Payment Service Provider: Meaning, Features, and How It Works Simplified

If you are an online merchant, you must have heard of the term “Payment Service Provider”.

That, or you are looking to venture into eCommerce. 

~ Which is something we strongly recommend. After all, the Indian eCommerce market is set to touch USD 73 Billion by 2022!)

Either way, a payment service provider is a necessity for businesses today. Let’s find out why. 

Payment Service Provider Definition

So, what is a payment service provider? 

Well, a payment service provider (or PSP) is a third party software that helps a merchant accept payments securely. These payments may be made through your website, app or even off-website tools like payment links and QR codes.

In fact, a PSP can also:

  1. Provides you with a merchant account
  2. Ensure the safety of your payments
  3. Ensures high payment transaction rates
  4. Offers your customers a smooth payment experience
  5. Provides payment analytics
  6. Offers subscription services
  7. Reconciles your payments
  8. Offers support in case of issues or chargebacks.

We know, this might seem overwhelming.

So, let’s take step by step, shall we?

What Does a Payment Service Provider Do?

Now we come to the heart of the matter.

Here is all you need to know about the functions of a payment service provider.

Offers You a Merchant Account

 A merchant account is a business bank account that enterprises use to accept or disburse payments.

Essentially, you cannot accept payments without a merchant account.

Now, a payment service provider (PSP) will provide you with a merchant account on onboarding. 

The PSP has a master merchant account and all their clients are provided with a sub-merchant account. 

Why is this a big deal?

Well, mostly because the alternative is extremely complicated and expensive.

Without a PSP merchant account, you would have to get a merchant account from an association member bank. (Banks that accept payments by Mastercard/Visa/RuPay)

These are called ISO merchant account. Now, you may be able to customize your merchant according to your needs. But, there’s a catch.

ISO merchant accounts require:

  1. A minimum transaction limit for qualification. (set by Card companies)
  2. An immense amount of resources
  3. Legal Teams for compliance

On the other hand, the merchant account provided by PSPs are suited for all types of businesses. 

For starters, payment service provider in India: 

  1. Onboard merchants online
  2. Offer low transaction discount rates
  3. Levies no maintenance or infrastructure costs
  4. The PSP takes care of the legal and compliance issues

Once a business is allotted a sub-merchant account, it can start accepting payments with a PSP. 

Helps You Accept Payments

We’re sure that you guessed this feature already. And you were right. 

The central function of a payment gateway service provider is to help merchants accept payments.

Now, where they differ is: what kind of payments they support

Let us explain. 

As a merchant, you have to ensure that you offer the widest and most popular payment modes to your customers. 

A PSP in India (like Cashfree Payments) will offer you to accept payment through:

  1. Credit Cards
  2. Debit Cards
  3. UPI
  4. Net banking
  5. Wallets (Paytm, Amazon Pay)
  6. EMI
  7. Buy Now, Pay Later
  8. International Payment Modes (International Cards, Paypal etc.)

Now, these payment modes may affect your overall PSP fee After all, the choice of payment mode directly affects the MDR levied on the transaction.

Furthermore, you need to ensure that you are providing a smooth payment experience to your customers. 

Here, your customer’s payment experience plays a huge role.

Payment Service providers ensure that they offer payment collection through:

  1. Website
  2. Mobile Apps
  3. Payment Links
  4. QR codes

Having said that, let’s dive deeper. 

Website Payment

You might want to accept payments through your website. Ensure that your payment page design is optimized for the highest conversions. For instance, here are some best practices for a great payment experience:

  1. Faster checkout and payment flow
  2. Clear CTAs
  3. Reliable customer support
  4. Clear cancellation and return policy
  5. Security batches
  6. Countdown timers

Mobile App Payment

It’s an understatement to say that mobile payments are on a rise in India. 

In fact, the mobile payment app BHIM  (Bharat Interface For Money) surpassed debit card payments in India in 2018. Moreover, UPI mobile apps became the preferred mode of payments surpassing all others. 

Needless to say, a mobile payment service provider is no longer an option for merchants. 

It’s a necessity. 

Furthermore, mobile app revenues are expected to rise to 935 billion USD by 2025. This has resulted in most businesses launching their mobile apps to ensure continuous sales. 

Payment Links

Till now, we were discussing on-site payments through websites and apps.

But what if you need to collect off-website payments?

That is where payment links come in. Here is a 3 step process explaining how they work:

  1. You, the merchant creates a payment link: Manually via Dashboard or API
  2. You enter the customer details: Share via Whatsapp/SMS/Whatsapp
  3. The customer clicks on the link and pays instantly! 

