There’s a lot of confusing industry terms in payment processing, and it can be hard to keep everything straight, especially with how fast things change. To help keep a few of them straight, we’ve put together this simple guide about Payment Service Providers (PSP) and the new breed of alternatives to that business model.
Keep in mind, however, that while we present these definitions as indicative of the terms, these entities go by many different names in the industry, and (especially internationally) different places will call them different things. The differences in structure, however, are real. So regardless of the name used, these groupings are well defined.
PSPs: The Original Model
In the traditional payment processing model, a Payment Service Provider would partner with an ISO or other merchant acquirer to find merchants. The ISO would help new merchants set up a MID (Merchant ID) and a merchant account. Then, they would connect the merchant to the PSP’s services, who would then process the payment, but would let the acquiring bank handle funding the merchant account.
In other words, PSPs interact with the merchant as little as possible. They don’t typically find their own merchants, they don’t give them a MID, and they don’t usually fund the account. They just offer the software that processes the payments.
Payment Facilitators and Payment Aggregators
In recent years, some enterprising providers have pioneered new models for payment processing, engaging more directly with the merchant and becoming more involved in the process. The term used most frequently is payment facilitators, of which payment aggregators are a specialized subset.
Payment facilitators answer a number of concerns inherent to the PSP model. First, signing up as a merchant under a payment facilitator is much faster. Merchants answer, on average, about 16 questions, as opposed to the lengthy paperwork or extended wait times required in applying for a merchant ID and merchant account normally. This is achieved primarily by the facilitator working around the normal underwriting process by applying their own risk to the merchants that sign on under them.
Facilitators offer a flat fee for payment processing, rather than a graduated system that depends on transaction volumes. This means it’s easier to understand how much you’re paying for the transactions your processing.
Facilitators also don’t tend to use ISOs or merchant acquirers to attract customers, preferring instead to advertise their own brand and find their own clients. Lastly, facilitators provide a MID and a merchant account to the sub-merchants that sign on under them.
It’s a model that works great for medium sized businesses who don’t want to deal with the hassle involved in the traditional model. For smaller businesses (included those consisting of only one person), there’s a slight variation in the structure.
Payment aggregators work very similarly to facilitators, with the exception that they don’t provide separate MIDs for each sub-merchant. Instead, the sub-merchants are signed up under the aggregator’s own MID, simplifying the process for businesses that handle very low volumes of transactions.
Advantages of Facilitators and Aggregators
Becoming a facilitator or aggregator has a number of advantages over traditional PSPs and ISOs. First, you control the whole process, both acquiring merchants and providing the service. That makes it easier to meet the demands and requests of the clientele. It also makes quality control easier, in the event that something goes wrong.
Another advantage is the ability to customize and market your own brand, which is an advantage from both directions. Processors will find it easier to control just what their service looks like to their customer, and ISOs will be happy to be able to market something they will be profiting from, rather than something they will have to walk away from after setting things up.
There is a downside, however, and that’s the fact that you have to provide the software and interface to be used by the merchant. That can take a lot of man hours of development to build. Or, you can shortcut the process by using a white label payment gateway, which will give you the technology and the freedom to brand it yourself and market it to your customers. With the right white label gateway, you get the best of both worlds, plus the backing of years of industry and technical experience to help you succeed.