What Is A Payment Service Provider? Everything You Need To Know

A payment service provider takes on the full financial risk of each business under its account. For the most part, this scenario is beneficial to the merchant because it makes accepting credit cards more accessible — the signup and approval process is practically instantaneous!

Much of the customer vetting is done after the signup, however, which can take some businesses by surprise. PSPs such as Stripe allow payment processing to begin immediately but hold the business’s funds for about two weeks to complete the vetting process.

The vetting process for each merchant is much more thorough in the merchant account model because the provider is dealing with the merchant directly. This typically includes credit checks and a more thorough look at the business’s cash flow and history.

However, once that process is complete, the account is associated specifically with that business, which can make it easier to resolve issues should they arise.

Merchant services aren’t exactly known for simple, transparent pricing, but payment service providers buck the trend by drastically simplifying the costs. Most of a PSP’s costs are covered by flat transaction fees. In most cases, your payment gateway and checkout are all covered for eCommerce selling, too.

The other nice thing is that you typically don’t have to pay additional fees for payment security because PCI compliance is bundled into your account.

Merchant accounts, on the other hand, often have a laundry list of itemized fees.

This doesn’t necessarily mean PSPs are cheaper than merchant accounts, though (more on this below).

Generally, a merchant account is laser-focused on payment processing, while a third-party processor takes a much different approach to serving merchants. A PSP aims to be more of an all-in-one solution for merchant services. For instance, with most third-party processors, you get hardware freebies, such as a mobile reader, to get you started.

With a payment service provider, you are typically buying into an entire platform of other types of business tools that complement payment processing. For instance, Square, Stripe, and Shopify offer reporting features, invoicing tools, and many add-on software options that are included for a reasonably low cost. They also provide their own gateways for users who want to sell online. So a merchant using Square could set up a loyalty program, utilize the free analytics reporting, and even send an email marketing campaign — all from a single account!

Customer service and account stability can be an issue for payment service providers. This stems back to the approach they take to vetting accounts and the responsibility they take by aggregating merchants into a single account.

Because third-party processors don’t thoroughly vet your business before approving your account, they analyze individual transactions with much greater scrutiny after your account is established. That means that a single abnormally large transaction could trigger an account hold while the company’s analysts evaluate whether it’s genuine. In some cases, the PSP might even terminate your account suddenly for what its algorithm deems as risky behavior.

What’s worse is that if you do have an account problem with a PSP, it can be difficult to reach a live customer support representative to resolve it.

Check out our post on avoiding merchant account holds and terminations to find out how you can prevent this unpleasantness.

Payment service providers often use a flat-rate pricing structure, meaning you pay the same amount for a transaction regardless of card type (something like 2.75% or 2.9% + $0.30 per transaction). Usually, PSPs have a low or no monthly fee and no other costs beyond transaction fees.

Transaction costs are typically deducted from every transaction, a model known as “pay as you go.” Very small businesses, in particular, tend to save money with this pricing model. But even higher-volume businesses can occasionally save more with flat-rate pricing.

All of the costs associated with a traditional merchant account tend to be a little harder to pin down, which is why it’s so important to read your contract and understand what you are committing to and what fees to expect — because, more often than not, there is more than meets the eye. Merchant account providers usually use one of the following pricing structures:

• Tiered Pricing: Transactions are grouped into qualified/non-qualified categories, with qualified transactions costing the least. This model is supposed to simplify payment processing but often leads to merchants paying more over time as a significant portion of transactions are treated as non-qualified. Pricing might be listed as 1.85% + $0.15 for a qualified transaction and 2.65% + $0.20 for a non-qualified transaction.
• Interchange-Plus/Cost-Plus Pricing: The payment processor passes on the interchange fees mandated by the card networks, as well as a small markup. Pricing might be listed as cost/interchange + 0.2% + $0.10 per transaction.
• Subscription Pricing: Merchants pay a monthly “membership” fee instead of a percentage-based markup, usually along with a small flat fee per transaction. Pricing for this model might be listed as $49/month + 0% markup + $0.15 per transaction.

Pricing structures can make a massive impact on your bill at the end of the day, so be sure to understand what services are billed separately. Typically, smaller businesses do better with a PSP, and once revenue climbs, a traditional merchant account can give you a better deal.

However, even now, nearly every third-party processor we review here also offers high-volume pricing. Most businesses processing somewhere between $10k and $15k/month in credit cards can start to see cost savings with a merchant account or qualify for a volume discount plan from a PSP.

Want to know more about credit card processing costs? Check out our guide to credit card processing rates and fees.

When it comes to a contract, there is a big difference between a PSP and a merchant account. PSPs usually operate on a pay-as-you-go or monthly basis, and there’s no penalty for canceling the service. Merchant accounts, on the other hand, are a different story.

The industry standard for merchant accounts is still a three-year contract with an automatic renewal clause that renews for a one or two-year period after the initial term. Closing your account early can lead to a costly early termination fee (ETF). That said, the industry is changing and trying to keep up with the times. Plenty of reputable merchant account providers offer month-to-month agreements that you can terminate without racking up expensive fees.