What Is A Payment Service Provider (PSP)? (2024)

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Behind the scenes, payment service providers combine credit card processing for tens of thousands of businesses under one super-sized merchant account. By aggregating payment processing volumes, PSPs can negotiate extremely low processing rates with supporting banks. Then, they pass those savings on to their clients, usually in the form of simple flat-rate fees and low or no monthly costs.

PSPs also take on the credit risks for fraud activities and chargebacks for their thousands of clients. When fraud and chargeback issues occur, the PSP’s merchant bank deducts these amounts, leaving the PSP to work it out with their client. This is why most PSPs prohibit high-risk sales activities and tend to have more account holds and freezes than standard merchant accounts.

Payment Service Providers at a Glance

Also known as third-party processors, PSPs enable a broad range of payment options in an all-in-one solution. They typically offer immediate account approval with no long-term contracts, simple, flat-rate processing fees and fully integrated software, POS systems and hardware.

Many PSPs have no startup, monthly or termination fees, so the only ongoing costs are your payment processing fees. PSPs set their processing rates based on the type of payment, such as credit and debit card, ACH or e-wallet and how the sale was processed, such as online, in person or manually keyed-in. At a certain sales threshold, typically around $250,000 in payments processed annually, most PSPs will negotiate lower processing rates.

PSP Pricing and Fees

Payment service providers deliver all-in-one solutions that roll payment processing fees, account costs and hardware and software into one service. Here’s a look at the payment processing fees, account features and related costs of several top-rated PSPs.

PSP Payment Processing Fees

Flat-rate payment processing fees are the cornerstone of most PSP services. Payment processing fees vary among PSP services, but all PSP fees are based on the type of sale, not the brand or type of card used, unlike traditional merchant accounts.

PSP Setup and Account Fees

Account fees are another way that PSPs simplify and reduce your costs. Most PSPs have no application, set-up or ongoing monthly account fees, plus no long-term contracts or termination fees. Those with monthly fees tend to be payment services built into other systems; for instance, Shopify Payments is part of the Shopify ecommerce platform, and QuickBooks Payments ties into QuickBooks accounting software.

PSP Software and Hardware Costs
Most payment service providers deliver a suite of integrated online and POS systems, card readers and checkout registers. These give businesses the tools they need to accept payments anywhere and streamline day-to-day operations. Many features are included for free, but some have added fees.

PSP Payment Options

Nowadays, most PSPs and traditional merchant accounts support a wide variety of payments, 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.

• Credit and debit cards: 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.
• E-wallet payments: 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.
• ACH e-checks and bank transfers: Accept ACH transfers for online sales and e-invoices.
• Cash and paper checks: 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.

PSPs are ideal for startups and side-gigs to fast-growing power sellers. Here are some of the top ways that a payment service provider can benefit your business.

• Instant approval. PSPs offer instant account approval plus payment processing apps and online tools that let you start accepting payments immediately.
• Low or no monthly fees. PSPs can save you hundreds or even thousands per year in monthly fees compared to traditional merchant account providers. This is especially important for side-gigs or solopreneurs who process payments occasionally.
• Predictable flat-rate processing fees. There are no add-on fees for card types, Payment Card Industry (PCI) compliance or printed statements with PSPs. Instead, transparent flat-rate fees make it easy to predict, track and reconcile processing costs each month.
• Streamlined sales and business management tools. Most PSPs combine payment services with a suite of integrated online and brick-and-mortar sales and business management tools, such as POS systems, online stores and e-invoices—many for free. This saves you both time and money since you don’t have to purchase separate software and hardware or connect all of the technical dots yourself.
• No long-term contracts. With no commitments or termination fees, PSPs are completely risk-free. Plus, it’s easy to test drive one or a few PSP options before settling on the best payment solution for your business.

Now you’ve seen all that payment service providers have to offer, but they aren’t the only option. Here are two other ways small businesses can accept credit cards, debit cards and other forms of electronic payments.

Traditional Merchant Accounts

Traditional merchant accounts are payment services that support credit and debit card processing plus various other electronic payments. Merchant accounts can be set up through banks and independent merchant service providers, but application and setup can take several weeks, unlike a PSP’s immediate approval.

Merchant account fees can be very complex. It’s not unusual to see higher fees for certain card types, such as American Express, or for cards that offer rewards, miles or cash back programs. However, processing rates are generally negotiable at lower sales volumes than PSPs, plus they service higher-risk business models.

Unlike PSPs, merchant account providers may have application, setup and monthly fees, along with long-term contracts and termination fees. Some offer built-in business software packages, online payment gateways and card processing terminals, but most use a variety of third-party providers for these tools.

Peer-to-Peer Payment Apps

Peer-to-peer payment services, known as P2P apps, include Venmo, Apple Pay, Zelle and more. P2Ps enable instant person-to-person payments by entering a payee’s email address or phone number into a mobile app. Most P2P services offer free person-to-person payments, plus simple flat-rate payment fees for startups and small businesses.

Business P2P accounts are similar to PSPs in terms of flat-rate processing fees, no monthly costs and built-in payment tracking. However, most P2Ps are limited to app-based or online payment options. As a standalone payment solution, P2Ps fall short of PSPs since few provide built-in card reader hardware, POS systems and online store integrations.

While PSPs deliver a powerful set of payment and business management solutions, they aren’t ideal for all businesses. Here are several instances where PSP alternatives may be an easier or more economical option.

High-volume Sales

Most PSPs will negotiate lower fees when you reach around $250,000 in annual processing volume. However, many traditional merchant accounts will negotiate at far lower volumes, even less than $100,000 in annual processing. This is especially true if you focus on a lower-risk business model, such as in-person mobile, retail or services payments.

High Percentage of Debit Card Processing

If your customers tend to use debit cards for purchases, a traditional merchant account can offer far lower fees compared to payment service providers. PSPs combine debit and credit cards under a single processing rate, but merchant accounts provide separate fee structures for credit and debit cards. You may pay more to process some credit cards, such as American Express rewards cards, but far lower debit card fees more than makes up for this.

High-risk Business Models

Each PSP sets their own rules but, in general, PSPs prohibit sales of illegal or age-restricted products, online gambling and credit repair services, to name just a few examples. Square is one PSP with a few “gray area” programs for items, such as cannabidiol (CBD) products, but these have higher fees than standard sales. If your business tips into high-risk areas or focuses on prohibited lanes, a traditional merchant account is a better alternative.

Brick-and-Mortar Retail Sales

If you only sell in a retail store setting in a single geographic region, you’ll likely get lower card processing rates with a traditional merchant account. This is especially true if debit cards make up a large percentage of your sales. PSPs average their fees over a broad range of geographic areas, card types and business models. In contrast, merchant accounts can offer lower fees based on the risk averages of your typical sales, type of cards processed and goods sold.

Solopreneurs and Small Service Providers

Peer-to-peer payment apps can provide everything the small or solopreneur service provider needs with little setup and no upfront or account costs. Many independent services use Venmo (by PayPal), Cash App (by Square), Zelle and Apple Cash to receive and track payments for in-person, virtual and online services. Those supported by major PSPs, such as PayPal and Square, also make it easy to integrate app payments into other sales tools such as POS and online sales as you grow.