Are you a merchant looking to accept credit card payments but unsure about the differences between a payment service provider (PSP) and an acquirer? Understanding the role that each of them plays in the payment processing ecosystem is crucial for making informed decisions that best suit your business needs.
In this article, we will talk about what a payment service provider is, how it benefits online merchants, and how working with a PSP differs from working directly with an acquirer (sometimes referred to as a merchant acquirer or merchant account provider).
What is a payment service provider?
A Payment Service Provider (PSP), also known as a payment aggregator, payment facilitator, or, sometimes, Internet Payment Service Provider (IPSP), is a service provider that facilitates payment transactions via online payment methods on behalf of sub-merchants or sponsored merchants. To clearly understand payment service providers, it is important to note that they sign a merchant agreement on behalf of the merchant acquirer. The PSP operates a master merchant account and receives settlements on behalf of the sub-merchants utilizing the account to accept credit card payments, in effect acting as a third-party biller.
Conversely, merchants choosing to partner with an acquirer work directly with a regulated financial institution that is licensed by Visa and Mastercard to accept payments.
How do payment service providers benefit online merchants?
A payment service provider will work with an acquirer in order to open a merchant account, agree on pricing, and complete the payment gateway integration process. When the PSP merchant account is all set up and ready to go, the payment service provider will then sign up multiple sub-merchants under its own Merchant Identification Number (MID) to enable them to accept online payments. Doing so allows the sub-merchants to bypass the more rigorous application, underwriting, and technical processes involved in opening an individual merchant account with a financial institution.
For example, a PSP will have one MID with an acquirer under which they process all online transactions falling within the travel merchant category code. Under the same account, the PSP will then sign up several small travel agencies as sub-merchants, all of whom will utilize the same travel merchant account.
The payment service provider will assume all risk and liability for their sub-merchants, and the acquirer will monitor the PSPs registered with them to ensure that the appropriate due diligence and compliance processes are followed when the PSP boards the sub-merchants.
Sub-merchants, on their end, simply sign up with the PSP to begin accepting e-payments from their customers. Typically, merchants with low transaction volumes are the ones that usually opt to work with a PSP.
Some of the benefits of choosing a payment aggregator for your business include
- Ease of application
- Fast approval
- Simple pricing structure
- Acceptance of electronic payments instantly
Despite the benefits of the PSP model, some merchants choose to open a direct account with a merchant acquirer such as payabl. instead to ensure exclusive, super secure credit card payment processing of their business transactions.
PSP vs acquirer: Comparing your two possible options
Making the choice between a payment service provider and an acquirer is a very important decision that every business needs to mull over. Let's go over some of the key differences between the two payment provider options in order to determine which model is right for your business.
Account setup
PSP – Account setup and onboarding are much quicker with a PSP. It's simplified because the PSP first undergoes the proper, exhaustive onboarding process with an acquirer themselves. Once they're approved, they utilize a simpler process to enroll each of the sub-merchants to their account.
Acquirer – The application and approval process lasts longer and is more rigorous for the merchant. However, if approved, the merchant is given a unique MID meaning that the merchant processes under a unique individual account that the merchant has complete control over.
Payments processing
PSP – With a PSP, all sub-merchants process their credit card payments under a shared MID with a number of other sub-merchants. They also share one single descriptor (what appears on the customer's credit card statement describing the transaction). Plus, Visa and Mastercard have set limits and rules regarding the volume a merchant can process under an aggregated account. Once those limits are surpassed, the merchant needs to process under their own dedicated MID.
Acquirer – Payment processing is done through a dedicated merchant account when the merchant signs up with an acquirer. The risk parameters and limits are set according to the business model of one merchant. There are no collective parameters set for a number of merchants at once, unlike what is the case with a PSP. Furthermore, the merchant gets to choose a billing descriptor that's clear enough to their customers regarding what their transactions were for. Why is this important? The better and more recognizable your descriptor, the more likely your customers are to recognize payments listed in their statements that were made to your business. This means they will be much less likely to question and dispute the particular transaction, be confused by it, or, subsequently, submit a chargeback for it with their issuing bank.
Fees and rates
PSP – A payment aggregator is not very flexible on rates. They usually have fixed prices, such as flat monthly fees. Many payment service providers charge percentage-based transaction fees, which can be quite expensive. The rates offered are usually much more expensive than those of an acquirer.
Acquirer – Merchant account providers are more competitive with their rates. That's possible because a direct merchant account removes a layer in the payment process. Using a PSP is like utilizing an agent between the merchant and the acquirer.
Funds settlement
PSP – An important part of a payment services agreement between a PSP and the acquiring bank it's registered with is the frequency of settlements. Depending on a pre-decided schedule (for instance, daily or weekly), the PSP will first have to receive the settlement for all sub-merchants from their acquirer, and then the PSP will allocate those funds to each sub-merchant accordingly.
Acquirer – Merchants who partner with an acquiring bank like payabl. usually receive their funds faster, as the money gets settled to their direct merchant account, eliminating the extra reconciliation and allocation steps the PSP is required to take.
Chargebacks and fraud
PSP – Sometimes, an aggregated account is the only way for high-risk merchants to get approved for payment processing. Sharing one single descriptor might confuse the end customer and lead to a higher chargeback rate on the account. In addition, since all sub-merchants fall under one single MID, all it would take is one merchant with excessive chargebacks and fraud for the acquiring bank to close the master account. Even if, as a merchant, you manage your chargeback and fraud effectively, keeping your merchant account live is subject to the rest of the sub-merchants you share the account with.
Acquirer – Acquirers like payabl. offer a variety of fraud prevention and risk management tools that merchants may utilize to protect the payments they receive from customers. Risk and fraud parameters are customized to each dedicated MID according to the individual merchant's business and history. The merchants have full control and responsibility over their respective merchant accounts and are able to avoid the exposure risk that is characteristic of aggregated accounts.
payabl.: A better alternative than PSPs
Hopefully, this article has clarified how payment service providers work and whether working with one would be a good fit for your business. As a fully regulated payment processor and acquirer licensed by Visa and Mastercard, offering merchant accounts to businesses across a variety of industries, we can provide you with more details on the difference between accepting payments through a shared versus a dedicated MID. If you have any further questions or confusion, feel free to contact us.