Payment service providers are important for any business that wants their customers to enjoy a simple payment experience.
It can be useful to know the key factors of payment processing so in this guide we define payment service providers, along with giving a description of how payment transactions work.
A PSP is a Payment Service Provider, also called Merchant Service Provider (MSP) or Payment Processor, and it is one of the key players in a payment transaction. PSPs process and manage the entire transaction, actually moving the funds from one account to the other, and serve as a mediator between the Issuing bank, card/payment network and Acquiring bank.
PSPs are responsible for authorising a payment and ensuring that funds are transmitted to the merchant’s account. Every business that takes debit or credit card payments needs to partner with a Payment Service Provider and pay them directly for their services. Some of the most well-known PSPs are PayPal, Square, Stripe, Adyen and GoCardless.
Though it can seem confusing at first, the basis of payment processing is quite simple. When a customer purchases something online, scans a device or enters their bank information manually, the payment gateway collects the payment information from the Issuing bank and transmits it to the PSP. It is now common to see payment gateways and PSPs merged into the same company, such as Stripe or Braintree.
The Issuing Bank then needs to verify the information through the payment processor, making sure that the payment details are valid and that there are enough funds in the bank account to process the payment. The transaction also has to pass verification checks based on the card’s CVV number or AVS.
CVV means Card Verification Value, and is composed by 3 digits on the back of the card for Visa and MasterCard, or 4 digits in front of the card for American Express. AVS means Address Verification Service, and it is a system used to verify the address and zip code of the cardholder. Both of these are used to ensure the legitimacy of all the data and prevent fraud or identity theft. If all details are correct, the PSP authorises the payment.
Authorisation is one of the main steps of a payment transaction. Merchants can choose between an authorisation hold or capture. Essentially, an authorisation hold means that the payment is authorised by the PSP and ready to be transferred, but it is on hold for the merchant to review the details of the payment before accepting it.
Merchants might choose to put the payment on hold to double check that the payment is legitimate and avoid chargebacks. They can have up to one month to review the order before the authorisation expires, depending on the PSP they partner with. Customers see this as a “pending” payment in their bank account until the merchant approves it.
Capture, on the other hand, means that the payment can be transferred immediately and doesn’t have to go through the merchant for review after it was authorised. This is the most common option and takes only a few seconds.
From then on, it is quite simple. The Issuing Bank charges the cardholder and the payment is processed via a card network (Visa, MasterCard, American Express) until it reaches the Acquiring bank (merchant’s bank), who settles the payment and deposits the funds in the merchant’s bank account. Overall, the PSP’s job is to facilitate the movement of funds and ensures that the payment arrives in the account.
Apart from allowing businesses to accept card and bank-based payments, payment service providers also offer a range of other services that can improve the payment experience for customers and merchants alike (as explained by GoCardless). So, what do payment service providers do in addition to processing transactions?
Many payment service providers offer high standards of security for PSP payments. By staying PCI DSS compliant, businesses can rest assured that their customer’s financial data is secure.
In addition, many PSPs facilitate cross-border payments by processing multiple currencies. This is a crucial service for any business that’s looking to gain a foothold in the global market.
Furthermore, many payment service providers will offer transaction reporting features, enabling you to reconcile transactions more effectively. Generally, this will consist of monthly reports, although some providers offer real-time reporting.
The majority of PSPs and traditional merchant accounts support a wide range of payment methods, including credit and debit cards, ACH bank transfers and e-wallets, such as Apple Pay and Google Pay. With PSPs, all payment options are immediately available or added easily with a few clicks. Traditional merchant accounts often require additional setup or separate accounts to support various payment types (as explained by Forbes).
PSPs make it easy to accept credit and debit cards anywhere you sell, including in-person via mobile and retail store sales, online for e-commerce sales and e-invoices and via keyed-in payments for phone sales and remote processing.
Accept Apple Pay, Google Pay, Samsung Pay and other e-wallet apps for all types of sales, including mobile payments, retail store sales and online orders.
Accept ACH transfers for online sales and e-invoices.
Most PSPs let you record sales made via cash and paper checks alongside your processed payments.
PSPs also support a range of customer payment conveniences, including secure card-on-file, quick-response (QR) code payment screens and automated recurring payments for memberships and subscriptions.
Connecting with the right PSPs and deploying payment technologies can be a stressful, expensive and time-consuming process. At Imburse, we understand the power that payments have in your business. Our mission is not only to connect companies with any PSP and technologies available on the market, but to do so easily, quickly and inexpensively.
If you have any questions regarding PSPs or would like to know more about Imburse, get in contact with us today.
Editor’s note: This article was originally published on the 25th of May 2021 and has since been updated for comprehensiveness.