What is a payment service provider and how do they work?

Payment service providers (PSPs) are third-party companies that facilitate electronic payments for merchants. They do this by providing the right infrastructure and connections with multiple acquiring banks (also known as acquirers or merchant acquirers) that process payments on behalf of merchants. PSPs allow merchants to accept customer payments across different methods - from debit and credit cards to digital wallets.

These two terms can often be confused with one another. A payment gateway is a service built to help businesses initiate and accept payments, sitting between the merchant and acquirer. Often it’s a web server which a business’ website or point of sale (POS) system connects to, providing them with different channels to accept payments, such as online, in-app, or in-person. The gateway encrypts sensitive data such as account numbers, CVVs, and cardholder names before passing it down the line in the payment journey.

You can either choose a payment gateway that is provided by a bank or one from a provider that can connect to one or more payment processors.

Another confusion is how payment processors differ from payment service providers. Both conduct the same tasks, but the extent of their offerings differs. 

While many PSPs offer a full end-to-end solution, including their own processing service, payment processors’ sole function is to facilitate a payment by verifying transactions and - as the name suggests - processing them. This includes safely and efficiently transferring the funds between the customers and the business.

To better understand how a payment service provider works, we’re going to walk you through the payment journey, in this case a scenario in which a customer is shopping online:

1. At the online checkout, the customer selects their payment method and enters their card details.

2. After they select ‘Pay now’, the transaction information is sent through the PSPs gateway to its processing function, which shares it with the acquirer.

3. Next in the line is the card scheme such as Visa or Mastercard, which after receiving details from the acquirer, pass it onto the issuing bank.

4. The issuing bank is the bank that issues the card to the customer. It determines whether the transaction is legitimate or not and whether it should be approved, and notifies the card scheme.

5. The card scheme sends the outcome back to the acquirer, which uses the payment gateway to send the decision back to the merchant.

6. If approved, the funds will be deposited into the merchant’s account through the PSP.

Working with a payments service provider, especially one whose services expand beyond processing, is beneficial for your business - especially at enterprise scale. Here are some of the things you can do with a PSP:

• Offer multiple payment methods 

With so many new payment methods emerging, it’s important to keep up if you want happy customers. PSPs help increase conversion rates by giving you access to a wide variety of payment methods, from buy now, pay later to digital wallets and debit cards. No matter your demographic or location, you can give customers the freedom to pay how they want.

• Save time and costs

As most PSPs prioritise easy integrations and API tools, you’ll be able to set yourself up to process and accept payments much faster than you would working with payment gateways or banks separately. PSPs can navigate their own pricings around payment methods, saving you from forming relationships with each individual one. 

• Expand globally

If a payment service provider is present in multiple markets and has local acquiring, the authorisation request to the bank is seen as local and formatted to meet the requirements of the bank. Therefore, your chances of approval are higher. Plus, having a gateway, processor and acquirer with a PSP, through a single integration, simplifies the process of expansion as they focus on the local nuances so you don’t have to.

• Always remain compliant

A PSP ensures compliance for businesses, saving you the burden of making sure everything meets requirements. And with a PSP that’s established in multiple markets you can rest easy knowing that their systems and processes are compliant with regulations and industry standards in each location, such as the Payments Service Directive (PSD) in the EU - which recently put forward its new proposals.

• Keep transactions secure

As mentioned previously, PSPs nowadays go beyond facilitating payments. They offer fraud prevention and security measures that protect your revenue and ensure customers’ transactions are safe. Thanks to machine learning, many PSPs enable you to set up rules tailored to your business and industry. 

• Gain actionable insights

Another feature offered by PSPs is reporting and analytics. They can collect insights such as popular payment methods and average transaction value (ATV) to help you understand your customers’ behaviour. This also helps steer wider business decisions thanks to having a clear outlook on performance.

You can enjoy everything on the above list and more when you work with a single provider, such as Adyen. 

We provide end-to-end payments, data, and financial management in a single solution. Which means no juggling multiple contracts and pricings, and everything you need in one place - including our very own acquiring capabilities which ensures our customers enjoy speed, flexibility, and reliability. And with our global coverage, extensive payment methods, and local acquiring, global expansion is much easier and ripe for success.

Our unique data ecosystem reveals opportunities where your business can grow. Coupled with our machine learning technology, we help protect your business from fraud, provide customer-friendly authentication, and increase approval rates.

Furthermore, our Embedded Financial Products empower you to create extra stickiness for your business. With us you can offer business bank accounts to your users, provide capital to your users, issue virtual and physical cards, and send global payouts in real time. 

Want to learn more about how we can help your business? Get in touch.