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A payment service provider is a third-party company that helps businesses accept various payment methods, including credit cards, debit cards, and digital wallets. It manages almost the entire payment transaction, from the moment a customer submits their information to the final deposit into your account, helping simplify and secure the checkout experience.
If you time-traveled to the Wild West and you told a banker we'd one day press a few buttons on a magic box in our pockets to teleport money instantly from one bank to another, they might think you've spent too much time in the saloon. Thanks to digital payment service providers, this is simply how we pay today.
With more payment choices available than ever, shoppers expect to use their preferred methods wherever they shop. Businesses that offer convenient ways to pay have a clear advantage.
Our guide breaks down what you need to know about payment service providers, including capabilities, benefits, and examples, so your business can deliver low friction checkout experiences, acquire and retain customers, and increase revenue.
Table of contents
Payment service providers manage the end-to-end payment process for businesses, including credit and debit cards and digital and alternative payment methods.
Businesses of all sizes can benefit from working with a payment service provider. Here’s what they do:
Payment service providers simplify online payment processing by connecting merchants, banks, and payment networks. They handle almost every stage of the payment process for you, including card processing, electronic payment processing, and business payment services. This makes it easy for businesses to offer multiple payment methods without managing individual merchant accounts.
Traditionally, businesses had to set up their own merchant accounts with a certain bank, which was usually a complex, time-consuming, and costly process. Payment service providers are often easy to set up and cost-effective, making them a particularly beneficial solution for small businesses.
Here are the basic steps PSPs use to help businesses with electronic payment processing:
All of this happens in seconds, providing a secure, frictionless experience for both the customer and business.
Payment services are constantly changing, so it helps to understand the different kinds of providers to find one that fits your business needs. PSPs typically fall into three main types: traditional, integrated, and specialized.
Traditional payment service providers primarily focus on in-person transactions and simpler online models. They often require a separate setup for each part of the payment process. These providers include:
Other traditional solutions include manually handling checks, cash, or mail orders.
Integrated payment service providers can be categorized by how they connect with a business or by the types of payments they handle. They are often full-service providers that bundle multiple features into one platform. Some examples include:
PayPal is a key example of an integrated PSP, enabling businesses to accept a broad range of digital payment options while maintaining security and ease of use.
Specialized providers go beyond basic transaction processing to offer a full suite of services tailored to specific needs. For example:
For many businesses, a payment service provider is a simple way to accept payments. Although PSPs, dedicated merchant accounts, and payment gateways are often used interchangeably, they all work differently. Here's how they compare across setup, stability, pricing, and scale, as well as pros and cons.
Payment service providers | Dedicated merchant | Payment gateways | |
|---|---|---|---|
Approval process | Fast approval, little paperwork | Lengthy application with underwriting | Depends on processor, often included in setup |
Account stability | Shared, aggregated accounts may not be very stable | Dedicated account offers control and reliability | Not an account, only transmits data |
Pricing | Flat, transparent fees Can be cost-effective for small businesses | Custom rates May be cheap for high volume | Additional fee on top of processor/merchant account |
Processing volume | Suitable for small to mid-sized businesses | Suitable for high-volume or enterprise merchants | Scales with processor and account setup |
Pros | Single integration, quick setup, wide range of features | Provide control, tailored rates, long-term stability | Secures and transmits payment data, flexible integrations |
Cons | Not controlled very much, pooled funds, strict terms | Complex setup, high costs, management involved | Requires pairing with a processor/merchant account, adds an extra step to setup |
There are many advantages to choosing a comprehensive payment processing software. The right payment service provider to manage your payments helps enhance security, streamline transactions, and meet changing compliance standards.
Here are some of big benefits of working with payment service providers:
Shoppers expect a fast and flexible checkout experience and a wide range of payment options. A PSP allows your business to accept almost everything from card processing to digital wallets like PayPal and Venmo, all through a single platform. This can help you expand your reach globally by supporting multiple currencies and providing the personalized experiences shoppers expect.
A payment service provider can help you navigate the ever-changing regulatory landscape of online payments. Instead of having to update your tools and processes to meet these regulations manually, you can count on your PSP to maintain compliance with necessary standards like the PCI DSS, which helps you securely store payments and prevent fraud.
When a customer purchases a product, their payment information gets transmitted through a payment gateway. PSPs provide built-in security features that encrypt this sensitive data as it travels between the customer’s bank and your business. This helps to protect your business from data breaches and fraud and gives your customers peace of mind.
Payment service providers manage the complexities of online and contactless payments, from authorizations to currency conversions, so you can focus on core operations like sales and marketing. These integrated payment processing software solutions can help a business save time and resources. PSPs may also offer tools to automate invoicing, reporting, and accounting tasks.
Payment service providers may offer tools to help personalize the checkout experience and drive sales. For example, PayPal allows businesses to customize data fields, payment buttons, and colors to fit their brand look. PayPal also helps businesses create mobile-friendly checkout pages so shoppers can purchase from any device.
Businesses can use their PSP to access detailed, real-time reports and data analytics. They can leverage this data to better understand customer behaviors and preferences and optimize payment experiences to meet their needs.
PSPs can help automate customer support by managing disputes and chargebacks, potentially saving retailers time and money. Businesses can also use PSPs to make payouts individually or at scale, helping improve customer satisfaction.
Many PSPs are easy to integrate. Still, it's a good idea to prepare for this process in advance so you can gather the resources you need to make it as smooth as possible.
To get ready for PSP integration, you may need to take these steps:
As customer preferences and payment technologies evolve, the right payment service provider gives your business the tools to adapt and meet customer needs. This helps your business isn't left behind with nothing but tumbleweeds rolling through your in-store or virtual checkout line.
Business Payments with PayPal Open allows you to safely and securely accept multiple payment methods through a single integration, like PayPal, Pay Later, Venmo, digital wallets, credit and debit cards, and local payment methods.
Learn more about Business Payments with PayPal Open.