Unlock Growth and Efficiency with Payment Service Provider

The digital revolution has transformed how businesses operate, and accepting online payments has become critical to success. As an entrepreneur or an online merchant, you’ve likely encountered the term “payment service provider” (PSP) – a vital piece of the eCommerce puzzle. With the Indian eCommerce market projected to reach a staggering USD 350 billion by 2030, understanding the role and significance of PSPs has become more crucial than ever.

What is a Payment Service Provider?

A payment service provider (PSP) is a third-party software solution that enables merchants to securely accept customer payments through various channels, including websites, mobile applications, payment links, and QR codes. These providers act as intermediaries between businesses, customers, and financial institutions, facilitating the seamless flow of transactions.

PSPs offer a comprehensive suite of services that extend beyond mere payment acceptance. They provide merchants with a merchant account, ensuring the safety of transactions, offering high success rates, delivering a smooth payment experience for customers, giving payment analytics, enabling subscription services, reconciling payments, and providing support for issues or chargebacks.

The Role of Payment Service Providers

1. Merchant Account Provisioning

One of the primary functions of a PSP is to provide merchants with a merchant account, a specialised business bank account designed for accepting or disbursing payments. Businesses would face significant challenges in processing online transactions without a merchant account.

PSPs streamline this process by offering sub-merchant accounts under their master merchant account, eliminating the need for merchants to navigate the complex and resource-intensive process of obtaining an individual merchant account from a bank directly.

2. Facilitating Diverse Payment Acceptance

At the heart of a PSP’s offerings lies the ability to accept a wide range of payment methods, catering to the preferences and convenience of customers. A reputable PSP in India will enable merchants to accept payments through credit cards, debit cards, Unified Payments Interface (UPI), net banking, digital wallets, EMIs, Buy Now Pay Later (BNPL) options, and international payment modes like PayPal.

Moreover, PSPs ensure a seamless payment experience by collecting payment through websites, mobile apps, payment links, and QR codes. They prioritise optimising the payment page design, incorporating features like faster checkout, clear call-to-actions (CTAs), reliable customer support, transparent cancellation and return policies, security badges, and countdown timers – all aimed at maximising conversions.

3. Ensuring Transaction Security

In an era where cyber threats and fraudulent activities are on the rise, PSPs play a pivotal role in safeguarding transactions and protecting sensitive customer data. They employ robust security measures, such as PCI-DSS certification, payment tokenisation, end-to-end encryption, data localisation, risk management systems, and strict adherence to data retention policies mandated by the Reserve Bank of India (RBI).

4. Maximising Transaction Success Rates

PSPs go beyond merely facilitating payments; they strive to ensure high transaction success rates, minimising failed transactions and enhancing customer satisfaction. They address common issues like incorrect bank account details or UPI IDs and bank system downtimes through features like bank account verification and dynamic routing of payments.

Dynamic routing enables the seamless redirection of payment processing to alternative banks when a particular bank experiences downtimes, ensuring uninterrupted service and maximising transaction success rates.

5. Delivering a Smooth Payment Experience

Seamless payment experience is crucial for customer retention and fostering brand loyalty. PSPs allow merchants to choose between self-hosted or hosted payment pages, allowing businesses to tailor the payment flow to their needs and customer behaviour.

Self-hosted payment pages enable merchants to maintain control over the user experience while adhering to PCI compliance standards. Conversely, hosted payment pages redirect customers to the PSP’s secure payment page, where sensitive card details are captured and encrypted, ensuring compliance without burdening the merchant.

6. Providing Valuable Transaction Insights

PSPs empower merchants with valuable transaction insights, enabling accurate cash flow forecasting and informed business decisions. Through comprehensive settlement information, ledger reports, and dispute management details, merchants gain a holistic understanding of their payment operations, facilitating strategic planning and optimisation.

7. Enabling Subscription-Based Business Models

Recurring billing models have gained significant traction across various industries, offering customer satisfaction, higher retention rates, cross-selling and upselling opportunities, precise business forecasting, and reduced customer churn. PSPs enable merchants to implement subscription-based models through Electronic Clearing House (ECS), NACH mandates, card standing instructions, and UPI Autopay.

