The symbiosis between Payment Service Providers and eCommerce businesses
These days, it’s easier than ever to take payments online. The process has changed dramatically in just a few years and now you don't need the hassle of managing all those pesky fees for your own merchant account! That's why so many businesses – from big-box retailers down to small mom & pop shops, are turning towards payment service providers who offer them access without having set up designated accounts or dealing with any other headaches involved when accepting credit card purchases through their website 24/7/365 days per year.
What do you need to accept credit cards and online payments?
Modern businesses need to know how to accept payments online in order for them to be able to stay competitive. Ultimately, two critical services are needed:
- Payment gateway
- Payment Service Provider
A payment gateway is an online version of a point of sale (POS) terminal that enables merchants to accept online payments. It’s a front-end software application on a website that captures and sends credit card data to a payment or credit card processor and communicates approvals or rejections to merchants and their customers.
Payment processor (or payment service provider)
The terms payment processor and service provider (PSP) are often used interchangeably in online payments. However, they refer to the same thing. A payment processor (PSP) is a company that helps merchants accept and process online payments. They work to securely execute transactions behind the scenes by transmitting the card data received from a gateway between the merchant, issuing bank, and the acquiring bank. They also often offer other services in addition to payment processing, such as fraud, compliance, and the capability to accept multiple currencies and payment methods.
You can also check article "What is a payment service provider (PSP) and why is it important to your online business?" for a quick overview of the PSP service and its benefits.
Difference between payment service providers vs. merchant account providers
A payment service provider is a company that provides merchants with the software and tools they need to accept, manage and facilitate online payments. They usually offer several value-added services, including opening a merchant account for small business owners at acquiring banks. Instead of giving each merchant their own account, PSPs work on behalf of merchants, pooling hundreds or thousands of merchants under one merchant account with one identification number (MID).
On the other hand, merchant account service providers are Financial institutions that provide a special type of bank account for merchants to accept online payments. Unlike a payment service provider, merchants get a separate merchant account and identification number (MID) when setting up a merchant account through a merchant account provider. Qualifying for a merchant account usually involves an extensive vetting and risk assessment process as banks take some of the risk associated with the given business model. There are also monthly fees and also sometimes hidden fees that merchants need to be aware of.
What is a merchant account and how does it work?
A merchant account for eCommerce is a type of business bank account that enables merchants to accept card payments such as online debit, credit cards, and other online payments. When the merchant opens a merchant account, he will be able to process payments from their customers, transfer or hold the funds before they are being transferred from merchant's account into his regular business account, where he will have access to his money as needed.
Who are merchant accounts and services for?
A merchant account is for any business that needs to accept debit or credit card transactions for goods or services. However, contrary to popular belief, getting approved for a merchant account is not guaranteed and may be difficult for merchants with past bankruptcies or black marks on their credit reports.
Can I accept credit card payments without a merchant account?
Merchant accounts used to be a requirement for every online merchant in the past. However, this is no longer the case. Merchants that prefer to accept credit card payments without a dedicated merchant account can do so by signing up with a payment service provider (PSP).
Can you accept credit card payments without a merchant account?
Payment services providers are a good option for merchants that don’t want to set up a designated merchant account through a merchant service provider. Payment service providers (PSPs) work like merchant service providers. They enable merchants to accept online payments and hold onto the money from credit card transactions. They handle the entire journey of what payment processing is too. Generally, the process of using a payment service provider is pretty straightforward. Everything can be done online, from the sign up to managing your account.
Summarized table of PROs and CONs
Benefits of accepting payments via a merchant account
Opening a merchant account can involve a somewhat detailed process, but putting in the effort can pay off in the long run. Here are three critical benefits of having your own merchant account.
- Account stability
Merchant accounts offer more reliable account stability, which means there is less risk of termination, holds, or freezes. This is important because having your account terminated or frozen can severely impact your cash flow and even lead your business to shut down.
- Flexible pricing
Merchant accounts acquired through a financial institution usually offer more flexible pricing and can be better customized to your business needs and size.
- Negotiable volume limits
When it comes to processing restrictions, merchant accounts tend to provide a decent level of flexibility. They usually offer negotiable limits on transaction size and processing volume, which can be especially handy if you’re a new or fast-growing business.
Downsides of accepting online payments without a merchant account
Payment service providers allow merchants to avoid setting up their own individual merchant accounts, but this convenience comes with a few significant downsides
- Account stability
Merchants face a higher risk of sudden holds, freezes, or terminations without a dedicated merchant account. The impacts of these events should not be underestimated. For example, during a freeze, merchants cannot process new debit or credit card transactions or access any of the funds from recent transactions until the freeze is lifted.
- Fixed pricing
Payment service providers are typically a little different from financial institutions regarding pricing. Although some custom plans are available for larger businesses, prices are usually fixed from the start.
