What Is a Payment Service Provider?
Payment service providers (PSPs) are businesses that serve as the middlemen between merchants and acquirers, helping them accept payments. The main benefit of using a PSP is that it allows merchants to start accepting payments without having a direct relationship with an acquirer. Setting up a merchant account directly with an acquirer involves legacy technology and due diligence processes that are complex and time-consuming. Instead, a merchant signs up with a PSP that already has an account with one or several acquirers.
Merchants use PSPs to handle a wide variety of off-line and online payments from credit cards, debit cards and bank-based transfers to online banking and mobile wallets. PSPs handle the payment process by sending transaction data from the payment gateway to the payment processor used by the acquirer.
How the payment process works
The payment process proceeds as follows:
- A customer attempts to make a payment using their card and the transaction details are sent to the acquirer.
- The information is sent to the credit card network (e.g. Visa or MasterCard), which then sends the transaction details to the card issuer.
- The issuer decides whether to approve the transaction or not and then transmits that decision back to the credit card network, which passes it along to the acquirer.
- The issuer’s decision is shared with the PSP, which shows the result to the merchant and customer.
- After payment has been authorized, the issuer will send the funds to the credit card network, which passes them to the acquirer to be deposited in the merchant account at the PSP.
Benefits of using a PSP
Beyond accepting a variety of payment methods, PSPs offer other services to compete for merchant clients. Services offered by some PSPs include:
- Point of sale (POS) solutions
- Fraud protection
- Cross-border payment processing in multiple currencies
- Ability to easily implement 3-D Secure payment flow
- PCI DSS compliance to protect cardholder data
Another benefit of using PSPs over directly working with an acquirer is that PSP pricing is typically fixed. You can expect to be charged the same rate for every transaction regardless of card type, unlike the tiered pricing used by acquirers. This means you pay a small fixed fee per transaction and a fixed percentage of the transaction.
Drawbacks to using a PSP
There are drawbacks to using PSPs. For starters, acquirers typically hold PSPs accountable for the chargeback rate shared by their clients. If the shared chargeback rate is too high, the merchant faces a significant risk of an account freeze or termination by the PSP to preserve its own relationship with its acquirer.
An additional drawback with using PSPs is that the technical implementation is usually standardized and does not leave room for customization.
Different types of PSPs
There are also differences depending on the type of PSP you have. PSPs can be divided into two types: independent sales organizations (ISOs) and payment facilitators (PFs or payfacs). An ISO is a third-party sales representative for a financial institution that sells merchant accounts, i.e. either an acquirer or another PSP. The acquirer they work with is known as their “sponsor.” They are registered with at least one credit card association, and usually both Visa and MasterCard, let alone American Express, Discover and others.
A major part of the role of the ISO is to connect businesses with the merchant services of the financial institution. They cannot sign a two-way agreement with the merchant, but must include the acquirer in the service contract. Importantly, ISOs do not control the funds the merchant receives when payments are processed. Instead, funding occurs directly from the acquirer to the merchant.
There is a further split between retail ISOs and wholesale ISOs. Retail ISOs do not underwrite the risk of their merchant clients nor their liabilities. Wholesale ISOs are providers that are interested in having more control over their own underwriting approvals and processes. Wholesale ISOs may have their own frontend onboarding and backend settlement systems. They also typically have their own teams of credit, risk and compliance experts. However, wholesale ISOs are becoming rarer as the payments industry evolves due to the continued growth in payfacs.
The advantages of using a payfac
Payfacs are third parties that allow clients, called sub-merchants, to accept payments using their infrastructure. The late 1990s saw the spread of PFs as an easier way for new companies to accept electronic payments without setting up a merchant account with an acquirer. Some major payfacs include Adyen, Braintree and Stripe – all of which are integrated with Acrocharge. Click here to see a much longer list of all the payfacs that work with MasterCard.
Unlike with ISOs, payfacs have two-way contracts with their clients, which means that their acquirer holds them accountable for their merchants’ chargebacks. If the payfacs can’t recover the funds from its merchant, then it is itself liable for the charges.
Besides their liability for payment reversals, payfacs perform a wider range of tasks than ISOs and take an active part in the merchant lifecycle. The key aspects delegated fully or partially to a payfac by an acquirer include underwriting, onboarding, payment processing, funding, reconciliation, settlement and reporting.
Perhaps the most important difference between an ISO and payfac besides for chargeback handling is that the payfac may choose to fund its merchants from a bank account that it controls. This funding ability enables a payfac to get a merchant their funds faster since they no longer have to wait until the acquirer’s settlement date to access them.
It is because of the greater control payfacs have over their customer experience and the resulting higher revenues that they are gradually displacing ISOs.
The importance of chargeback mitigation
Regardless of whether they are a payfac or an ISO, PSPs have an interest in helping their merchants reduce and prevent chargebacks. Otherwise, the PSP will have to rapidly freeze and terminate merchant subaccounts to prevent exceeding chargebacks thresholds.
AcroCharge can help here. We provide a tailored chargeback mitigation solution that combines technology with human-powered know-how to achieve the highest success rates in the industry. We already have experience partnering with some of the world’s leading PSPs to help merchants win chargeback reversals. Best of all, our win-win fee structure means that you will always use us risk-free. If you are interested, send us an email to learn more.