What is a payment service provider?

A Payment Service Provider (PSP) is a third-party company that allows businesses to accept electronic payments from customers. PSPs act as intermediaries between merchants and the financial infrastructure, handling credit cards, debit cards, digital wallets, and bank transfers through a single integration.

PSPs support various payment capabilities:

• Credit and debit card processing (Visa, Mastercard, American Express)
• Digital wallets (Apple Pay, Google Pay, PayPal)
• Bank transfers and ACH payments
• Buy now, pay later (BNPL) options
• International multi-currency transactions
• Recurring billing and subscription management

PSPs establish technical connections with acquiring banks and card networks, enabling merchants to accept different payment methods without partnering with each institution individually. This aggregated approach makes payment acceptance accessible to businesses of all sizes without requiring dedicated merchant accounts.

How payment service providers work

PSPs facilitate the complete payment lifecycle from customer checkout to merchant settlement through a multi-step process.

When a customer initiates payment, the PSP receives encrypted payment details and transmits them securely to the merchant's acquiring bank. The acquiring bank forwards the transaction through credit card networks to the customer's issuing bank for authorization.

The issuing bank verifies account details, checks available funds, and approves or denies the transaction. This authorization process typically completes within seconds despite involving multiple financial institutions.

After approval, the PSP confirms payment to both merchant and customer. Settlement occurs when funds transfer from the customer's bank through the card network and acquiring bank to the merchant's account. Settlement timing varies by PSP and transaction type, ranging from instant availability to 2-3 business days.

Throughout this process, PSPs handle security protocols including encryption, fraud detection, and PCI DSS compliance. They also manage chargebacks, refunds, and transaction reporting for merchants.

PSP fees and pricing models

Payment service providers charge fees through several pricing structures depending on business size and transaction volume.

Flat-rate pricing

Most PSPs offer flat-rate pricing charging the same fee per transaction regardless of card type or ticket size. The industry standard is 2.9% + $0.30 per transaction for online payments.

For a $100 transaction: Fee = ($100 × 0.029) + $0.30 = $3.20 Net to merchant = $96.80

This model benefits small businesses with low transaction volumes who value predictable costs. However, flat-rate pricing becomes expensive at scale since higher-value transactions and debit cards carry the same markup as low-value credit card transactions.

Interchange-plus pricing

Some PSPs offer interchange-plus models where they pass through actual card network interchange fees plus a fixed markup. This transparent approach benefits high-volume businesses since they only pay actual costs plus the PSP's margin.

Additional fees

Beyond transaction fees, PSPs may charge:

• Setup fees: €49-€100 for integration and onboarding
• Monthly fees: Some PSPs charge recurring platform fees ranging from $0-$50 monthly
• Chargeback fees: $15-$25 per disputed transaction
• Currency conversion fees: 1-3% for international transactions
• Failed transaction fees: Some PSPs charge for declined payments

Average PSP fees range from 2.5-3.5% per transaction. A business processing $10 million annually pays $250,000-$350,000 in fees before accounting for additional charges.

Major payment service providers

The PSP market includes established players and regional specialists serving different business needs.

Global PSPs

• PayPal: Holds 48% market share in payment processing with 431 million active users. Offers PayPal Checkout, Venmo, and PayPal Business accounts supporting 25 currencies across 200+ countries.
• Stripe: Commands 25.32% market share, processing $817 billion in 2022. Known for developer-friendly APIs and customizable integration options. Supports recurring billing, subscription management, and marketplace payments.
• Square: Processed $186.5 billion across 4 billion transactions in 2022. Popular for point-of-sale systems and in-person payments alongside online processing. Targets small businesses with simple setup and transparent pricing.
• Adyen: Holds 9.26% market share, processing €767.5 billion in 2022. Provides unified commerce platform supporting 250+ payment methods. Serves enterprise clients including eBay, Spotify, and Microsoft.

Regional specialists

Regional PSPs offer localized payment methods and lower costs for specific markets:

• Razorpay (India): Serves 8 million customers with UPI, net banking, and wallet integration
• Mollie (Europe): Specializes in European payment methods including iDEAL, SEPA, and Bancontact
• PayU (Latin America, Asia, Middle East): Provides region-specific alternative payment methods
• Checkout.com (UK, Middle East): Known for competitive rates and strong fraud prevention

Businesses often use multiple PSPs—a global provider for core markets plus regional specialists for specific countries where they offer better local payment method coverage or pricing.

