Payment service providers, or PSPs (also known as third-party payment processing companies or payment aggregators), are third-party organizations that enable business owners to securely accept online payments. Here’s everything you need to know about PSPs, so you can make the best choice for your small business.
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Payment service provider basics
Payment service providers make it possible for businesses to accept all types of online payments, including credit cards, debit cards, cash cards and e-wallets. Rather than having a dedicated merchant account with a bank, PSPs function as a financial umbrella for multiple merchants. By pooling all their customers into a single account (with subaccounts for each individual customer), PSPs are in effect taking on the combined financial risk of all the businesses they work with.
Once you sign up with a PSP, it will handle every stage of your online payment transactions from the moment a customer initiates a payment to when your business receives those funds. PSPs can connect with numerous card and payment networks, as well as a wide range of acquiring banks. The result is a smooth and secure payment experience for both merchants and customers, with payment card industry, or PCI, compliance and your payment gateway already taken care of. Additionally, because of their pricing structure, PSPs may be the most affordable option for smaller businesses or those just starting out.
» MORE: How much are credit card processing fees?
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Payment service providers vs. merchant account providers
The terms "payment service provider" and "merchant account provider" may sound similar, but they describe two different types of organizations. While both make it possible for businesses to accept online payments, merchant account providers designate a separate account and merchant identification number, or MID, for each business they serve, as opposed to PSPs, which combine multiple businesses under a single account and MID umbrella.
Because merchant account providers give each business its own separate account, it can take some time (as much as a few weeks) to be approved so you can start getting paid — and you can expect a thorough vetting process as your individual risk as a business is assessed.
PSPs, on the other hand, take on the combined risk of all their customers, so the approval process is simple and almost instantaneous. This difference in risk also affects account stability, however. Once you’ve made it through the merchant account approval process, your account should remain stable, barring any extreme circ*mstances. The collective risk PSPs take on makes them more likely to hold, freeze or terminate accounts they decide are too risky.
There are other significant differences as well. PSPs typically provide a turnkey solution with a set price that may include a range of features and even hardware. Merchant account providers often offer a customizable solution tailored to the unique needs of each business. The chart below summarizes how these two options compare:
Payment service provider | Merchant account | |
|---|---|---|
Merchant account setup | Hundreds or thousands of merchants share a single merchant account. | One dedicated merchant per account. |
Approval process | Typically instant approval. | Involves verification and compliance process that may take weeks. |
Account stability | Higher risk of sudden holds, freezes or termination. | Stable with little risk of termination, holds or freezes. |
Pricing | Typically fixed, some custom plans available. | Typically more flexible and customized to your business needs. |
Processing volume | Strict limits on transaction size and processing volume. | Negotiable limits on transaction size and processing volume. |
Pros of PSPs
Opting for a payment service provider has some advantages:
A comprehensive suite of tools: Unlike most merchant service account providers, PSPs typically include features like invoicing, reporting, team management, loyalty programs, personalized marketing and a synched online store.
Price: PSPs are usually less expensive to start up and maintain than merchant accounts, often have an option with no monthly fee and usually don’t have a required minimum for monthly transactions.
Faster setup: Payment service providers generally offer a simple setup process to get you up and running quickly, unlike many merchant account options, which have an involved approval process.
No additional security fees: PCI security compliance is typically included in your PSP account with no extra charge.
Simplified accounting: Transaction reporting capability makes it easier to reconcile transactions and keep your books in order.
No monthly minimum transactions: Unlike merchant accounts plans, which may require customers to process a minimum number of transactions on a monthly basis, PSPs typically don’t impose a monthly transaction minimum.
Accept multiple currencies and payment methods: PSPs typically allow you to securely accept U.S. and foreign currencies through payment methods that include credit cards, debit cards, online banking and e-wallets. They also tend to stay abreast of new payment methods, making them available to you as they develop.
Cons of PSPs
Before deciding to go with a PSP, consider these potential drawbacks:
Less account stability: The downside of quick approval and setup is an increased chance of having your account frozen or canceled if your business is suddenly deemed too risky. This could mean weeks of waiting before you’re up and running again. The extra vetting process merchant account providers require may be stressful, but it helps ensure that your account will stay in force over the long haul.
Volume limits: PSPs tend to have set limits on transaction size and processing volume. This could become problematic as your business grows.
Top payment service provider options
Here’s a quick snapshot of a few prominent PSPs:
Square
Best known for its free iconic square-shaped magstripe reader hardware, Square offers a quick, online signup with no credit check and a free point-of-sale mobile app that lets you accept payments from your phone or tablet. Square meets PCI standards with no extra charge to you, and can accept all types of payments including all major U.S-issued and most international credit and debit cards, as well as ACH and more. Customers can choose from a range of plans designed for different types of businesses, many of which have no monthly fee. You always have the option to scale up to a paid plan with more tools and lower processing rates as your business grows, and to purchase additional hardware from the company’s marketplace.
Processing rates for no-monthly-fee plans:
2.6% plus 10 cents for tapped, dipped or swiped transactions.
2.9% plus 30 cents for online transactions.
3.5% plus 15 cents for keyed-in transactions.
Major features included with no-monthly-fee plans:
Basic inventory tools.
