What Is a Payment Service Provider?
Payment service providers pool multiple businesses under a single merchant account, which allows them to start accepting payments quickly but can lead to account freezes.
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Lead Writer & Content Strategist A payment service provider, or PSP, is a third-party company that lets businesses securely accept credit card, debit card and digital wallet payments online and in person without having to open a dedicated merchant account. They’re a good fit for new small businesses that need to start accepting card payments quickly and want an all-in-one solution for point-of-sale systems and payment processing.
How payment service providers work
Payment service providers (also known as third-party payment processing companies or payment aggregators) facilitate a variety of electronic payment types, including credit cards, debit cards, ACH transfers and digital wallets for brick-and-mortar, mobile and online businesses. They work with numerous card and payment networks, as well as a wide range of acquiring banks, to create a seamless payments experience with a low barrier to entry.
Through a PSP, businesses get access to a shared merchant account, which removes the need to apply for a dedicated merchant account. That means businesses can begin accepting payments almost immediately, as opposed to having to go through a long application process, and can often avoid monthly subscription fees. Lots of payment service providers also sell POS systems or card readers for in-person payments and provide payment gateways for online payments. Other features commonly include reporting dashboards, built-in PCI compliance and security tools.
Payment service providers may not commonly charge monthly fees, but businesses do need to pay processing costs, often in the form of flat-rate fees. These fees typically differ depending on whether the transaction takes place in person or online.
Payment service providers vs. dedicated merchant account providers
Payment service providers and dedicated merchant account providers both make it possible for businesses to accept payments. The biggest difference is that payment service providers pool multiple businesses under a single merchant account to provide a turnkey, one-size-fits-all solution, whereas dedicated merchant account providers designate a separate account and merchant identification number, or MID, to each business to offer a more customizable and tailored solution.
Because merchant account providers give each business its own separate account, it can take weeks to get approved to start accepting card payments. Typically, you can expect a thorough vetting process as your individual business’s risk is assessed. Once you’ve made it through the merchant account approval process, though, your account should remain stable, barring any extreme circumstances.
Payment service providers supply aggregate merchant accounts, so the approval process is simple and almost instantaneous. However, they also take on the combined risk of each of the businesses they work with, which means they’re more likely than dedicated merchant account providers to hold, freeze or terminate accounts they decide are too risky.
Here’s a summary of the main differences between payment service providers and dedicated merchant account providers:
| Payment service provider | Dedicated merchant account | |
|---|---|---|
| Merchant account setup | Hundreds or thousands of merchants share a single merchant account. | One merchant per account. |
| Approval process | Typically instant approval. | Involves verification and compliance process that may take weeks. |
| Account stability | Higher risk of sudden holds, freezes or termination. | Stable with little risk of termination, holds or freezes. |
| Pricing | Typically fixed, some custom plans available. | Typically more flexible and customized to your business needs. |
| Processing volume | Strict limits on transaction size and processing volume. | Negotiable limits on transaction size and processing volume. |
Payment service provider pros and cons
Pros
✅ A comprehensive suite of tools
These may include invoicing, reporting, team management, loyalty programs, personalized marketing and a synced online store.
✅ Predictable flat-rate pricing
Flat-rate transaction fees are simple and predictable. There’s also usually no monthly fee.
✅ Quicker setup
Payment service providers generally offer a simple setup process to get you up and running quickly, unlike many merchant account options, which have an involved approval process.
✅ No additional security fees
PCI security compliance is typically included in your PSP account at no extra charge.
✅ No monthly minimum transactions
Unlike merchant accounts plans, which may require customers to process a minimum number of transactions on a monthly basis, payment service providers typically don’t impose a monthly transaction minimum.
Cons
🆇 Less account stability
The downside of quick approval and setup is an increased chance of having your account frozen or canceled if your business is suddenly deemed too risky. This could mean weeks of waiting before you’re up and running again. The extra vetting process merchant account providers require may be stressful, but it helps ensure that your account will stay in force over the long haul.
