What are payment service providers

And how to choose the right one for your business

Small business owners like you have countless responsibilities. After all, there’s a lot that goes into you getting your business up and running. One of the key pieces of running a small business is finding a payment solution to help you accept all types of payments – from point of sale (POS) transactions to online transactions. So, in this article, we’ll explore the payment service provider (PSP) ecosystem: what they are, what they do, and how to choose the right one for your company. To start, let’s learn the basics of PSPs.

How do payment service providers work?

As you look to accept payment from your customers, you have two options: set up a merchant account through a merchant account provider, which is usually a financial institution (and known as an acquiring bank), or work with a PSP.

A merchant account helps all types of businesses accept multiple payment options at checkout – from credit and debit card transactions to automated clearing house (ACH) transactions, bank transfers, mobile payments and online payments. The merchant account helps facilitate the transactions from the issuing bank and the acquiring bank.

A PSP is the go-between, connecting you – the merchant – and the merchant service provider. The payment processor is valuable because it allows your business to accept payments without having your own merchant account. Therefore, if you do not have a merchant account or a PSP, your business won’t be able to accept payments from your customers.

PSPs are also known as third-party payment processors or payment aggregators. That’s because they aggregate all of the payments of multiple businesses into their merchant account. Once they use their merchant account to get the payments processed, the PSP then disburses your payments from their merchant account to your business bank account. In contrast, a merchant account provider gives businesses their own separate accounts.

So, why would a company choose to use a PSP? Well, while many larger businesses elect to set up their own merchant accounts, the process of establishing a merchant account can be a long, difficult process. The merchant service provider (MSP) who is responsible for processing your transactions needs to take an in-depth look at your company. On the other hand, payment processing companies already have a relationship with the MSP, so it’s much quicker to get started accepting payments.

The benefits of payment service providers

As we’ve discussed, third party payment processors can help your business by removing obstacles for accepting payments at your business. Let’s look at the benefits of using PSPs to help you decide if they’re right for you.

Easy to setup and use

One of the biggest advantages of using a PSP is the ease of setup. If you as a business owner want to establish a merchant account, the MSP must go through an underwriting process that can take weeks or even months. During this process, your company won’t be able to accept any payments besides cash. But with a PSP, the approval process is much faster – taking as little as a few hours. Some PSPs even let you complete the setup process online.

No monthly or annual fees

Another benefit of working with a third party payment processor is that many do not charge annual or monthly fees. Often, there’s a large deposit required to set up a merchant account, plus monthly or annual fees, depending on the MSP. If you establish a merchant account, you could incur other fees like Payment Card Industry (PCI) compliance fees and gateway fees. However, working with a PSP can streamline the fees you pay. Typically, you’ll only pay processing fees to the payment processing company based on the actual transactions which, in turn, can help to streamline your billing and simplify your accounting.

Easy to terminate contracts

Another benefit of working with a PSP is the flexibility of contracts. Many payment providers make it easy for you to alter or cancel your contract with them, and some even let you cancel the contract online. In contrast, MSPs have longer contracts that lock your business in for much longer – up to three years. Obviously, these variables differ depending on the payment processor you choose to work with. But generally speaking, third party payment processors work on a month-to-month basis. Also, many merchant accounts impose minimum transaction limits per month, while PSPs don’t typically have such a requirement. That means a small business like yours may have more flexibility with PSPs.

A suite of tools

Compared to merchant service account providers, PSPs will often have more tools for business owners like you. These tools can include invoicing, reporting, loyalty programs, marketing tools, and more.

Accept multiple payment methods

PSPs give your company access to accepting a variety of payment methods – including both U.S. and foreign currencies. These payment methods can include credit cards, debit cards, online banking, and even mobile payments or e-wallet payments.

Now that you have a better understanding of the pros of PSPs, let’s look at some of the challenges of PSPs.

The challenges of payment service providers

Like any business decision, choosing the right PSP has advantages and disadvantages. Since the merchant account your company will use isn’t yours, there are some drawbacks. Let’s take a look at a few of these drawbacks.

Transaction fees and limits

In order to help make obtaining a way to take payments easy, payment processors have to make money, too. They do this by charging you slightly higher fees than you’d pay if your business had its own merchant account. These transaction fees are the price you’ll need to pay for the convenience and simplicity of working with a PSP. Also, some PSPs set limits on the transaction size and volume of transactions. This is something to keep in mind as your business grows.

Account stability

Again, PSPs can get your business accepting payments much faster than a traditional MSP. But this comes with a downside: the chance of having your account frozen or canceled if your business becomes too high-risk. A PSP may not want to deal with all that comes with high-risk merchants, especially since there are other merchants they’re responsible for. Unlike third party processors, MSPs can be more tolerant to these changes because they have a clearer financial picture of your business from the start.

Customer support

While third party payment processors tend to streamline the payment process for your business, they may be less responsive when issues arise. Many payment processors have online support and articles that can help walk you through issues. However, they may have less human support available. In contrast, MSPs are more likely to have dedicated support for your issues, including specific people who service your business.

How do I choose a payment service provider for my business?

If your business is looking for a PSP, there is a lot to consider. Choosing a partner will come down to your business’s specific needs and how the PSP can help. However, there are some broad considerations that can help you narrow down the right provider for your business. Let’s look at these considerations.

Costs

Perhaps the most important consideration when choosing a processing partner is costs. While each PSP will have different pricing structures, you should investigate and compare them. You’ll want to keep an eye out and understand the transaction charges, each of the fees unique to the processor, and any other applicable fees. Investigating and understanding these fees in the research phase of your search is critical before making a decision, as you don’t want to be surprised by any charges after beginning your relationship with a PSP.

Security

As a business owner, you have an obligation to protect your customers’ payment data. The good news is that when working with a PSP, they shoulder the responsibility of fraud protection and PCI DSS compliance on your behalf. However, you should still understand how they’re helping to protect your customers. And you’ll want to make sure to understand how the processor is helping to keep your company’s sensitive and confidential information safe.

Payment acceptance

While many payment processing companies accept debit and credit card payments, it’s important to evaluate which other payments they accept. With the rise of mobile payments, ACH payments, and other payment methods, it’s good to double check each third party payment processor’s capabilities to find the right fit for your business.

Software integrations

Another important consideration when evaluating payment processing companies is their ability to integrate with your current software. This could include your online store and ecommerce platforms, payment gateway, and account software, thereby ensuring a seamless experience for your customers and your business.

Hardware integrations

Your business should also consider how payment processing partners will integrate with your hardware – from POS systems to card readers. It’s important to ensure compatibility with these systems for efficiency sake. Some payment processors even provide all-in-one solutions, making it easy for your business to get the hardware it needs while developing a seamless payments system.

Policies and limits

Each payment processor will have varying policies. It’s important to compare these policies, including any transaction minimums as well as the timeframes for businesses to receive their deposits.

As you can see, there’s a lot to consider when it comes to PSPs. It comes down to your business’s needs. For those companies that are looking to get up and running and immediately accept payments, a PSP can be a great partner. And, as an added benefit, they can help manage the processing relationship so you can focus on your business. However, there are some important considerations that you’ll need to weigh to make sure you find the right PSP for your company.

Ready to work with a payment processor who can help you accept payments?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.