What is a PSP (Payment Service Provider)?

In an increasingly digital world, it’s becoming more and more important for businesses to offer payment methods that are secure, convenient and familiar to their audience - wherever they may be.

However, the infrastructure behind payments is fast-evolving, and can be complicated with lots of industry-specific terminology to understand.

So what is a payment service provider (PSP)? In this comprehensive guide, we’ll define the terms and look at a PSP’s main purpose, as well as clarify the difference between a merchant account, a payment gateway, a payment processor, and a payment service provider.

PSPs offer merchants access to electronic (digital) payments, using different online payment methods such as credit and debit cards, digital wallets, online banking, direct debit, and more. A PSP handles the technical relations with the external payment networks and bank accounts of merchants and customers. Therefore PSPs are sometimes called merchant service providers.

Most payment service providers also offer merchants additional services. Ecommpay, for example, maintains an entire FinTech ecosystem, which includes direct acquiring, 100+ local payment methods, consulting, and ready-made solutions for specific industries like travel, mobility, retail, and more.

If you want to accept payments from your customers without them leaving your site, provide them with a choice of payment methods, and you have customers from around the world, you’ll need a payment service provider.

PSPs do more than simply facilitate payments, they provide vital services for e-commerce merchants, such as currency conversion, reporting tools to help you track transactions and understand customer behaviour, and even technologies that help improve your security and prevent fraudulent transactions.

A good PSP will ask you questions like which countries and currencies you’re dealing with, what your average transaction amount is, who your customers are and their payment preferences. They’ll then put together a solution that includes all the payment methods that are the right fit for your business, whether that’s accepting debit and credit card payments, digital wallets, open banking, or local payment methods for specific countries.

As we’ve already touched upon, working with a payment service provider (PSP) offers several advantages beyond simply facilitating payments. Below are the key benefits:

By working with a PSP you can focus on growth and customer satisfaction while outsourcing the complexities of payment handling to a reliable partner.

A PSP facilitates online and offline payments for businesses by acting as an intermediary between the business, the customer, and the various financial institutions involved in the transaction. Here is a breakdown of the steps involved:

1. Customer enters payment details - a customer selects a payment method (credit card, debit card, digital wallet, etc.) at checkout on a website, mobile app, or physical store and enters their details.

2. Payment data is transmitted - The PSP securely collects the payment details from the customer through a payment gateway, which is often provided by the PSP. This data is encrypted to ensure security during transmission.

3. Authorisation request - the PSP sends the payment details to the acquiring bank (the merchant's bank). The acquiring bank forwards the request to the appropriate card network (e.g. Visa, Mastercard) or payment processor.

4. Verification and authorisation- The card network communicates with the issuing bank (the customer's bank) to verify whether the account has sufficient funds or credit, and whether the payment method is valid. If approved, an authorisation is sent back to the PSP, confirming that the transaction can proceed.

5. Settlement - once the transaction is authorised, the PSP facilitates the settlement process:

6. Notification - the PSP notifies the customer and the merchant whether the payment was successful.

The amount and type of payment methods offered by payment service providers differ greatly between providers. However, common payment methods supported by PSPs include:

Make sure you partner with a PSP that can offer the payment methods your customers prefer to use, and don’t forget to consider customers in different countries and how they may differ. At Ecommpay we’re proud to offer over 160 different payment methods.

PSPs and acquirers both help merchants accept payments, however, they have different roles and responsibilities.

An acquirer is a financial institution (typically a bank) that provides businesses with merchant accounts to accept card payments online or via POS terminals. To do that, card networks like Visa and Mastercard must license the acquirer. Most top-tier PSPs, including Ecommpay, hold their own payment network licenses and provide direct acquiring, which cuts the transaction processing costs.

From a merchant's perspective, the acquirer is only responsible for accepting card payments. PSPs offer a more complex service with multiple payment methods, including digital wallets, mobile payments, and more.

A PSP and a merchant account are both ways for businesses to accept and process payments. However, while a PSP facilitates payments, a merchant account is a specialised type of bank account required by businesses to accept credit and debit card payments. It is provided by an acquiring bank or a payment processor working with a bank. Funds from card transactions are deposited into this account before being transferred to the business’s main account.

A business can also create a full-service merchant account that would only work with a particular vendor. However, setting it up requires a lot more time and effort as it involves undergoing a complicated underwriting process.

The PSP uses a merchant account as part of a complex process that occurs automatically. Neither sellers nor buyers see the mechanism in operation. A PSP combines multiple merchants into a single account, meaning that setup is usually quicker and easier than merchant accounts, with a simpler, flat-rate pricing structure.

PSPs and payment gateways serve different, distinct roles in processing payments.

A payment gateway is a technical service that collects the card transaction details from your customers and transfers them to a payment processor or an acquiring bank. Basically, a payment gateway is a link between your website and your acquiring partner (a bank or a payment service provider). A payment gateway also ensures that the information exchanged between your website, your customer, and your acquiring partner is encrypted and protected from interception.

In short, a payment gateway is the actual software that is responsible for the technical aspects of accepting payment, while a payment service provider is a company that offers a range of payment services, often including a payment gateway.

Ecommpay offers its clients a proprietary payment gateway with multiple integration options that would fit most e-commerce businesses.

The terms ‘payment processor’ and ‘payment provider’ are often used interchangeably, however, there are certain differences between them. While payment service providers work with a range of payment services like multiple payment methods, fraud protection, analytics, and more, payment processors' sole purpose is to facilitate credit and debit card transactions from a technical perspective.

A good way to understand the difference is to think of an analogy in the mobile phone industry. A PSP is responsible for the phone (a product facing the client directly), and a payment processor is responsible for the cellular network (the infrastructure).

When choosing between a PSP and a payment processor, think about how much support and flexibility you require, and whether you’d benefit from any additional services such as assistance with regulatory compliance.

Banks and PSPs provide different services and operate differently. Banks rarely process payments directly, they’re more likely to use a PSP to manage the technical aspects of payment processing.

Banks offer a wide range of financial services, including deposit accounts, loans, credit cards, wealth management, and financial advisory and are more likely to serve individuals as well as businesses, whereas PSPs usually focus on merchants and businesses looking for payment solutions.

When it comes to e-commerce, the banks involved are called acquiring banks and issuing banks. The issuing bank is the customers' bank, and the acquiring bank is the merchants' bank. A merchant might choose to go with a bank as the main acquiring partner; however, solutions provided by banks are often limited in terms of geography and available payment methods. Those are a good fit for smaller-scale or local e-commerce businesses. In contrast, international e-commerce enterprises should aim for more complex, customisable solutions offered by payment service providers like Ecommpay.

PSPs are third-party companies helping their clients to accept online payments. In order to do that, most payment service providers combine a number of technical capabilities. Take Ecommpay, for example. Our FinTech ecosystem includes direct acquiring, a payment gateway that provides communication between your website and the card network, and a merchant account where you will receive money from customers. In addition to card payment processing, we offer dozens of alternative payment methods, open banking, payouts, and a solid risk management system.