What is a payment service provider (PSP)?
If you want to start accepting credit or debit card, contactless, or mobile wallet payments in your business, it’s helpful to understand some of the associated processes and terminologies.
The payment service provider (PSP) is a good example of this.
A crucial third party when it comes to payment processing, a PSP is something that many businesses benefit from, but not a lot of people know too much about. Let’s change that.
In this post, we explain what a PSP is, how it works, and why it’s a good idea to use one.
What is a payment service provider?
An alternative to a traditional merchant account, a payment service provider is a company that receives, authenticates, and processes electronic payments on behalf of merchants.
How does it work?
PSPs work with acquiring banks (otherwise known as “payment processors”) to manage the entire payment process, from beginning to end. In practice, it looks like this:
- A customer attempts to make a payment using their card or device.
- This triggers the process, sending the transaction details to the acquiring bank.
- The information is then sent to the credit card network, which forwards the transaction details to the bank that issued the card to the customer (the “issuing bank”).
- The issuing bank checks that there’s enough money in the account to approve the transaction, and then passes the decision back to the credit card network.
- The credit card network informs the acquiring bank, which then informs the PSP, and the PSP shares the result with the customer and the merchant (i.e. the transaction has been approved or declined).
- Once payment has been authorised, the issuing bank sends funds to the credit card network, which forwards them onto the acquiring bank, which deposits them in the PSP’s merchant account.
Beyond streamlining the payment process, many PSPs also offer additional services, including transaction reporting, currency processing, translation, fraud detection and protection, and security.
Are there different types of PSP?
Yes, there are two categories of PSP:
Type 1. | Collecting PSP: As the name suggests, a collecting PSP collects all the online sales revenue from the different payment brands and acquiring banks and sends it as one payment to the merchant. Using this model, the merchant has one contract, one point of contact, and one payout — the PSP.
CCV is a collecting PSP for all brands that allow this model.
Note: PayPal doesn’t allow this, and pays the merchant directly.
Type 2. | Switching PSP: A switching PSP, on the other hand, only takes care of the technical part of the transaction. This means that the merchant needs to have a contract with an individual acquiring bank, which will pay out the funds from online sales. This results in multiple points of contact and makes the process far more complicated for the merchant.
What are the benefits of using a PSP?
There are a number of benefits to using a PSP. These include:
- Less administration:
As alluded to above, you don’t need multiple agreements or points of contact when dealing with a PSP. You simply deal with one company to handle your transactions, making your life easier in the process. PSPs can also supply monthly reports, making it simple to reconcile transactions and keep your admin in order. - The ability to accept multiple payment methods:
PSPs support a wide range of payment methods, both online and off. And by providing your customers with a choice — from credit and debit cards to online banking, mobile wallets, and more — instead of limiting their options, you’re less likely to lose the sale once they reach the checkout. - The ability to accept multiple currencies:
Many PSPs also offer support for multiple currencies, which is especially useful if you sell online. This means that you can accept fast and secure payments from customers around the world. - A more secure transaction process:
All of the sensitive payment information handled by a PSP is heavily encrypted. This gives your customers confidence that their details are safe and secure when paying. And from your point of view, you know that the sale will only be authorised if the PSP has verified the customer’s card details and located sufficient funds in their account.