- Limited processing volume
Unlike a separate merchant account from a financial institution, businesses that use a payment service provider to accept payment online without a designated merchant account face much stricter limits on transaction sizes and volumes, which may not suit every type of business.
Benefits of using third-party payment service providers over a merchant account
Third-party payment service providers are set up to help business owners accept payments online more easily. The benefits of using third-party payment service providers include:
- Quick setup
Payment service providers usually offer a simple setup process and instant approval that is quicker than most merchant account options.
- Lower costs
Payment service providers are usually cheaper than merchant accounts to start up and maintain. They often don’t have a monthly fee and don’t require a merchant to process a minimum number of transactions in a month.
- Additional services
Unlike merchant account providers, payment service providers usually offer several value-added services like fraud management, PCI compliance and merchant tools such as customer insights, reporting, and analytics.
- Better customer experience
Payment service providers offer merchants the ability to provide multiple payment options and easily add new ones to stay up to date with customer payment preferences and provide the most convenient experience.
How to find a good third-party payment processor?
Choosing the right third-party payment service provider is an important decision, but it can be difficult because there are a lot of options out there. Once you understand your business needs and what markets you operate in, you can know what payment methods and solutions your chosen provider must support. Fees, security and compliance, and the level of support are vital issues to know about. It's also essential to understand each provider's capabilities for customizing the checkout process and which merchant tools they offer to help you optimize and run your operations more smoothly.
What is the best way to accept payments & credit cards for small businesses without a merchant account?
Using a payment service provider is the best way to accept credit cards for small businesses. By using a payment service provider, merchants don’t have to worry about setting up a merchant account and also get access to additional services that can help them manage and grow their business. This can also help small business owners to accept credit card transactions and debit cards with the help of online payment processing companies.
Online payment alternatives
While debit and credit cards are popular in many countries around the world. They certainly aren't alone. Over the last decade, hundreds of other alternative payment options have become available. For merchants, it's critical to choose a provider that offers the popular payment methods in each market of operations to enable customers the most convenient and frictionless payment experience possible. Alternative payment methods that are popular with many consumers and merchants include Google Pay, Apple Pay, Klarna, PaySafe, Skrill, and PayPal.
Can online payment gateways work without merchant accounts?
Yes, but only if the payment gateway is provided by a payment service provider (some payment service providers offer both processing and gateway services in one solution). In this case, the PSP sets up the merchant account on your behalf and accepts and holds your money from credit card transactions, much like a merchant account.
How does a payment service provider work?
Let's go through an example of a basic online transaction — from the moment it starts, through to the moment you see the funds in your account - to see how a PSP works.
- First, the customer initiates paa yment, and transaction details will be sent to the acquitting bank.
- Then, the information is sent to the credit card network, which then sends the transaction details to the issuing bank (the bank that issues the card to the customer).
- After deciding whether or not to approve the transaction, the issuing bank passes the decision back to the credit card network, which passes it back to the acquiring bank.
- Then, the decision is passed back to the payment service provider, which shares the result with the customer and the merchant.
- After payment has been authorized the issuing bank will send the funds to the credit card network, which passes them back to the acquiring bank to be deposited in the PSP’s merchant account.
At each stage of this process, the PSP will take a small fee for their services. In addition, you may also be charged additional fees by your acquirer or payment processor. These fees can vary depending on which PSP you use and which pricing model they offer (more on that later).
What are the different types of payment service providers?
There are four main types of PSPs: banks, independent sales organizations (ISOs), payment facilitators, and merchant service providers (MSPs). Let’s take a closer look at each one.
- Banks: as you might expect, banks are PSPs that are affiliated with a particular bank. In order to offer payment processing services, banks must be able to connect to the major card networks (Visa, Mastercard, Discover, American Express) and have a relationship with an acquirer. When you use a bank as your PSP, you’ll usually be working with the bank’s in-house payment processing team.
- Independent sales organizations (ISOs): ISOs are third-party companies that offer payment processing services to businesses on behalf of a particular bank or acquirer. ISOs typically work with multiple banks and processors, which gives them the ability to offer a wide range of payment processing services to their clients.
- Payment facilitators: payment facilitators are PSPs that provide payment gateway and/or payment processing services to eCommerce businesses. To offer these services, payment facilitators must have a relationship with an acquirer. Payment facilitators typically work with multiple banks and processors, which gives them the ability to offer a wide range of payment processing services to their clients.
- Merchant service providers (MSPs): MSPs are payment processing companies that provide payment processing services to businesses of all types and sizes. MSPs typically work with multiple banks and processors, which gives them the ability to offer a wide range of payment processing services to their clients.
What are the different pricing models offered by PSPs?
There are three main pricing models offered by PSPs: subscription-based, transaction-based, and hybrid. Let’s take a closer look at each one.
