What is a Payment Service Provider?

by Mitch Thomas

FinLync | July 7, 2022

The last few years have seen the rise of payment service providers (PSPs). These third-party payment providers offer greater choice for companies that need to be able to accept different types of payments from their customers. As such, PSPs have an important role to play in today’s increasingly complex payments landscape. So what is a PSP, what do PSP payment services include, and what challenges do companies need to be aware of if they are thinking of working with a PSP?

What is a PSP?

Payment service providers (PSPs) are third-party payment providers that provide services to businesses and help them accept online payments from their customers, typically by supporting a number of different payment methods including credit cards, bank transfers and digital wallets. By offering customers access to as many payment methods as possible, businesses may be able to expand their customer base and thereby maximize their sales. PSPs are also sometimes referred to as Merchant Service Providers (MSPs) or Payment Processors.

PSPs have become more significant in recent years. In the European payments market, the second Payment Services Directive (PSD2) that came into force in 2016 was an important development for PSPs. In particular, it required banks to give third-party providers access to customer accounts, thereby creating a level playing field for a wider range of payment service providers.

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PSP fees are typically levied in one of two ways: as a percentage of each transaction or a fixed cost per transaction. Additionally, US-based on-line PSPs are supervised by the Financial Crimes Enforcement Network (or FinCEN), a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat money laundering, terrorist financiers, and other financial crimes.

What services do PSPs provide?

PSP companies come in a variety of different shapes and sizes. While their core function is to process payments for merchants, they can also perform different PSP services, which may include some or all of the following functions:

  • Payment formatting – taking raw data and formatting it into the standards needed by different banks in order to facilitate payments.
  • Payment optimization – deciding which type of payment, and which bank, will allow the required payment terms to be achieved in the most cost-effective way. This means taking into account a number of considerations, such as the value date or due date of the payment as well as currency, amount, and the countries encompassed by the transaction.
  • Bank communication communicating the payment to the bank and retrieving status updates.
  • Payment monitoring – keeping an eye on the payment in order to monitor it for successes and failures.

 

Depending on the type of PSP, payment service providers may also offer a variety of other services including fraud protection, compliance, currency processing and real-time transaction reporting.

PSPs can operate in different ways. Some use accounts owned by the corporation – in other words, the PSP directly facilitates payments from the corporate account, which can introduce an element of risk. Other PSPs leverage accounts owned by the PSP itself – however, this can also introduce a challenge in cases where some payments need to be made from corporate-owned accounts.

Payment provider meaning: gateways, processors and aggregators

Not all PSPs are alike, and it is important to understand the difference between PSP processing and payment gateways, for example.

There are some important differences between a payment gateway and a payment processor. A payment gateway is a technology that is used to facilitate card payments by capturing and encrypting a customer’s payment data. A payment processer, meanwhile, transmits the relevant transaction information to the relevant parties and executes the transaction.

Payment aggregators, meanwhile, are providers that process payments for merchants with low processing volumes. This is achieved by using a single merchant ID (MID) for all merchants and aggregating their transactions into a single master merchant account.

Payment service provider list

While there are many PSPs operating today, some of the better-known payment service provider examples include the following:

  • Alipay
  • Amazon Pay
  • Apple Pay
  • net
  • Dwolla
  • PayPal
  • Square
  • Stripe
  • WePay

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Why use PSPs?

There are a number of reasons why a business may choose to use a PSP. For one thing, businesses can improve the checkout experience for their customers by offering a variety of payment methods, thereby improving customer satisfaction. They may also be able to accept a wider range of currencies, and therefore sell their goods and/or services to customers in more countries.

What’s more, by outsourcing some or all of their payment-related communications, businesses can free up resources that can then be redeployed to focus on their core business. The PSP, meanwhile, can focus on the tasks involved in maintaining payment formatting, such as making changes to payment limits for specific types of payments, as well as accommodating new and more efficient types of payment.

If done correctly, the cost savings achieved by harnessing lower cost payments may be able to offset much of the cost incurred by working with a PSP.