Payment links can be used by various industries for digitizing Cash on Delivery payments. Here are some examples: 

  1. Ecommerce Companies: By apparel stores like Nykka or food delivery services like Zomato
  2. Service Provider and Utility Bills: For recurring payments like telephone bills, gas and water bills
  3. Lending Companies and NBFCS: For SIP instalments, loan instalments, credit card payments
  4. Education Sectors: For Schools, tuition and coaching institutions for student fees
  5. ERP Providers: To accept payments without customer sign up or account creation

QR Codes

QR codes are graphic codes that can help you accept off-website payments. 

A payment service provider can offer you two kinds of QR codes:

Static: General QR codes applicable for all payments

Dynamic: Unique QR code for every transaction. Here, the payment details are auto-filled so the customer does not have to. 

Ensures Payment Security 

Another important aspect of a payment service provider is ensuring transaction security.

All the more important at a time when frauds and malware are daily news headlines.

What’s more, cyber-attacks have a direct impact on a company’s sales. In fact, 1 in 5 customers states that they will not transact with a business that has been a victim of cyberattacks. 

Generally, you can inquire about a PSP’s policy on the basis of 3 broad categories:

  1. Transaction Security Measures
  2. Data Security Measures
  3. Risk & Fraud Monitoring

For instance, here’s how Cashfree Payments maintains transactional security. 

  • PCI-DSS Certification 
  • Payment Tokenization of every transaction
  • 2048 bit end-to-end encryption
  • All the transaction data is processed and stored locally
  • Robust risk management systems
  • Transaction and merchant level monitoring for fraud
  • FTS, CTS ratio, IP, Velocity checks, etc
  • Strictly following data retention policy as per RBI norms

Ensures High Transaction Rates

Your payment service provider doesn’t just help you accept payments. They also ensure that these payments are successful.

In other words, they provide high transaction success rates. 

How PSP Ensures High Transaction Rates
IssueSolution
Incorrect Bank Account Details or UPI IDBank Account Verification
Downtimes of Bank SystemsDynamic Routing of Payments

But why do transactions fail in the first place? Well, 2 major reasons.

  • Incorrect Bank Account Details or VPA in UPI
  • Downtimes of Bank Systems

However, here’s the good part. An online payment service provider may have solutions to this issue. For instance:

Dynamic Routing of Payments

Let’s assume a bank is facing downtimes. Dynamic routing helps in forwarding the payment processing to another bank. This leads to higher transaction success rates. 

Bank Account and UPI ID verification 

Your payment service provider can match your customer’s account details with the bank servers. This verifies the customer’s name, bank account number and UPI ID to reduce transaction failures. 

Payment service provider may go steps further in ensuring high success rates. For instance, Cashfree Payments offers:

  • MIGS, CyberSource, FSS integration for a higher success rate
  • Additional NPCI integration for higher success on RUPAY Cards
  • Dynamic Routing of payments 
  • Lower transaction lags for better conversions

Offers Your Customers A Smooth Payment Experience

Your payment service provider is also responsible for a smooth payment experience

Customers may abandon carts because of many reasons:

  • Slow or long checkout time
  • Lack of payment methods
  • Inefficient Payment Flow

Now, we have already discussed solutions for the first two issues. (diverse payment modes and dynamic routing)

The good news is, inefficient payment flow has an easy fix. 

All you have to do is choose a payment flow that fits your business needs. Here are a few choices:

Self Hosted Payment Page

Here, your customers will stay on your website. However, you will need to ensure PCI compliance. Moreover, you will need to ensure the safe transfer of customer data to your payment gateway. 

This type of payment flow gives you more control over your user experience. 

Hosted Payment Page

In a hosted payment page, the customers will be redirected to your PSP’s page. The PSP will safely capture and encrypt the customer card details. They will take charge of PCI-DSS compliance.

Offers Insights Into Transactions

Your online payment gateway service provider can help you analyze your customer transactions. 

This information can be very helpful in predicting future cash flow. As a result, you can make accurate business forecasting. 

For instance, here are some ways PSPs provides transaction insights to its merchants:

Information on Settlements: Comprehensive information on the settlements including the unique number for each transaction. This information details transaction-level details along with adjustments.

Ledger Report: Accounts for the net settlement amount for merchants. (Basically, the amount credited after deducting MDR). It also includes info on chargebacks and refunds. 

Information on Disputes: Your customers may raise disputes with some transactions. This report details these instances, along with tier current status. 

Furthermore, payment service providers like Cashfree Payments make it easy for you to access these files.

All you have to do is follow these steps. 