🆇 Volume limits
Payment service providers may have set limits on transaction size and processing volume. This could become problematic as your business grows.
🆇 Nonnegotiable flat rates
While flat-rate processing is easy to understand, it’s not always the most economical option for higher-volume small businesses. Make sure to compare prices to interchange-plus options, too.
Payment service provider examples
Square
Best for brick-and-mortar retail
Why we like it: Best known for its free square-shaped magstripe reader, Square has a quick, online signup process and a free mobile POS app that lets you accept card payments from your phone or tablet. It meets PCI compliance standards at no extra charge to you, and has a range of plans designed for different types of businesses. You always have the option to scale up from a free plan to a paid plan with more tools as your business grows. Read our full Square review for more details.
Monthly POS software fees
- $0 for Square POS, Restaurant, Retail and Appointments Free plans.
- $29 for Square Appointments Plus plan.
- $69 for Square Appointments Premium and Square Restaurants Plus plans.
- $89 for Square Retail Plus plan.
- $165 for Square Restaurant Premium plan.
- Custom pricing for Square Retail plan.
Hardware costs
$0 for Square magstripe-only card reader ($10 for each additional reader) or if using Tap to Pay for iPhone (iPhone not included).
$59 for Square Reader contactless and chip card reader.
$149 for Square Stand iPad POS or Square Stand Mount (iPad not included; monthly financing available).
$149 for Square Kiosk for self-serve ordering.
$299 for Square Terminal mobile card reader with built-in printer (monthly financing available).
$399 for Square Handheld portable POS system with built-in barcode scanner (monthly financing available).
$799 for Square Register two-screen system (monthly financing available).
Payment processing fees
2.6% plus 15 cents for in-person transactions with all free plans.
2.6% plus 10 cents for in-person transactions with paid restaurant plans.
2.5% plus 10 cents for in-person transactions with paid retail and appointments plans.
2.9% plus 30 cents for online transactions.
3.5% plus 15 cents for manually keyed transactions.
3.3% plus 30 cents for invoices.
Toast
Best for restaurants
Why we like it: Designed specifically for restaurants and the food industry, Toast is PCI-compliant and offers a pay-as-you-go plan with a two-year contract and no monthly fee. And instead of paying for hardware upfront, you can choose to pay higher processing fees to cover the costs. The company also sells a variety of hardware options, including a portable handheld terminal and guest self-service kiosk. Read our full Toast review for more details.
Monthly POS software fees
- $0 for Starter Kit plan.
- $69 Point of Sale plan.
- Custom plans available.
Hardware costs
$494.10 for Handheld Starter Kit (but $0 if you agree to a higher processing fee).
$1,123.20 for Countertop Starter Kit (but $0 if you agree to a higher processing fee).
$1,438.20 for Guest Self-Service Starter Kit (but $0 if you agree to a higher processing fee).
Payment processing fees
- 3.09-3.69% plus 15 cents per transaction, if you choose a pay-as-you-go plan.
- 2.49% plus 15 cents for card-present transactions, if you pay for hardware upfront.
- 3.50% plus 15 cents for card-not-present transactions, if you pay for hardware upfront.
Stripe
Best for online businesses
Why we like it: With customers ranging from small businesses to Fortune 500 corporations, Stripe offers a customizable and frequently updated suite of tools to help companies securely accept online payments and handle invoicing, reporting, business management and more. It’s an especially good fit if you know how to use developer tools to customize your online checkout process. Read our full Stripe review for more details.
Monthly POS software fees
- $0 for standard services.
- $10 for custom domain.
Hardware costs
- $59 for Stripe Reader M2.
- $249 for BBPOS WisePOS E card reader.
- $349 for Stripe Reader S700.
Payment processing fees
- 2.7% plus 5 cents for in-person transactions.
- 2.9% plus 30 cents for online transactions.
- 3.4% plus 30 cents for manually keyed transactions.
- 4.4% plus 30 cents for international card transactions.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.
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