What Is A Payment Service Provider? Everything You Need To Know
We break down the differences between payment service providers and merchant accounts, including costs, contracts, pros and cons, and more.
What is a payment service provider? If you’ve been reading about credit card processing, there’s a decent chance you’ve come across the term payment service provider (or PSP). While “payment service provider” may be used interchangeably with terms like “merchant account” or “payment processor,” it actually refers to a specific type of payment service.
Read on as we break down what a payment service provider is, some examples of the best credit card payment processing providers, and the pros and cons of using one.
Table of Contents
- What Is The Definition Of A Payment Service Provider?
- PSPs (Third-Party Processors) VS Merchant Accounts
- Which Payment Processors Are Payment Service Providers?
- Merchant Accounts VS PSPs: Which Costs More?
- The Pros & Cons Of Using A Payment Service Provider
- Is A Payment Service Provider Right For You?
- FAQs: What Is A Payment Service Provider?
What Is The Definition Of A Payment Service Provider?
A payment service provider (also known as a PSP) provides merchants with the ability to accept electronic payments, such as credit cards, debit cards, and digital wallets (e.g., Samsung and Apple Pay), during both online and in-person transactions.
While payment service provider is the technical name for them, these companies are better known by many merchants as third-party processors or even aggregators. And herein lies the critical distinction with a payment service provider. Unlike a traditional merchant account, where merchants have a unique, separate account, a PSP combines all merchant accounts as sub-users under its umbrella merchant account.
PSPs (Third-Party Processors) VS Merchant Accounts
The following table breaks down some of the general characteristics of payment service providers vs. merchant accounts, although some outliers do exist in both categories.
|Credit Card Processing|
|Business Has Unique Merchant Account|
|Quick & Easy Approval|
|Generally Comes With Integrated Productivity Software|
|Suitable For High-Risk Businesses|
|No Monthly Administrative Fees|
The biggest difference is that a payment service provider facilitates one large merchant account, with individual business users being sub-users. A merchant account provider is more traditional in the sense that every merchant has an individual account.
Which Payment Processors Are Payment Service Providers?
While most payment processors are merchant account providers, some of the biggest names in the industry are payment service providers. These include some big names, such as Square, PayPal, and Shopify Payments, as well as Stripe and Toast.
If you’re wondering what separates some of these providers from each other and which would be best for your business, we have pieces that compare Stripe vs. Square, Square vs. PayPal, and Stripe vs. PayPal.
These companies are some of the most well-known, but there are many other PSP companies out there.
Merchant Accounts VS PSPs: Which Costs More?
Generally speaking, PSPs are a very good value for small, seasonal, or new businesses with relatively low transaction rates as they minimize overhead costs. Meanwhile, merchant accounts are often cheaper for well-established, higher-volume businesses that can take advantage of economy-of-scale pricing.
Let’s break it down some more.
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.
Which Pricing Model Is Best?
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.
Contract Length With Merchant Accounts & PSPs
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.
The Pros & Cons Of Using A Payment Service Provider
- Convenience: PSPs are one of the most accessible forms of payment processing
- No Maintenance Fees: You generally only pay for a PSP when you’re using it. If you take a month or two off, it costs you nothing.
- Fast Setup: You can signup for a PSP within a matter of minutes.
- Free Software: If you’re just getting your business off the ground, it can be very convenient to bundle your inventory tracking, invoicing, and other services with your PSP.
- Account Holds & Freezes: PSPs are more often subject to account instability than merchant accounts
- Scaling Issues: PSPs tend to cater to small, lower-volume businesses. An established business can easily outgrow the default PSP plan, so make sure to speak with your provider about getting a plan more suited to your volume when you approach the $10K/month threshold.
- Restricted Industry Lists: While not unique to PSPs, they tend to be less inclined to take on high-risk industries.
Is A Payment Service Provider Right For You?
We’ve shared a fair amount of food for thought in this post, and ultimately, it’s up to each merchant owner to decide if a payment service provider is right. Of course, keep in mind that this post is speaking in generalities, and each PSP will have its own set of pros and cons. We do a lot of digging and researching here at Merchant Maverick, so if you are looking for something particular, you’ll probably find a post dedicated to it among our reserves.
To help support you on your journey, we have additional resources, including our full guide to third-party payment processors, which goes into more detail.
In the meantime, we hope this post gives you the information you need to go down the right path to entrepreneurial success!