  1. Open your Cashfree Payments portal and head on to the Dashboard.
  2. Apply filters to check the reports on transactions for a specific period of time.
  3. You can search for specific transactions through the unique transaction serial number. The Dashboard will reflect if the transaction is ongoing or completed. 

Provides Subscription Services To Your Customers

Recurring bill is a model that allows you to accept repetitive payments.

There are various benefits associated with a subscription-based business model. For instance:

  • It ensures customer satisfaction 
  • Leads to higher customer retention rates
  • Increases cross-sell and upsell opportunities
  • Offers precise business forecasting
  • Reduces customer churn-off point

And some more…

So, how can you use repetitive billing to boost your business? Well, there are 4 major ways you can enable repetitive payments in India:

  1. Electronic Clearing House  (ECS)
  2. NACH eMandates
  3. Standing Instructions on Cards
  4. UPI Autopay

A lot of industries are using recurring payments to enable subscription businesses. This includes the SaaS, eCommerce, healthcare and utility industries.

In fact, 80% of all historical software vendors are now shifting to subscriptions as well!

However, it is important to offer different subscription plans to your customers. Evidently, the structure of these plans depends on your business needs. 

Let’s have a look at some of your options:

Fixed Fee 

Here, you can charge your customers a flat fee for the subscription. You can enable the mandate weekly, monthly or yearly. 

This model is used by popular OTT platforms like Netflix and Hulu.

Pay Per Consumption

Your payment gateway service provider can offer you another model too. Here, your customers can pay per the units of product consumed. 

For instance, a water company can levy charges according to the units of water consumed. Similarly, an electricity provider can charge on the basis of consumption.

Fixed Fee+ Pay Per Consumption

As you must have guessed, this is a hybrid model.

Here the customers pay a fixed price at the beginning. Then, after a certain threshold, they pay based on consumption. 

For instance, your gym programme may charge you :

  • A fixed price of INR 200 for 8 classes
  • Additional Rs. 50 per class after those 8 classes are complete

Reconciles Your Payment

An integrated payment system matches every customer transaction with a particular payment ID. 

Your payment service provider ensures that you can cross-check all your expenses and profits.

Here’s how.

Through the dashboard, you can get information like:

  1. Transaction Amount with a unique number for each transaction
  2. Merchant Discount Rate levied on settlements
  3. Date and time of transactions and settlements
  4. Net Settlement Amount (Settlement – PSP charges)
  5. Payment modes and platforms used by customers

All of these insights will also help you optimize your payment process. As a result, your conversion rates increase as does customer satisfaction. 

Pro Tip: Reconciling Your Payment: All You Need To Know

Offers Support In Case of Payment Issues

You may think that a high transaction success rate is all you need from a PSP.

However, if you aim to achieve customer satisfaction, support plays a huge role.

Ensure that your payment service provider helps with day to day operational issues. For instance:

  • Settlements
  • Refunds
  • Chargeback

What is an example of a Payment Services Provider? 

A payment services provider aid businesses across industries to accept payments.

However, it’s best to take some examples for a better understanding.

So, here’s how Cashfree Payments, a leading payment service provider in India helps businesses in the eCommerce, education, NBFCs and Insurance sector. 

Here’s how Cashfree Payment’s solution has been helping these businesses scale:

  1. Multi-Channel Payment Collection: with the widest range of payment options
  2. Recurring Payments: Enabling subscription businesses to scale rapidly
  3. Easy Refunds: Customers can get instant refunds instead of waiting for 5-7 business days. Payments are also possible through payout links. 
  4. Pre-authorization Feature: Preauthorization helps eliminate PSP charges on cancelled orders or refunds. 
  5. Fast Settlements: Fastest settlement cycles in India. Moreover, Instant settlements allow access to funds within 15 minutes. 
  6. Secure Payment solutions: PCI-DSS compliant with regulated card vault for the safety of transactions.
  7. Payment Reconciliation and Analytics: Live transaction reports, comparative modules of different time frames, daily reports of settled & unsettled transactions.
  8. Hosted and Non-hosted checkout options: Offer the payment flow most suited to your business case and customer behaviour. 
  9. High Transaction Success Rates: with dynamic routing, diverse payment modes and bank account verification feature
  10. Lowest Payment Gateway Charges: Cashfree Payments offers the lowest payment gateway charges in India with zero maintenance or onboarding fees.

How Does a Payment Service Provider Work?

Yes, the last two sections give you a pretty good idea of what to expect from a payment services provider.

But, how does a PSP operate? Which players are involved in online payment processing?

Well, 4 players, to be exact.

Here is a quick definition of the latter three players: 

Acquiring Bank or Acquirer

The bank that registers the merchant. It enables online payment processing when businesses operate under pre-decided merchant agreements. 

