What Is a Payment Service Provider (PSP) & How Do They Work?

If you own a small or medium-sized business and you accept multiple forms of payment, then the chances are that you’ve got a payment service provider.

PSPs are a vital tool in the arsenal of your business. Especially as we go further into a new generation of buyers. Generation Z shops in a much different way from previous generations.

For example, less than 20% of Generation Z representatives pay for goods and services with cash. Whereas around 70% of Gen Z consumers use mobile banking apps daily or weekly.

This means that as a business, you have to be flexible with your payment methods. That’s where PSPs come into play.

But what exactly is a payment service provider, and how do they work? Let’s take a closer look.

Here’s What We’ll Cover:

What Is a Payment Service Provider (PSP)?

How Do Payment Service Providers Work?

How Do I Choose a Payment Service Provider?

Key Takeaways

What Is a Payment Service Provider (PSP)?

A payment service provider is a payment gateway tool. They provide businesses with the ability to accept credit cards, debit cards and digital wallet payments.

For those who are unfamiliar with digital or mobile wallets, they are a form of electronically stored cards. These cards are kept in a “digital wallet” through a service such as Apple Pay or Google Pay.

These PSPs provide a range of payment options for both in-person and online transactions.

How Do Payment Service Providers Work?

Whilst PSPs are not the only type of enterprise that offers this type of service, they do however offer a unique approach to accepting payments.

To put it simply, a PSP collates all of its clients together into one large merchant account. A merchant account is a bank account that fronts your business the majority of the proceeds from a customer’s credit card payments. This is before your customers pay off their card issuers.

This unique approach from PSPs is a huge benefit to business owners. It means that they receive their funds within one or two days of the transaction. Whilst the PSP waits to receive the actual funds from the customer’s issuing bank which can sometimes take longer.

This means that PSPs take on the majority of the financial risk that can be associated with accepting credit card payments. These risks could include fraud or chargebacks.

How Do I Choose a Payment Service Provider?

While there are some providers that are leading the industry, there is no one-size-fits-all solution when it comes to choosing a service provider. This is because each business is unique in its wants and needs.

So when it comes to choosing a payment service provider for your business, you should keep in mind the following criteria to focus on:

Locale

Depending on what sector your business is in and the type of goods and services sold. You should either choose a local payment system provider or a global one.

Each one has unique benefits and drawbacks so it’s up to you to weigh up the options.

Compatibility

You should pay attention to the compatibility of the provider as it may not match your existing framework. However, if you’re not married to your current framework and are looking to change then this may be a good time.

Mobility

With a range of different ways to run a business, you want a provider that can offer mobility and flexibility. Therefore it can be handy to choose a provider that offers mobile payments for simple on the go solutions.

Security

This is perhaps the most important aspect of all. As with anything that involves your business capital, you want to keep a keen eye on the security measures put in place. This is important not just to protect you and your business, but also to keep your customers’ financial details safe from potential fraud or theft.

Key Takeaways

Choosing from the huge number of payment processors out there is an important decision for you and your business. It’s not always an easy task as it needs to be a fully researched and informed choice.

It’s also important to note that what works for other people may not work for you. For example, PayPal may be the most popular choice, but there are plenty of businesses out there who steer well clear of their service.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.

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