What is a Payment Service Provider (PSP)

What is a Payment Service Provider (PSP)
Want to know about payment service providers? Find out everything you need to know about PSPs and their benefits. Learn more using Square as an example.
by Square Mar 17, 2022 — 4 min read
What is a Payment Service Provider (PSP)

As a business owner you need to accept payments however your customers may want to make them. If you don’t, you risk missing out on a customer’s business at the very last hurdle. Today, that payment method is almost always electronic.

At first, the prospect of accepting electronic payments can feel like a challenge for a small business owner – a potentially complex process full of unfamiliar financial processes, forms and regulations. And if you do things the old-fashioned way, negotiating with banks, completing credit checks and setting up merchant accounts, that’s exactly what it can be.

But there’s another, better way to ensure you take payment however your customers want to make it: utilising the talents of a payment service provider (PSP).

What is a payment service provider (PSP)?

A payment service provider – often shortened to PSP – is a third-party company that grants businesses access to the electronic payment methods that their customers want. These are most commonly credit and debit card payments but can include digital wallets, bank transfers, direct debit functions and more.

Payment service providers do this by offering to take care of the more complex and time-consuming aspects of dealing directly with banks and financial institutions. They provide the necessary merchant accounts and payment gateways in a handful of clicks; things that can take days or even weeks to set up if a business is dealing directly with a bank.

Once set up, PSPs manage each transaction from the start when a customer gives you the details you need to process the payment, to the finish, where the money lands in your account.

How does a payment service provider work?

To gain a better understanding of exactly what an online payment service provider does, let’s take a closer look at the payment process itself. In this example, imagine that you made an eCommerce sale through your website, but the same basic process applies to in-person and over-the-phone payments too.

A customer enters their card details and clicks ‘Pay’ to make the purchase.

A transaction request is sent to the payment service provider.

The PSP verifies the customer’s card details with the bank/financial institution/credit card company and ensures the customer has the necessary funds.

Verification complete, the PSP transfers funds out of the customer’s account and to your merchant account (which often resides on the PSP’s platform.)

The PSP notifies you and your customer that payment has been accepted. If the card details were unable to be verified or if there weren’t sufficient funds in the customer’s account, the PSP will notify both parties that the payment was unsuccessful.

Most PSPs do far more than just smooth out and simplify the payment process. A payment service provider like Square offers a wealth of added functionality such as invoicing, financial reporting, payment hardware and software, point of sale (POS) systems and more.

7 benefits of using a payment service provider

Why use a payment service provider over other options, like dealing directly with a bank or financial institution? Here are just a few of the benefits.

1. Less time, effort and admin

In order to accept card payments you’d traditionally have to go through the lengthy process of setting up a merchant account with a bank and negotiating the terms of your agreement. PSPs simplify this process by setting up umbrella accounts with financial institutions and allowing businesses to open sub-accounts that connect to these pre-approved and pre-negotiated accounts. This makes setup almost instant!

2. Instantly accept the payment methods you need to

By engaging with a PSP you can instantly begin accepting payments in the way your customers want to make them, card or contactless, in-person or online. This allows you to make more sales and increase customer satisfaction.

3. Add new payment methods

Have you realised that customers are demanding a method of payment that you initially overlooked? No matter – you can easily add it! It’s a payment service provider’s job to keep up-to-date with the demands of the modern consumer, and you’ll be able to instantly add whatever payment method you choose.

4. Transparent and affordable

PSPs can save you money as well as time. Manually integrating all the different payment methods your business may require – credit cards, debit cards, contactless, e-wallets, bank transfers – can incur significant costs. A PSP can save you from many of these, instead of charging a small (and 100% transparent) percentage of each sale.

5. Ultimate safety and security

PSPs understand how critical financial safety and security is, so they heavily encrypt all transactions with SSL (Secure Socket Layer) technology. This gives both you and your customer the confidence you need to make and accept payments online.

6. Do business across borders

In today’s global economy, PSPs offer one huge advantage over banks: the ability to deal across borders and currencies. Most PSPs allow you to deal with customers around the world, making them perfect for anyone looking to expand their business empire.

7. Enjoy financial analysis

Most PSPs offer financial reporting functionality that gives you a snapshot of how your business is doing at any given time. This can also make it far easier to reconcile your accounts.

A payment service provider example: Square

Searching for an online or mobile payment service provider that can do all the above and more? Look no further than Square.

At Square, we have made it our mission to help you establish, operate and grow your business in as simple, fun and effective way as possible. We do so by offering a complete suite of payment products and services, including both hardware and software:

In fact, we can help with a lot more than just payments. Appointments, inventory, team management, marketing, loyalty programs, business loans; at Square we offer a wealth of tools designed to help you get ahead in business.

If you’re ready to simplify the world of business payments with a payment service provider, our team at Square is ready to help. Get in touch today!

The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.


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