Payment Service Provider
A payment service provider gives a merchant everything it needs to accept payments under one contract — gateway, access to card acquiring, local payment methods, fraud tools, settlement and reporting — for a blended fee per transaction. In European law the term means any licensed payment institution; in the market it means the Stripes, Adyens and Worldpays a merchant signs with.
- Also known as
- PSP, Payment provider, Merchant payment service provider
- Used at
- merchant payment acceptance at every size — from a start-up's first checkout to a marketplace processing billions; the PSP's economics are the payments industry's most contested margin
- Binding
- a merchant agreement (or a facilitator's sub-merchant terms); the PSP holds the licences — payment institution, e-money, acquiring principal membership — or contracts with those that do
- Typical pricing
- a blended rate (2.9% + $0.30 is Stripe's convention for cards) or interchange-plus for larger merchants; per-method pricing for wallets and bank transfers; the PSP's net take rate after interchange, scheme fees and method costs is 0.2–0.8% of volume
- Typical models
- the full-stack PSP with its own acquiring licence (Adyen, Checkout.com); the facilitator PSP on a partner acquirer (Stripe in many markets historically); the gateway-plus-partners PSP; the payment orchestrator above them
- Parties
- the merchant, the PSP, the acquirers and method providers behind it, the schemes, and the regulators of each licence the PSP holds
How a payment service provider works in practice
A merchant integrates a PSP's API or checkout. Behind one contract the PSP does what would otherwise be five: it captures and tokenises the card (gateway); it is the merchant of record or the acquirer (acquiring); it offers cards, wallets, bank transfers and buy-now-pay-later through one integration (methods); it screens for fraud and manages 3-D Secure (risk); and it pays the merchant, net of fees, on a schedule (settlement). The merchant sees one rate, one dashboard and one payout; the PSP sees interchange, scheme fees, method costs and its own margin. Its business is the difference and the volume.
The market has stratified by merchant size. Small merchants pay blended rates and value simplicity; large ones negotiate interchange-plus, add a second PSP for redundancy, and use orchestration to route between them; the largest run their own acquiring and buy only pieces. PSPs compete on approval rates (a point of authorisation uplift is worth more than a point of price), on method coverage, on the quality of their fraud tools, and on the data they give merchants — and consolidate, because the margin is basis points and the platforms are expensive.
For an acquirer of a PSP the diligence is the take rate by merchant cohort, the concentration, the licences, the acquirer and method contracts behind it, and the approval-rate advantage the sales deck claims.
Example
A PSP processes €12bn a year for 40,000 merchants at a blended 1.5% average — €180m of gross revenue — and pays €125m in interchange, scheme fees and method costs: a net take rate of 0.46%, €55m. Its cost base is €38m; contribution €17m. Its largest 200 merchants are 55% of volume on interchange-plus at 0.15–0.3%; its 39,800 small merchants are 45% of volume at 1.9% blended and most of the margin. A buyer prices the PSP on the small-merchant book's durability and the large merchants' churn risk — two of the top ten moved to a competitor last year for a 0.05% saving — at 12× the net revenue, €660m, and its integration plan is to move the small merchants onto its own acquiring licence and remove the partner acquirer's €9m of fees.
Common mistakes
- Comparing PSPs on the blended rate and ignoring approval rates, which decide more revenue than the fee. - One PSP with no second, so an outage or a notice is the checkout's outage. - Treating a PSP's licence as the merchant's; the merchant is a sub-merchant or a client, and the money moves on the PSP's terms. - Buyers valuing a PSP on gross revenue when interchange is a pass-through. - Confusing the regulatory meaning (any licensed payment institution) with the commercial one in a contract.