Merchants can offer diverse subscription plans, including fixed-fee models (as employed by popular OTT platforms like Netflix and Hulu), pay-per-consumption models (suitable for utility companies), or hybrid models combining fixed fees and consumption-based charges (ideal for gyms or coaching institutions).

8. Streamlining Payment Reconciliation

Practical payment reconciliation is essential for accurate financial reporting and a clear overview of expenses and profits. PSPs integrate payment systems, matching every customer transaction with a unique payment ID, enabling merchants to cross-check transactions, merchant discount rates, settlement amounts, payment modes, and platforms used by customers.

This comprehensive reconciliation process facilitates financial management and provides valuable insights for optimising payment processes and increasing conversion rates.

9. Offering Dedicated Support

While high transaction success rates are a priority, exceptional customer support is equally crucial for customer satisfaction. PSPs offer dedicated support to merchants, addressing day-to-day operational issues related to settlements, refunds, chargebacks, and other payment-related queries, ensuring a seamless and hassle-free experience.

Understanding the Payment Processing Flow

To grasp the intricate workings of a PSP, it’s essential to understand the key players involved in the online payment processing ecosystem:

1. Merchant: The business entity accepting payments from customers.
2. Acquiring Bank (Acquirer): The bank that registers the merchant and enables online payment processing through pre-determined merchant agreements. This bank maintains the merchant account that accepts payments.
3. Issuing Bank (Issuer): The bank issues customers’ payment cards (credit/debit) and authenticates online transactions. This bank maintains the customer’s account from which payments are made.
4. Card Networks: Entities like Mastercard, Visa, American Express, and RuPay issue payment cards and maintain bank directories, facilitating the mapping of transactions.

The online payment processing flow typically involves three main stages:

Card Authentication

• The customer enters their payment details (card number or UPI ID) on the merchant’s website.
• The PSP encrypts or tokenises these details and forwards them to the Acquirer.
• The Acquirer sends the payment details to the appropriate Card Network for verification against their server information, enabling card authentication.
• Using its directory, the Card Network maps the account number to the correct Issuing Bank.

Cardholder Authorisation

• The Issuing Bank verifies the card’s CVV and performs additional authentication, such as sending an OTP to the customer.
• Upon successful authentication, the Issuing Bank positively responds to the Card Network, informing the Acquirer.
• The Acquirer requests funds from the Issuing Bank after verifying the account balance and availability of funds.

Fund Capture

• Once the payment is authorised, the Issuing Bank adjusts the debit line for the sale amount.
• The Acquirer receives the funds and forwards them to the PSP.
• The PSP then credits the funds to the merchant’s account, a process known as settlement. Merchants can opt for instant or standard settlement cycles, depending on their preferences and the PSP’s offerings.

Distinguishing Payment Service Providers from Related Entities

While the lines between various payment processing entities may seem blurred, it’s crucial to understand the distinctions between them:

Payment Service Provider vs. Payment Gateway

A payment gateway is responsible for securely encrypting and tokenising customer payment details and forwarding the information to the Acquiring bank. However, it is not authorised to handle customer funds directly. Conversely, a payment service provider offers a more comprehensive solution, including providing a merchant account, facilitating diverse payment modes, and securing transaction information and status between the merchant and the Acquirer.

Payment Service Provider vs. Payment Processor

A payment processor facilitates communication between card networks, Acquiring banks, and Issuing banks during the payment processing flow. In contrast, a payment service provider focuses on enabling merchants to accept customer payments securely and communicating transaction information between the merchant and other players involved.

Payment Service Provider vs. Acquirer

While an Acquirer (a bank) holds the merchant’s bank account and enables online payment processing, a payment service provider is a third-party entity distinct from the Acquirer. PSPs facilitate payment acceptance and enhance the overall payment experience for merchants and their customers.