Online store with no limit on the number of items for sale.
POS app.
Toast
Designed specifically for restaurants and the food industry, Toast is PCI-compliant and offers a pay-as-you-go plan with a two-year contract and no monthly fee. This no-monthly-fee plan comes with a starter kit that includes the Toast software, 24/7 launch support and a router, a Toast Flex POS terminal and a Toast Tap payment device. You can always purchase additional hardware from Toast, and/or scale up to one of the company’s paid plans as your business grows. But if you want only a few additional tools from its paid plans, Toast gives you the option to purchase these features as add-ons.
Transaction rates for no-monthly-fee plan:
2.99% plus 15 cents per transaction.
Major features included with no-monthly-fee plan:
Payment processing.
Reporting and analytics.
Order, table and management.
Guest feedback.
24/7 phone, email and chat customer support.
Automatic upgrades for features and software.
Stripe
With customers ranging from small businesses to Fortune 500 corporations, Stripe offers a comprehensive, customizable and frequently updated suite of tools to help companies securely accept payments and handle invoicing, reporting, business management and more. Stripe is PCI-compliant and allows you to accept payments in person, online and via its mobile app from all major credit and debit cards worldwide, as well as wallets, bank debits and bank redirects. As your business grows you can upgrade to a custom plan that fits your company’s specific needs.
Transaction rates for no-monthly-fee plan:
2.7% plus 5 cents for in-person transactions.
2.9% plus 30 cents for online transactions.
3.4% plus 30 cents for manually keyed transactions.
4.4% plus 30 cents for international card transactions.
Major features included with no-monthly-fee plan:
Reporting and reconciliation.
Invoicing.
Mobile app.
Roles and permissions.
Dispute handling.
Third-party integrations.
24/7 phone, email and chat support.
» MORE: NerdWallet's best small-business apps
A version of this article was first published on Fundera, a subsidiary of NerdWallet.
As an expert in the field of payment processing and financial technology, I can confidently share comprehensive insights into the concepts discussed in the article about Payment Service Providers (PSPs). My expertise is grounded in a deep understanding of the payment industry, including the workings of PSPs, merchant accounts, and the key players in the market.
Payment Service Providers (PSPs):
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Role and Function:
- PSPs serve as third-party organizations facilitating secure online payments for businesses.
- They enable businesses to accept various forms of online payments, including credit cards, debit cards, cash cards, and e-wallets.
-
Financial Umbrella:
- PSPs act as a financial umbrella for multiple merchants, pooling their customers into a single account with subaccounts for individual customers.
- This approach allows PSPs to take on the combined financial risk of all the businesses they work with.
-
Transaction Management:
- PSPs handle the entire lifecycle of online payment transactions, from initiation by the customer to the receipt of funds by the business.
- They connect with multiple card and payment networks, as well as acquiring banks, ensuring a smooth and secure payment experience.
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PCI Compliance:
- PSPs ensure Payment Card Industry (PCI) compliance, relieving merchants of the burden of managing security and compliance for their payment gateway.
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Affordability for Small Businesses:
- Due to their pricing structure, PSPs are often a more affordable option for smaller businesses or those just starting out in comparison to traditional merchant accounts.
Payment Service Providers vs. Merchant Account Providers:
-
Differences:
- Merchant account providers assign a separate account and Merchant Identification Number (MID) to each business, while PSPs combine multiple businesses under a single account and MID.
- Merchant account approval is a more involved process, potentially taking weeks, while PSP approval is typically instant.
- PSPs take on the combined risk of all customers, making them more likely to hold, freeze, or terminate accounts they deem too risky.
-
Account Stability:
- Merchant accounts offer more stability once approved, with a lower risk of sudden holds, freezes, or terminations.
- PSPs, while providing quicker approval, may have less account stability due to the collective risk they assume.
Pros and Cons of PSPs:
Pros:
- Comprehensive suite of tools, including invoicing, reporting, team management, loyalty programs, and more.
- Typically lower startup and maintenance costs compared to merchant accounts.
- Faster setup process and no additional security fees.
- Simplified accounting and no monthly minimum transactions.
- Ability to accept multiple currencies and payment methods.
Cons:
- Less account stability with an increased chance of account freezes or cancellations.
- Set limits on transaction size and processing volume.
Prominent PSPs and Their Features:
-
Square:
- Known for its free magstripe reader and offers a quick online signup with no credit check.
- Provides a range of plans with no monthly fee and the option to scale up as the business grows.
- Accepts various payment methods, including credit cards, ACH, and more.
-
Toast:
- Designed for restaurants, PCI-compliant, and offers a pay-as-you-go plan with no monthly fee.
- Provides a starter kit with POS terminal and payment device.
- Additional tools available as add-ons for businesses needing specific features.
-
Stripe:
- Offers a customizable suite of tools for businesses of all sizes.
- PCI-compliant and accepts various payment methods, including credit and debit cards, wallets, and bank debits.
- Transaction rates vary for in-person, online, and international transactions.
In conclusion, the world of payment processing is dynamic, and choosing the right Payment Service Provider is crucial for the success of any business. The information provided in the article covers essential aspects, enabling small business owners to make informed decisions based on their specific needs and priorities.
