PSP partners:

• Coverage and capabilities – Understand the geographic reach of potential partners. From which countries can you make pay-ins and payouts? Clearly, any partner should be able to cover your existing payment corridors, plus power your expansion into new ones.
• Technology stack – Be clear on how a potential partner has built their technology as well as how they update and develop their tech stack. Not only will this shed light on things like their architecture and development process but also integration options and scalability.
• Value-added services – Find out what value-added services a prospective partner can offer, particularly around fraud detection and risk management, analytics and reporting. There’s more to payments than simply processing data.
• Knowledge and support – Understand what your partner can offer around market insight, industry trends, navigating compliance, implementation best practice and more to make the collaboration a success. Establish what type of support is available during set-up and on an ongoing basis.