Pricing Models: Understanding the Costs

PSPs typically charge merchants fees based on various factors, including transaction volume, payment methods, and the level of service provided. Standard pricing models include:

1. Transaction fees: A fixed fee charged per transaction, often with tiered pricing based on transaction volume.
2. Monthly fees: A recurring fee for using the PSP’s services, regardless of transaction volume.
3. Percentage fees: A percentage of the transaction amount charged as a fee.
4. Subscription fees: A fixed monthly or annual fee for a suite of PSP services, often including additional features like fraud prevention or advanced analytics.

Factors to Consider When Choosing a PSP

When selecting a PSP, businesses should carefully evaluate the following factors:

1. Transaction volume: PSPs may have different pricing models for businesses with high or low transaction volumes.
2. Payment methods: The PSP should support your customers’ preferred payment methods.
3. International reach: If your business operates in multiple countries, the PSP should be able to process international payments.
4. Integration capabilities: The PSP should integrate seamlessly with your existing e-commerce platform or point-of-sale system.
5. Security and compliance: The PSP should be PCI DSS compliant and have robust security measures to protect customer data.
6. Customer support: The PSP should provide excellent customer support to address issues or queries.
7. Additional features: Consider whether the PSP offers additional features important to your business, such as fraud prevention, advanced analytics, or subscription management.

If you’re looking for a reliable and efficient payment solution, SabPaisa is the partner you need to streamline your transactions.

Technical Aspects: Understanding the Underlying Technology

While the user experience of accepting payments is relatively straightforward, the underlying technology is complex. Here are some important technical aspects to keep in mind:

1. Tokenisation: Payment Service Providers (PSPs) utilize tokenisation to substitute sensitive card information with unique tokens, thereby minimising the risk of data breaches.
2. Encryption: Data is encrypted during transmission to protect it from unauthorised access.
3. API integration: PSPs typically provide APIs that allow merchants to integrate their payment systems with their e-commerce platform or other applications.
4. PCI DSS compliance: PSPs must adhere to the Payment Card Industry Data Security Standard (PCI DSS) to ensure cardholder data security.

Conclusion

Choosing the right payment service provider is crucial for businesses of all sizes. Companies can make informed decisions and select a PSP that meets their needs by understanding the different types of PSPs, pricing models, and technical aspects.

FAQs

1. What is the difference between a payment gateway and a payment aggregator?

Payment gateway: A payment gateway bridges a merchant’s website and the payment processor. It securely transmits payment data to the processor for authorisation and settlement.

Payment aggregator: A payment aggregator is a type of PSP that acts as a middleman between merchants and acquiring banks. They have direct relationships with multiple banks and can offer merchants better rates and flexibility.

2. How do PSPs charge merchants for their services?

PSPs typically charge merchants fees based on various factors, including transaction volume, payment methods, and the level of service provided. Standard pricing models include:

• Transaction fees: A fixed fee charged per transaction, often with tiered pricing based on transaction volume.
• Monthly fees: A recurring fee for using the PSP’s services, regardless of transaction volume.
• Percentage fees: A percentage of the transaction amount charged as a fee.
• Subscription fees: A fixed monthly or annual fee for a suite of PSP services, often including additional features like fraud prevention or advanced analytics.

3. What factors should I consider when choosing a PSP?

When selecting a PSP, businesses should carefully evaluate the following factors:

• Transaction volume: PSPs may have different pricing models for businesses with high or low transaction volumes.
• Payment methods: The PSP should support your customers’ preferred payment methods.
• International reach: If your business operates in multiple countries, the PSP should be able to process international payments.
• Integration capabilities: The PSP should integrate seamlessly with your existing e-commerce platform or point-of-sale system.
• Security and compliance: The PSP should be PCI DSS compliant and have robust security measures to protect customer data.
• Customer support: The PSP should provide excellent customer support to address issues or queries.

Additional features: Consider whether the PSP offers additional features important to your business, such as fraud prevention, advanced analytics, or subscription management.

4. What is PCI DSS compliance?

PCI DSS refers to the Payment Card Industry Data Security Standard. It is a set of security requirements that all entities that handle cardholder data must follow to protect cardholder information.

5. How does tokenisation work?

Tokenisation is a security technique that replaces sensitive card data with unique tokens. This reduces the risk of data breaches, as even if the token is compromised, the original card data remains secure.