Payment service provider

What a payment service provider does

A payment service provider, often called PSP, handles payments in a shop technically. It receives the payment data, passes it to the bank involved or the card network, confirms the result to the shop and makes sure the money arrives in the merchant account. For the customer this happens in the background; for the merchant it is the part of the checkout where most can technically go wrong.

The contract models

Three models are common. In the classic model the provider acts as a technical intermediary, the money flows directly to the merchant and fees are billed monthly. In the aggregator model, common with providers such as Stripe or PayPal, the money runs through the provider first and is paid out afterwards. In the model with risk assumption the provider buys the receivable, carries the default risk and charges a higher rate for it.

The third model is often the only option for a young shop. Anyone who cannot present balance sheets does not get a card acceptance contract with their bank and goes through a provider that takes on the risk instead.

Where the selection goes wrong

• Looking only at price: the cheapest rate does not help when payments are declined more often or the billing is opaque.
• Too few methods: customers drop out when their preferred method is missing. Invoice, card, direct debit and one instant method cover the bulk.
• Underestimated switch: a change touches the checkout, invoices, accounting, refunds and subscription logic. That is a project, not a setting.
• Blocks abroad: anyone selling internationally needs a provider familiar with the local methods.

What matters beside the fee

Four points belong in the comparison. First the drop off rate at the payment step, meaning the share of payments that fail because of technical errors or declines. Second the payout frequency: daily payouts ease liquidity, weekly ones can become a problem during fast growth. Third the handling of refunds and chargebacks, because fees hang on them. Fourth the support, because during a payment outage every hour costs revenue and not every provider is reachable around the clock.

Frequent questions

• Do I need several providers? A second provider as a fallback lowers the risk that an outage stops sales.
• Who is liable for fraud? That depends on the contract model. With risk assumption it lies with the provider.
• What is PCI DSS? A standard for handling card data. Anyone who never touches payment data themselves cuts their audit effort considerably.