Payment Service Provider Vs. Payment Processor

For the ‘every day’ business owner, navigating the payments ecosystem can be a minefield – especially when distinguishing between a payment service provider and a payment processor.

Both entities are required to coordinate online transactions, yet their roles and functionalities differ massively.

Understanding their key differences and characteristics is essential for merchants who want to optimise their payment systems.

This article dives into the nuances of ‘payment service provider vs payment processor', exploring both their unique contributions to the transactional process.

What is a payment service provider?

A payment services provider (PSP), also known as a payment aggregator, processes online transactions that take place on a merchant’s website, both by credit and debit cards.

They operate their own merchant account, aggregating the transactions of all their clients under that one account.

Payment service providers offer merchants the quickest and simplest way to sell online and accept payments by providing both a payment gateway and a merchant account.

As well as allowing merchants to accept credit card payments and debit card payments, they also enable the acceptance of a broader range of payment methods such as direct debits and bank transfers.

What is a payment processor?

A payment processor is the financial institution that handles card transactions for a merchant, acting as the ‘middleman’ between the issuing bank (the customer’s bank) and the acquiring bank (the merchant account).

The payment processor facilitates the transaction by capturing the customer’s payment data, forwarding it to the relevant card networks and merchant account providers.

Having a good payment processor is key to the success of a merchant’s business. Not only can they help accept a variety of payment types, but they can reduce the cost of acceptance through interchange optimisation. The funds are temporarily held in the merchant account before being transferred to the business's regular bank account.

How does a payment processor work?

The cardholder initiates the transaction flow by presenting their card information at the Point of Sale (POS) – this may be online payments, over the phone, or in person transactions via a credit card reader.

The payment processor collates the customer’s payment information, routing it through a separate payment gateway. The payment gateway sends this to credit card networks to begin the authorisation process.

The card network, like Visa or Mastercard, will contact the issuing bank, who will approve or deny the transaction. Approval of the transaction means that the issuing bank has confirmed that the customer has sufficient funds available to make the payment. A transaction would only be denied if there are insufficient funds or on suspicion of fraud.

Once the issuing bank approves or denies the transaction, the authorisation status will be relayed back to the payment processor through the card network.

When the transaction has been authenticated, the issuing bank will place a hold for the payment amount. This is known as a pending transaction.

The merchant acquirer will send approved transactions for settlement via the payment processor at the end of each business day.

Following this, the card network will send the approved transactions to the issuing bank, who will release the funds to the merchant bank.

Finally, after all the payment facilitators efforts, funds are deposited into the merchant’s account, minus any pre-agreed interchange and processor fees.

What is a payment gateway?

A payment gateway facilitates online transactions by securely capturing and transferring credit card data between customers, merchants, and financial institutions. It encrypts sensitive data to protect it from fraud and ensures that the payment process is seamless and efficient.

Similarities: PSPs & payment processors

The core similarity between payment service providers and payment processors is that they both play key roles in the payment transaction, whether that be card not present transactions or a physical card terminal. 

From authorisation to settlement, payment service providers facilitate the transfer of funds from the customer’s account to the merchant account.

Payment service providers act on the behalf of merchant accounts and are paid a monthly fee by merchants for their services online.

However, payment processors handle the entirety of payment processing services, ensuring that the merchant bank receives the payment. 

Differences: PSPs & payment processors

Due to the nature of their offerings, payment processors and payment service providers are often confused as being the same.

Payment gateway vs payment processor is a common comparison that highlights their distinct roles in securely handling credit card transactions. While a payment gateway is responsible for authorising the transfer of funds between the customer and the merchant, a payment processor handles the actual transaction by moving the funds from the customer's bank to the merchant's account. 

Businesses that accept online payments need both components to ensure smooth and secure transactions. Various configurations, such as third-party and integrated payment gateways, come with different associated fees.

Even though they both share the same goal, to process transactions, they are different. It’s important to remember that they are not the same provider.

Financial institutions

A payment services provider is a financial institution that enables merchants to start accepting payments online. It links merchants with card networks and processors for payment processing.

A PSP provides a merchant account and payment processor the ability to collect and manage customer payments.

Whereas a payment processor is the financial software behind transactions between a merchant and their customers. Upon entering payment details on a website, the processor connects to the payment service provider in order to process the transaction.

Role in the transaction process

A payment service provider is the component responsible for facilitating communication and securely transmitting payment information between the customer, business and processor.

The payment processor is responsible for conducting the transaction by processing and authorising payments. They must also ensure that funds are transferred securely between the issuing and acquiring bank.

Integration with other systems

Often, payment service providers integrate payments software for businesses, including APIs, plug-ins, and pre-built modules – allowing merchants to begin online sales quickly and efficiently.

Payment processors typically require companies to establish a business account first to process transactions and may have more complicated set-up and onboarding procedures.

Service offering

For payment service providers, the primary focus is on the secure transmission of personal finance data, like the customer’s credit card information. They do not tend to provide additional services such as chargeback management or fraud detection.

Unlike PSPs, processors offer a broad range of services in addition to processing transactions. These include, and are not limited to, fraud detection, charge back management and ensuring that merchants are compliant with payment regulations set out by regulators like the Financial Conduct Authority (FCA).

Conclusion

Understanding the distinction between payment service providers and payment processors is imperative for merchants looking to optimise their payment systems.

While both play integral roles in the payment transaction process, when taking a deeper look, it’s clear that they serve different functions and offer unique benefits.

Payment service providers streamline online sales by aggregating transactions under a single merchant account, offering simple integration solutions. In contrast, payment processors handle the intricacies of transaction authorisation and settlement; they also provide additional services like fraud management.

Through the recognition of these differences, merchants can make informed decisions around their payment solutions, ensuring seamless and secure transactions for their customers when offering a variety of digital payment methods.