If you’re reading this, there’s a good chance you’re already thinking about launching a business. You might have looked up a few articles on ecommerce and discovered that if you want to take online payment methods, you need the right tools.
At first, terms like “payment service provider”, or “payment gateway” can be confusing for beginners. This is particularly true when many people don’t seem to know the difference between a merchant account, or a payment service provider – two separate entities.
Today, we’re going to deliver the help you really need to start taking credit and debit cards online. We’ll be defining what a payment service provider is, how it helps you to process different payment methods, and more. Let’s get started.
Payment Service Providers: A Definition
A payment service provider, or PSP, offers merchants the support they need to access electronic payments, from credit cards, digital wallets, and more. PayPal and Stripe are both types of payment service provider.
A payment service provider might also be referred to as a third-party payment processing company. However, it’s important to note that a payment provider and a merchant account aren’t the same thing. While traditional merchant account gives merchants their own account, a PSP combines a variety of different merchants under a single umbrella. This means that PSPs take on the complete financial risk of every business it connects with.
Payment service providers can be beneficial to merchants because it makes accessing payments from visa, Mastercard, and other accounts easier. This strategy also reduces the fees commonly associated with merchant accounts.
What does payment service provider mean?
A third party that facilitates and helps merchants in the accepting of payments, also known as a Merchant Services Provider or PSP. In online shopping, the PSP will provide various methods of payment including direct debit, bank transfer, real-time bank transfers using online banking, and credit card. Basically they bring everything together to allow a merchant to accept credit cards, and do so in a seamless fashion that makes the entire process transparent to customers and stress-free for merchants.
A PSP can connect to multiple acquiring banks as well as payment and card networks. By enlisting the services of a PSP, the merchant becomes less dependent on financial institutions to manage transactions, since the PSP can manage bank accounts as well as relationships with the external network.
Payment Service Provider vs Merchant Accounts
A payment service provider differs most from a merchant account in the way that it handles accounts. With a PSP, there are a number of users in a collection or group or merchants. On the other hand, a merchant account provider gives every seller their own individual accounts. The vetting process for each merchant is also more thorough with merchant account models.
Merchant accounts also differ from payment service providers in other ways. Merchant accounts are very concentrated on payment processing. A third-party processor, on the other hand, can provide a more complete solution for companies. As well as a payment processor, you might be able to access things like checkout tools, and hardware.
The good thing about taking card payments through a payment service provider is that you generally don’t need to pay extra fees for security. Things like PCI compliance are already available within your account.
Another big bonus of payment service providers over merchant services is that you buy an entire platform of tools. The support that an acquirer gets with a PSP is often much more comprehensive for handling payment processing. Tools like Square, Shopify, and Stripe all include invoicing tools and reporting features, for instance.
There’s also a unique gateway available with many of these solutions that make it easier for people to start selling online. Square and PayPal users could easily take payments from American express and other payment options, while also offering things like fraud protection and loyalty options from their payment solution.
Businesses without much of a budget to spend on their accounts and point of sale can definitely benefit from a payment service provider. However, you won’t get a lot of support if you need help starting from scratch.
Issues with Using Payment Service Providers
There are a lot of benefits to using a PSP to handle payment card services, from PCI DSS to other extra features for online transactions. However, there are downsides to a PSP too. For instance, you don’t get a great deal of customer service to help with your online transactions. You can deal with an issuing bank if you have any direct bank issues. However, there aren’t a lot of ways to get help from your PSP.
Some payment systems do provide technical resources so you can find your own answers to questions about global payments or chargeback for instance. However, your aggregator won’t be as available to help you. There may be a need to do a lot of searching on Google.
On the other hand, with a merchant account, you do get a lot more support with your credit card processing features. Because merchant accounts are designed to support individual users, you get a great deal of custom support.
Another downside for a PSP is how easy it is to get an account. Although it might sound great that you can set up an account immediately, this also means that you have a higher risk of someone suddenly cancelling or freezing your account if something goes wrong. The extra vetting process that you’re subject to with a merchant account might seem annoying, but it boosts your chances of staying on top of your account.
Merchant accounts give you the benefit of the doubt with something changes in your account. On the other hand, with a payment service provider, if you suddenly change a huge credit card transaction, or something else makes you seem suspicious, your account will often be frozen instantly. Since there aren’t as many people around to help you if something goes wrong, you’re left to struggle alone.
There’s a risk that once your account is frozen, you might have to wait weeks before you can get everything properly set up again.
How Much Does a Payment Service Provider Cost?
One of the first things that many business owners will look at when using online payment service providers, is how much the account is going to cost. Things can get tricky at this point, as the best solution for your business might not be the same as it is for any other business owner that you know. The fees will depend on the size of your company, the average transactions you need to handle, and so on.
The pricing of a merchant account or PSP can sometimes go against you when you consider things like price per transaction, business volume, compliance fees, hardware costs, and so on. The pricing structure of the merchant account also needs mentioning.
Most payment service providers use a flat rate structure for pricing. Basically, this ensures that you pay the same amount for every transaction, no matter what the card type might be. There’s no monthly fee to worry about, and other costs beyond transaction costs or usually non-existent too.
In some cases, the prices of transactions are deducted from each transaction in a simple strategy to help small business owners manage expenses. High volume businesses also benefit from the flat—rate pricing structure of a payment service provider.
The costs that are often associated with using a basic merchant account can be a lot harder to understand. This is why it takes a lot of time for business leaders to properly read through the terms and conditions of their services.
With a merchant account, you may need to pay for the following structures:
- Interchange-plus: This basically means that your payment processor delivers the interchange fees of the card networks to you, along with a small markup.