PSP vs payment gateway vs payment processor

While often used interchangeably, these terms describe different components of the payment infrastructure.

• Payment gateways are the secure communication layer that transmits encrypted payment data between merchant websites and payment networks. Gateways capture customer payment information and forward it for processing.
• Payment processors handle the technical transfer of funds from customer accounts to merchant accounts, including authorization, clearing, and settlement.
• Payment service providers combine gateway and processor functionality into a complete solution. PSPs bundle merchant accounts, gateways, processors, and additional services like fraud detection and reporting into a single platform.

For example, Stripe operates as a full PSP providing the gateway for collecting payment details, processing infrastructure for authorizing and settling transactions, and a shared merchant account for receiving funds. A business using only a payment gateway would still need separate contracts with processors and banks.

Benefits of using a PSP

Payment service providers offer several advantages over managing payment infrastructure directly.

• Fast implementation: PSPs enable businesses to start accepting payments immediately rather than waiting weeks for traditional merchant account approval. Account setup often completes within hours since PSPs use shared merchant accounts rather than dedicating accounts per business.
• Multiple payment methods through single integration: Instead of contracting separately with Visa, Mastercard, PayPal, Apple Pay, and dozens of regional payment providers, merchants integrate once with a PSP to access all supported methods. This consolidation reduces technical complexity and ongoing maintenance.
• Built-in compliance and security: PSPs handle PCI DSS compliance, tokenization, encryption, and fraud screening, reducing the merchant's security burden. For businesses without in-house payment expertise, this transfers significant liability and regulatory responsibility to the PSP.
• International expansion support: PSPs facilitate cross-border transactions through multi-currency support and localized payment methods. A business can accept euros, pounds, and yen without opening foreign bank accounts, with the PSP handling currency conversion and local regulatory requirements.
• Transparent reporting and analytics: Most PSPs provide dashboards showing transaction volumes, approval rates, chargeback trends, and revenue analytics. Real-time reporting helps businesses monitor payment performance and identify issues quickly.

Limitations and considerations

PSPs involve trade-offs that become more apparent as businesses scale.

Higher long-term costs

Flat-rate pricing becomes expensive for businesses processing significant volume. A company processing $10 million annually at 2.9% + $0.30 pays approximately $300,000 in fees compared to $180,000-$220,000 with dedicated merchant accounts using interchange-plus pricing.

Account stability risks

Since PSPs use shared merchant accounts, they assume liability for all transactions. PSPs may freeze accounts or withhold funds if they detect risk patterns, even from legitimate businesses. High-risk industries often face account restrictions or rejections.

Limited customization

PSPs offer standardized solutions that may not accommodate complex payment flows. Businesses with unique requirements like split payments, custom authorization rules, or specialized reconciliation needs may find PSP offerings restrictive.

Data ownership constraints

Merchants using PSPs have limited access to raw payment data and customer payment profiles. This restricts the ability to optimize approval rates through direct issuer relationships or build proprietary fraud models.

PSPs for fintech and payment infrastructure

While PSPs simplify payment acceptance for traditional businesses, fintechs building payment products face different requirements.

Fintech platforms enabling payments for their customers—such as neobanks, embedded finance apps, or marketplace platforms—often need payment facilitator (PayFac) or marketplace PSP solutions. These specialized offerings support split payments, sub-merchant onboarding, and white-label payment experiences.

For B2B payment infrastructure like cross-border transfers or treasury operations, specialized solutions beyond consumer PSPs may be required. Platforms handling stablecoin payments or alternative rails need infrastructure that bridges traditional banking with blockchain settlement.

Regulatory oversight

PSP operations are subject to financial regulations varying by jurisdiction.

In the United States, PSPs are supervised by FinCEN under anti-money laundering and counter-terrorist financing regulations. State money transmitter licenses may apply depending on the PSP's structure and services offered.

European PSPs operate under the Payment Services Directive (PSD2), which established open banking requirements and Strong Customer Authentication (SCA) for card payments. PSD2 also created regulatory categories for Payment Initiation Service Providers (PISPs) that facilitate bank-to-bank transfers.

Merchants remain responsible for ensuring their PSP maintains proper compliance even though the PSP handles technical security measures. This includes verifying PCI DSS certification, data protection compliance (GDPR in Europe), and appropriate licensing for target markets.