- Subscription-based: with this pricing model, you’ll pay a monthly or annual fee for access to the payment service provider’s payment gateway and/or payment processing services. In addition, you may also be charged a per-transaction fee for each payment that you process.
- Transaction-based: with this pricing model, you’ll pay a per-transaction fee for each payment that you process. In addition, you may also be charged a monthly or annual fee for access to the payment service provider’s payment gateway and/or payment processing services.
- Hybrid: as the name suggests, the hybrid pricing model is a combination of the subscription-based and transaction-based pricing models. With this pricing model, you’ll pay a monthly or annual fee for access to the payment service provider’s payment gateway and/or payment processing services. In addition, you may also be charged a per-transaction fee for each payment that you process.
What are the benefits of using a PSP?
There are several benefits associated with PSPs and PSP payments. Most importantly, they take care of the entire payment process, so you can focus on your core business without having to worry about whether you’re able to get paid. Here are some of the benefits associated with using PSP services
- Convenience: payment service providers offer a convenient way for businesses to accept payments. All you need is an internet connection and you can start processing payments.
- Ease of use: payment service providers offer easy-to-use payment gateway and/or payment processing services. This means that you can start accepting payments without having to invest in expensive hardware or software.
- Flexibility: payment service providers offer a wide range of payment processing services, which gives you the flexibility to choose the services that best meet your needs.
- Security: payment service providers use state-of-the-art security measures to protect your data and safeguard your transactions.
- Support: payment service providers offer 24/ seven support, so you can rest assured that someone is always available to help you with any questions or issues that you may have.
Even though going with a single acquirer can be beneficial in many ways, we encourage merchants to try going into multi-acquiring. Single acquiring merchants tend to see their strategy as good because this results in lower costs, less complexity in the process, and less infrastructure to manage for both the merchant and the payment service provider. However, trends have shown that more clients have started looking for multi—acquiring plans for the following reasons:
Being flexible in the e-commerce sphere is very important as it assures business continuity and risk mitigation. There are often cases in which the acquirer experiences a service outrage or changes its acceptance policy for a certain business model. Such occasions may lead to huge difficulties for all the involved parties. Having multiple acquirers to handle merchant’s transactions reduces the risk of transactions being unauthorized as traffic from different types can be re-routed to the acquirer that is most appropriate and similarly, declined transactions can be sent to alternative acquirers. Multiple players can also positively affect businesses by offering a higher quality of reporting and knowledge of the current trends in the given industry. For example, in cases where there is a more complicated reconciliation, partners who offer an automated reconciliation can resolve this issue. Moreover, having an independent payment gateway solution could offer “plug-n-play” integrations with acquiring banks which can significantly reduce merchant’s time to market without precedented delays.
Global reach is an important element as well because companies can leverage the reach of their product. Merchants and partners should be assured that the given reach is aligned with their payment strategy and connectivity. Otherwise, clients won’t be interested in purchasing the offered product, and failing to incorporate various methods for payments may harm customers’ experience and loyalty.
Being able to optimize transaction routing can reduce operational costs and increase revenues because in this way the number of declined transactions will decrease. In addition, diversifying the acquirers will help both merchants and payment partners have the leverage to negotiate prices.
Another key reason for multi-acquiring is the global and local acquiring approval rates and interchange fees as well as the chargeback processing costs and acquirer commissions. Partnering with several banks can enhance these as well as the speed of operations. At the same time, multi-acquiring requires an investment in time and resources which stands as a barrier for smaller entities who cannot afford to expand their capabilities.
Increased Conversion Rates:
Working with several acquiring banks boosts the conversion rates. This is especially important for the customers’ experience. The increased conversion rates most often come as a result of increased payment acceptance and alternative payment methods due to the diversity of acquiring banks. In this way, merchants can deliver more paying options for their customers both domestically and cross-border which gives more flexibility to the clients as well.
We at Catalyst always encourage our clients to apply for several acquirers. It is always smarter to spread the risk across multiple banks. It is worth mentioning that there’s no single acquirer that has the best success rates and costs for all countries. Therefore, multi-acquiring will improve these numbers by redirecting the transactions to the acquirer that best fits the given transaction.
In summary, Payment Service Providers can help you reduce integration and processing costs, accept multiple payment methods and currencies, and safely and securely facilitate your payments. If you’re looking to expand your business, you will need to start accepting a wider variety of payments from your customers, allowing them to pay through whichever method they prefer. If this sounds like the direction you want to head in, consider working with CatalystPay.
At Catalyst, we offer a wide range of payment processing services to businesses of all types and sizes. We work with multiple banks and processors, which gives us the ability to offer a wide range of payment processing services and 120+ payment methods to our clients. We also have a team of experts who are available 24/7 to help you with any questions or issues that you may have. Contact us today to learn more about how we can help you grow your business.