Challenges with PSPs

While PSPs can provide plenty of benefits, there are also certain challenges that businesses will need to consider when working with PSPs. In particular, companies need to consider the implications of the following:

  1. Cloud integration. Many corporates are focused on the risks involved in handling sensitive bank data, and are concerned about transmitting this data to third parties and hosting it in the cloud. As such, many would prefer to host the data locally to avoid any risks that are outside their control
  2. Standardized messaging. Most PSPs expect a specific format to be sent – so migrating to that format and connecting to the PSP from all ERP and TMS systems can be a challenge, particularly for decentralized companies that are running many different systems.
  3. Data hosting. Another consideration is the need for data to be hosted and managed in a third-party system that is not the originating system. The security audit for the PSP is very strict, while the tieback of data to a book of record system can also be a challenge.
  4. Connectivity. In addition, connectivity to the PSP as a single point of contact will need to be maintained and availability ensured. In most cases, this is the only way that corporates are able to pay creditors.

Meanwhile, PSPs face a number of challenges themselves, including the difficulties involved in keeping on top of fraud risk while minimizing the effort involved in maintenance and integration. Other challenges for PSPs include keeping up-to-date with regulatory change, remaining competitive in what is an increasingly crowded and complex payments market, and keeping abreast of the latest developments in payment methods across different markets.

How do ERP Embedded Apps and Bank APIs Alter the Payments Landscape?

So how does a company like FinLync, that offers ERP-embedded apps and bank API connectivity, compare to a PSP? For one thing, FinLync streamlines companies’ business-to-business payments into one secure, visible process. We provide all the benefits of a PSP, but without the need for an additional system. Treasury teams often struggle to handle a plethora of connections, file types and fragmented system, which can make it difficult to keep track of B2B payments. FinLync’s ERP-native applications carry out native monitoring within SAP.

Our secure API multi-bank aggregator BankLync sits inside the corporate network, so there is no need for banking data to be communicated to or hosted by a third party – removing the need for complex integrations and meaning that opportunities for fraud are greatly reduced. New bank formats are maintained, and new channels are added when they become available, which means that users always have access to the fastest and most efficient payment methods.

This leverages your existing ERP authorizations, reinforcing security and also removes barriers, creating secure and on-demand direct connections to the banks via APIs for real-time payment initiation, greater visibility into payment statuses, and enables automatic reconciliations that continuously improve through artificial intelligence.  Real-time multi-bank API connectivity ensures instantaneous payment transactions that can be tracked quickly, easily and – most importantly – accurately.

Flexible payment workflows are built into the applications, with multiple levels of approval, referencing the existing payment controls directly available in your ERP. This means that payment information generated in the ERP is sent securely to your banks via prebuilt, pretested APIs. Since there are no intermediary parties or processes, you always retain full transparency and get immediate feedback regarding payment status or fees all in real-time.  There is no need to define and maintain separate workflows or user authorizations, and any changes in the underlying ERP master data will automatically apply to FinLync applications.

Last but not least, security audits are a breeze with FinLync because corporates have done their due diligence on their own network, and on their SAP system specifically.

 

How does Treasury benefit from this technology in their payment processes?

The payments landscape is changing dramatically as new technology is opening the door for greater efficiencies and new value propositions.  According to EY, “the competitive landscape in business payments also has created expectations of new capabilities, such as application programming interfaces (APIs) to embed payments in other ecosystems and global pay-outs. Real-time payment rails are about to unleash a whole new wave of use cases and opportunities.”  This is playing out in terms of the benefits being realized within the treasury team, including:

  • Treasurer & Assistant Treasurer
    Reduced vulnerability to fraud; greater confidence with seamless, secure payment processes
  • Treasury Team
    Automatic same-day reconciliation reduces time to financial close; faster resolution of exceptions and discrepancies; artificial intelligence for continual process improvement
  • IT
    Can focus exclusively on the ERP; no need to maintain multiple connections or systems

What does all this mean for you?

Whether you currently use a PSP or are evaluating new technologies, it’s important to look at your company’s growth objectives.  As a high-volume transactional business, payments are ripe for technology innovation. FinTechs are driving the majority of changes in this area because they can help businesses better target differentiated needs among their clients, regardless of vertical; offer new value propositions to better grow the business; and scale rapidly — three key objectives for the future of all businesses.

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