What Is a Payment Service Provider (PSP) and How They Make Money
Payment service providers (PSPs) have changed the way businesses and individuals handle financial transactions from the ground up. They streamline payments, enhance security and privacy by minimizing data logging and retention, and facilitate global trade by removing geographical restrictions from the equation.
In this guide, we are delving into some of the details regarding PSPs, their underlying mechanisms, some of the advantages and disadvantages that come with them, as well as the ways they stay afloat and generate profit in the dynamic and competitive fintech sector.
What Is a Payment Service Provider (PSP)
First things first, the terminology. A Payment Service Provider (or PSP for short) is a third-party company or entity that offers businesses and individuals solutions for receiving and handling electronic payments, for example, credit and debit card transactions.
These solutions facilitate secure and efficient transactions not only between buyers and sellers but also between buyers, sellers, and financial institutions that issued the buyer’s card and that serve as the payment processor for the seller. That is, they act as intermediaries between merchants and payment networks, ensuring seamless and secure payment processing.
How Does a Payment Service Provider Work
Payment service providers work in tandem with banks to manage the entire transaction process from start to finish. The process usually goes as follows:
- First, the customer initiates the payment. During the initiation, the customer furnishes the necessary transaction details, which are then conveyed to the bank for a review, that is, a preliminary assessment that ensures that the provided information adheres to established security protocols;
- Then, the transaction details go through the intricate network of credit card infrastructure. That is, the data passes through a series of digital pathways that ensure safe transmission;
- Then, the transaction details arrive at the issuing bank or another institution that holds the cardholder’s account. The issuing bank evaluates the customer’s available funds, transaction history, etc., to make sure there are no indicators of potential fraud. If everything is in order, the bank approves of the transaction;
- Finally, the issuing bank sends the information back through the credit card network, relaying it to the initial bank, that is, the bank that first received the payment initiation;
What role does the PSP play in all this? In short, it acts as the bridge between the customer and the merchant, as it communicates the result of the data revision to both the customer and the vendor. This results in increased transparency and ensures that all parties involved are in the clear about the status of the transaction.
Who Needs a Payment Service Provider
Who needs payment service providers? In short, everyone with an online business platform, but most importantly:
- E-commerce businesses: PSPs pretty much singlehandedly ensure that an e-commerce platform can receive and direct online transactions safely. With the increasing demand for seamless transactions and a number of available payment options, a solid PSP can help you offer your customers a diverse range of choices;
- Retailers: Electronic payment systems are not restricted to the digital realm — brick-and-mortar retailers rely on them almost as much, no matter how large their operations. With PSPs, they can move beyond traditional cash transactions and embrace more sophisticated payment methods, such as contactless payment options;
- Subscription Services: For businesses that rely on a subscription model, PSPs facilitate automated payments and manage their subscriptions. That is, they allow businesses to bill customers at regular intervals automatically;
- International Businesses: Globalism is real, and thanks to the widespread nature of capitalism, geographical borders are a thing of the past, at least as far as capital is concerned. Thus, international companies can make use of PSPs to ensure cross-border trades can be conducted without having to worry about currency conversion and varying payment methods.
The Benefits of Having a Payment Service Provider
PSPs are more than simple transaction facilitators. They have become indispensable to businesses of all sizes, as they offer an array of advantages that can help them revolutionize the ways they manage payments and streamline operations. Some of those advantages include:
- Speed: The ability to ensure seamless payment processing means that businesses can handle payments while bypassing some traps placed by bureaucracy. This, in turn, allows them to focus on growing their brand and improving customer satisfaction;
- Cost-effectiveness: PSPs alleviate this financial burden since they come with lower fees. That, of course, means increased annual savings;
- Transparency: PSPs imply predictable processing fees. There are no hidden charges for different card types; there is no hidden small print to be read, etc. This transparency empowers the buyer and allows businesses to handle processing costs effortlessly;
- Efficiency: PSPs are easy to integrate within pretty much any platform. This streamlines operations by negating our need for separate software and hardware purchases;
- Flexibility: There are no long-term contracts and termination fees with PSPs. That lets businesses explore various payment options without having to commit to one immediately until they have found the optimal payment solution.
How Reactivepay Can Help
Reactivepay offers a comprehensive API with an extensive array of essential functionalities designed to initiate and finalize transactions seamlessly, as proven by integrations with prominent leaders in the payment processing market.
By leveraging our API, you can incorporate a range of features on your platform, all tailored specifically to your payment processing needs. Some of them include:
- Invoicing widgets: Automate your payment process with our easily integrated invoicing and checkout widgets;
- Card processing: Our API lets you process a variety of bank cards and ensure swift authorization and completion of all transactions;
- Multiple payment options: We can help you expand your global reach with an array of payment options, such as WeChat, AliPay, China UnionPay, PayPal, and others;
- Payment notifications: Our API will keep you informed of all transactions in real-time with instant payment notifications and web-hooks;
- Chargeback settlement: Leverage our API to handle refunds, disputes, and chargeback settlements through our platform and react quickly to your customer needs to build a trusting digital environment;
- Commission service: Use our commission services to adapt to changing industry dynamics and trends, as well as to optimize your revenue streams.