- Subscription pricing: With this strategy, merchants pay a monthly fee for their membership with the merchant account. There’s also another small fee to pay with transactions too. This cost often comes at a flat rate, so it’s easier to plan.
- Tiered pricing: Transactions here are often grouped into non-qualified and qualified categories, with qualified transactions costing less. This model often simplifies payment processing and leads to merchants paying more in the long-term.
Aside from the basic costs, pricing structures can also come with other extra fees to think about, such as costs for PCI compliance to keep your payment system secure, and fees for statements. If you’re a smaller company without a lot of money to spend, you’ll usually get a much cheaper experience when you’re working with a payment service provider. On the other hand, if you’re making a lot of cash every month with your company and you want some extra support, then a merchant account provider might be the better choice.
What About Prices for Card Networks
There’s another cost you’ll need to think about when you’re setting up your business with the right payment provider. Card brand networks act as a middleman between an issuing bank and service provider. There are credit card associations, and PIN-less card networks to consider.
Every business which needs to accept credit and debit cards for payment will need a service for processing those payments. Some of these connections require extra third-party payment gateways that lead to greater fees. Payment gateways offer a point of connection between point of sale systems and platforms. Gateways, on the other hand, offer connectivity for businesses that want to access the payment processor that’s right for them.
Gateways are an appropriate option for a wide array of business configurations in-store and online. Payment services are often embedded in more comprehensive service choices. Some platform providers for ecommerce sites also give you support for the payment processor that you want to use.
There are also independent sales organizations that work with payment providers to handle merchant relationships. These companies resell services and products from payment processors, and service providers. ISOs also receive commission from processors which they sign up merchants for.
Another option is to work with a value-added reseller which works in partnership with one or more payment processors to deliver services to merchants. VARs offer extra features that complement payment processing options like point of sale hardware, inventory management, and so on.
Finally, banks also play a part in the overall expense of your system. The issuing bank will deliver credit or debit card to your consumers. Additionally, acquiring banks handle credit and debit payments for merchants. You’ll need to enter a contract with an acquiring bank with your merchant account, or through a payment service provider.
Contract Lengths with Payment Service Providers
Another thing that you might need to consider when you’re evaluating your payment acceptance options, is how long you need to stay with a payment service provider. Being tied into a specific deal can make it difficult to change your strategy if you find a better option elsewhere.
On the plus side, with a payment service provider, you’ll usually get a pay-as-you—go experience. There’s no extra fee to worry about if you decide that you want to cancel your service. On the other hand, if you choose a merchant account, then it’s a lot tougher to get out of a relationship that you no longer want to be in.
Although the industry is evolving and more merchant accounts are giving businesses a lot more freedom to evolve and pay on a monthly basis, you do get a discount if you pay for long-term accounts. Annual contracts and other expensive ending or termination fees for your accounts will mean that you have more financial worries to consider when you’re trying to build a successful business. It’s definitely a good idea to make sure that you don’t rush through your comparisons.
Examine what’s going on in your industry, and make sure that you know which companies can give you the best costs in the long-term. If you’re still a relatively new business and you’re not sure how quickly your needs are going to change, a monthly pricing structure might be best for you. Taking this approach will allow you to switch accounts if you find something that might be more affordable elsewhere.
The Pros and Cons of Using a Payment Service Provider
There are a lot of reasons why you might prefer to use a PSP over a merchant accounts. Payment service providers are a lot more flexible than their counterparts. For smaller businesses, you’ll have the freedom to change your services at will and explore the various options that might be available to you. Pay as you go pricing also means that you’re not stuck into anything.
A lot of the popularity associated with payment service providers comes from the fact that you get a lot of convenience for a low cost. Payment service providers are great for growing companies and smaller businesses. You get things like payment security, and various advanced tools all built into your package. That means that you can find what you need easily.
Additionally, remember that payment service providers are great for getting you up and running fast. You can fill out an application and begin accepting payments almost immediately. There are no intimidating contracts to worry about, or underwriting processes where you might not be accepted. Additionally, although merchant account providers are giving businesses more options today, they still don’t make it as easy to get your foot in the door.
So, why would anyone not get a PSP account?
Well, there are some downsides too. As mentioned above, a payment service provider is a third-party processor. There are some risks with taking this approach to selling. For instance. It’s easy to open an account, so there’s also more of a risk that someone will cancel your account if something about your purchases begin to change.
Another common compliant with a payment service processor is that there’s always a risk that something will happen with your account and you’ll be unable to get the support you need to get back on track. When you’re signing up for this kind of account, you need to understand that your account might be frozen or terminated almost without warning.
Although there are people you can get in touch with to find out what’s going on, it often takes a while before you can get the money that you’re owed.
Should You Use a Payment Service Provider?
So, who should choose a payment service provider.
Let’s run down some of the facts.
- Easier to get set up for beginners
- Monthly payments mean you can keep your costs low
- Excellent for flexibility when you’re not sure what you need long-term
- Lots of extra features built in as standard for companies
- Excellent for ease of use and growth
- Fewer fees to worry about in general
- Limited transaction fees
- Great for credit card payments online and offline
- Not as much customer support for beginners
- Could risk frozen or cancelled accounts
- Less specialist guidance
Payment service providers are likely to be the right option for a specific kind of business owner. You need to think carefully about what you want to accomplish with your business before you get started. A payment service provider is more likely to appeal to you if you want something that’s flexible and affordable to get you started with selling online.
Payment service providers are also a good choice for those who are selling large volumes and want to keep costs as low as possible. However, if you are running a bigger business and you need more guidance, then a merchant account might be the right way forward for you.