In simple terms, this bank maintains the account that accepts the payment

Issuing Bank or Issuer

The bank that issues the cards to the customer. It validates the card authenticates the online transactions. 

In simple terms, this bank maintains the account that sends the payment.

Card Networks 

Essentially, networks like Mastercard, Visa, American Express and RuPay. 

They issue the cards and maintain a directory of all the banks. This way they map the transactions for online payment processing. 

Related Read: Debit Cards Payments Processing

So how do these players interact to make online payments possible?

Well, 3 main steps:

  • Card Authentication
  • Cardholder Authorization
  • Funds Capture

Want to jump into some details instead? 

Here we go.

Card AuthenticationCardholder AuthorizationFunds Capture
Customer Enters Payment Details4. Issuing Bank Verifies6. Adjustments of Settlements between Banks
Acquirer Forwards Data To Card Network5. Acquirer Requests Funds7. Payment Service Provider Credit Funds
Card Network Maps To Issuing Bank

Card Authentication

Customer Enters Payment Details

The customer enters payment details like card number or UPI ID on your (aka the merchant’s) website. 

The payment service provider encrypts/tokenizes these details and sends them over to the Acquirer. 

Acquirer Forwards Data To Card Network

The acquirer sends the payment details to the card network. 

The card network uses its systems to verifies the account number with the information on the server. This leads to card authentication.

Card Network Maps To Issuing Bank

Then, the card network uses its directory to map the account number to the correct Issuer.

Cardholder Authorization

Issuing Bank Verifies

The Issuer checks the card’s CVV and performs authentication. The customer is sent an authentication request. For insurance, an OTP. The Issuer verifies that authentication.

If the response is positive, the response is sent back to the card network. Thereafter, the card networks inform the Acquirer.

Acquirer Requests Funds

 Once the cardholder is authorized, the Acquirer requests funds from the Issuer. The Issuing Bank checks the account for fund availability. 

In case the funds are enough, the payment is authorized. 

Fund Capture

Adjustments of Settlements between Banks

Once the payment is authorized, the Issuing Bank adjusts the debit line for the amount of the sale.

Payment Service Provider Credit Funds

After receiving the funds, the PSP sends the funds to the merchant account. This is known as the settlement. 

A merchant can opt for Instant or Standard Settlement.

Payment Service Provider vs Payment Gateway

Here’s the difference between payment gateway and payment service provider:

A payment service provider handles funds.

On the other hand, a payment gateway only handles the technical aspects of the same

Let us explain. 

According to RBI regulations, a payment gateway is only in charge of:

  • Encrypting the customer payment details
  • Tokenizing the payment details
  • Forwarding the information to the Acquiring bank securely

A Payment Service Provider is more of a comprehensive solution. 

  • It provides you with a merchant account
  • Provides you with various payment modes
  • Securely communicates transaction information and status between you and the acquirer. 

Essentially, a payment gateway is not allowed to handle the customer funds. While a payment service provider can offer your services that make payment processing easier. 

Payment Service Provider vs Payment Processor

Now, payment service provider companies are often mistaken for payment processors. 

And for good reason! The lines between them CAN be a bit blurry.

But here’s one differentiation.

A Payment Processor helps communicate the payment information between card networks and Banks.

So essentially, a payment processor acts as an intermediary between:

  1. The Acquirer and the Card Network: After the transaction and card user is authenticated. 
  2. The Card Network and Issuer: After the account number is verified and payment information is mapped to the right Issuing Bank. 

On the other hand, a payment service provider helps in:

  1. Accepting the customer payment securely
  2. Communicating Information between the merchant and the other players in the payment process. 

Related Read: Third Party Payment Processor

Payment Service Provider vs Acquirer

Here’s a rather common question.

Is a bank a payment service provider?

Well, a payment service provider is defined as a third-party player.

This means that it is separate from the Acquirer. The Acquirer is the bank that holds the bank account of the merchant.

The payment service provider makes payment acceptance possible. 

 Few Parting Thoughts

As technology is evolving, new players are entering the game. 

A payment gateway may work as a payment aggregator as well. Your payment service provider may not only accept but also disburse payments. 

However, all of these evolutions end up providing a superior customer experience. Moreover, they add to a merchant’s convenience. 

As a merchant, pay caution while choosing a PSP. Evaluate all the aspects.

  • Are you choosing a payment service provider for small businesses? Or is it a large enterprise?
  • Are you looking to enable recurring payments?
  • Do you aim to automate reconciliations?
  • Do you need a hosted or non hosted payment page?

These are just a few examples.

Interested in knowing more about choosing a payment service provider?

Reach out to our payment service experts!