October 18, 2022

Payment Service Provider

A payment service provider (PSP) helps merchants accept payments via methods such as credit cards, bank transfers and digital wallets. As well as handling payments, PSPs offer additional services such as risk management, fraud protection and reporting.

Payment service providers are a third party that helps merchants accept payments. Depending on the PSP, it will support payment methods such as credit cards, bank transfers, digital wallets or cryptocurrencies. The PSP works together with acquiring banks or payment processors to manage transactions, and can offer additional services such as risk management, fraud protection and reporting. PSPs generally charge fees either on a per transaction basis (flat fee) or as a percentage of the transaction value.

In order to accept payments and use the services provided by a payment service provider, merchants first need to sign a contract with the PSP. Once signed up for the service, merchants can integrate the PSP using the API they provide. However, this API will be different for each PSP, which can make integrating multiple PSPs a challenge. 

An alternative to using the API provided by the PSP is to use a payment orchestration platform like IXOPAY, which uses just one API to integrate multiple payment service providers. This approach can significantly reduce the overheads for integration and maintenance when using multiple PSPs, e.g. for different geographic regions, to provide different payment methods at checkout, or as a fallback option if the preferred PSP is unavailable. Using a common API for all PSPs also makes it much easier to add additional PSPs at a later date or to switch PSPs.

There can be many reasons to want to integrate more than one PSP: catering to different geographic regions, offering multiple payment options, taking advantage of superior rates for certain transactions, or as a fallback option if one PSP is unavailable.

However, there are significant challenges associated with this approach. Each PSP will use its own API for integration with a merchant’s website or app. As the number of PSPs grows, the overheads associated with implementing and maintaining each one also grow. An alternative is to use a payment orchestration platform like IXOPAY that uses a single API to integrate multiple payment providers. This also makes it much easier to add new PSPs or to switch from one PSP to another with minimal overheads.

By providing a single API for all payment providers, IXOPAY makes it easy for merchants to switch to a new PSP by simply routing transactions to that PSP instead. As long as a contract with the PSP is in place, switching to a different PSP can be done in a matter of seconds by changing the transaction routing. This gives merchant’s significant leverage in negotiations with their current PSP, who faces the risk of losing business to a competitor if they offer unfavorable terms.

Besides negotiating favorable conditions, there are a few strategies merchants can adopt to reduce the costs associated with a PSP. These range from routing a transaction through the PSP that offers the lowest fees to avoiding declined transactions.

IXOPAY integrates multiple PSPs using a single API, and allows merchants to define rules that determine which PSP should handle a transaction. This can help reduce costs:

  • Route transactions based on the geographic region, e.g. using a local PSP to handle bank transfers in Germany. Local payments typically have lower transaction costs.
  • Route transactions based on the payment method, e.g. route Visa and American Express payments to different PSPs to leverage more favorable conditions.
  • Some PSPs are more risk-averse than others; routing higher risk transactions through a risk averse provider will lead to higher decline rates. Transactions with a higher risk score can be routed through more risk-affine providers.

A payment service provider is the link between a merchant and the acquirer. The PSP provides the technical means for accepting payments via the merchant’s website or app, as well as other services like risk management, fraud protection and a secure PCI-compliant vault for storing card details.

The acquirer is a step further down the chain, receiving payment information from the PSP. The acquirer is a member of a card scheme (e.g. Visa, Mastercard etc.), and acts as the middleman between PSP and card issuer. The acquirer accepts payments on the merchant’s behalf, and forwards any payment requests to the card issuer for approval. Once the transaction has been approved or declined by the issuer, the acquirer notifies the PSP of this status.