This glossary article will clarify and illustrate some financial terms widespread in the payments sector
Any reputable merchant needs to be prepared for demanding customers who look for quick, seamless, omnichannel shopping experiences. Accepting payments efficiently is the major factor in building up customer loyalty and trust. When we say efficiently, we mean both offering a variety of payment methods (cash, credit/debit cards, bank transfers, mobile payments, e-wallets, QR-code scanning, and so on) and a secure data exchange (properly encrypted, tokenised, or better both).
Thankfully, in the world of modern commerce, business owners can deal with recognised third-party service providers who can make their lives easier and boost their conversion rates. However, the offers are so numerous that merchants choosing a payment provider may sometimes feel like kids in a candy store.
This glossary article will clarify and illustrate some financial terms widespread in the payments sector. Their similarity often brings confusion, so we aim to make a clear distinction between these essentially different notions.
PSPs stand for payment service providers. Those are financial institutions that bridge the gap between merchants and banks. As an intermediary, a PSP establishes connections with multiple payment processors, optimises diverse transaction types in a single software solution, and creates the ability to accept payments smoothly.
Merchants benefit from working with PSPs since they get fast and easy payouts. PSPs allow their clients to incorporate a number of payment methods (such as credit cards, direct debit deposits, real-time bank transfers, mobile payments, etc.) into a single payment gateway. A nice bonus is that many providers develop software that performs fraud protection, risk management, as well as international currency conversion. Part of the services that a PSP can provide include payment terminal and Point of Sale (POS) technologies.
PSP is a very broad umbrella term covering many subtypes of financial organisations. PSPs range from large institutions which have created massive international networks to smaller startups that address specific pain points within the market. The key players include PayPal, Stripe, Adyen, Apple, Amazon Payments, Ant Financial, Klarna, Square, Payoneer, Tencent, etc.
Becoming a PSP is not easy. So far, the regulators express great concerns as for the matters of security, preventing crime, hacking and fraud. In the system where banks process transactions from intermediaries who act on someone’s behalf, greater clarity is needed regarding the responsibility for any illegal activities that might occur.
Open Banking should have been a huge opportunity for European PSPs, but so far a lack of unified standards, the absence of harmonised fraud reporting requirements as well as the confusion around strong customer authentication creates high risks for banks while cooperating with PSPs.
Payment processors are companies authorised to process credit/debit card transactions initiated by buyers and sellers. A payment processor executes the money transfer by exchanging data between the merchant, the issuing bank and the acquiring bank. The payment processor also typically provides the credit card machines and other equipment needed to accept credit card payments.
Processors follow the standards and regulations organised by credit card associations. These standards include rules regarding fraud, chargebacks, and identity theft.
Payment processors can be of two types, namely, front-end and back-end processors.
- Front-end processors interconnect card networks and settlement services and authorise transactions enabling a purchase (without actual money transfer).
- Back-end processors formally finalise transactions, moving money from the customer’s account to the merchant’s bank, which consequently funds the relevant business bank account.
According to another classification, one can distinguish three types of payment processors: merchant account + payment gateway, all-in-one solutions and simplified credit card processors.
Traditional payment processors require your business to set up a merchant account – an arranged space for pending transactions where the funds are “frozen” until full confirmation. Typically, a payment processing company assigns you a merchant ID (MID) number tied to that transit account.
One thing to note about using a merchant account/payment gateway combo is that it’s not an instant process. Merchants have to apply for both options usually filling out forms and providing some financial information. After approval of both applications, you’ll need to connect your account to the gateway and then your gateway to your store. Usually, this involves configuring your store with API keys, shared secrets and tokens.
Some services like PayPal and 2Checkout combine an account and gateway into one solution, which may make setup quicker and easier. On the downside, they may require a customer to leave your website at the checkout stage which is a bummer for many.
Simplified services like Stripe are very similar to the all-in-one solutions, but they usually integrate seamlessly with your store’s checkout so that the shopper never leaves your site. And they can be much quicker to set up — you can start taking various payment methods in a matter of minutes.
The examples of payment processors are TSYS, Chase Paymentech, First Data, Flagship Merchant Services, Helcim, Square, Fiserv, PayPal, SumUp, Shopify Payments.
Payment gateway is a system of money acceptance from buyers and customers through the website or mobile app, as well as in person. Choosing the right payment gateway is essential for the smooth and rewarding checkout process. As you may already know, difficulties at the final stage of the purchase, result in shopping cart abandonment, or even switching to another store.
The term differs from the payment processor since it’s not the company but the provided technology itself. In physical stores, payment gateways consist of the point of sale (POS) terminals used to accept payments by card or by phone. In online stores, payment gateways are the “checkout” portals used to enter their credentials. These gateways act as in-between services, processing inputted information and facilitating the authorisation or fulfilment of payments.
The gateway encrypts the information it received from the buyer and sends the transaction data to a card association. The issuing bank answers to the authorisation request which it may ‘approve’ or ‘deny’.
- Hosted gateways redirect your customers to the payment processor’s platform to input their payment information. Hosted gateways are easy to set up and are best suited for new stores, but the trick is that customers may back off if they aren’t familiar with the processor.
- Integrated gateways connect to your eCommerce website via their own API. The biggest advantage is that customers never have to leave your store to input payment details and submit orders.
For instance, PayPal offers a gateway called Payflow. Other popular payment gateways include Authorize.net, Stripe, 2Checkout, Skrill, WePay, BlueSnap, Payline, Adyen, Paytm Business, SagePay, etc.
Payment facilitators are merchant service providers that simplify the merchant account enrolment process. In particular, they eliminate the need to establish an individual merchant account. They are registered by an acquirer to facilitate transactions of sub-merchants on board their sub-merchant platform. Facilitators for short are called “PayFac”.
A facilitator provides merchants with their own Merchant ID under a master account. Usually, a simple onboarding application form and verification are needed to get started.
The acquirer (e.g. Mastercard) administers application and underwriting processes, works out a pricing agreement and facilitates a payment technology integration. It is also responsible for monitoring the payment facilitator’s compliance with operating regulations.
The payment facilitator, in its turn, integrates to the fintech and infrastructure of an acquirer, in order to register there. The third-party account holders assume all risk and liability for their sub-merchants. Payfacs are responsible for the underwriting process of every entity under their custody. Therefore, they must complete Know Your Customer (KYC) checks, Anti-Money Laundering (AML) and Sanctions checks. They also must handle chargebacks, fraud and data breaches.
The list of payment facilitators registered with Mastercard can be found here.
Payment aggregators are those third-party service providers that enable merchants to accept mobile or online payments in their e-stores.
The aggregator groups your business retailers together and accepts payments on their joint behalf. It signs up users directly under its own MID to process all money requests within a single master account.
It seems to be very similar to what payment facilitators do. The key difference is that an aggregating service doesn’t give every merchant its own merchant ID within its system. It uses its own MID to handle transactions instead.
As a rule, middle-sized businesses prefer facilitators since they can get a separate MID with little hassle. Small businesses would generally tend to use aggregators choosing lower fees over a personal ID.
Some of the best-known aggregators are Citrus, Billdesk, CCAvenue, PayUMoney, Instamojo.
The confusion about all the above-mentioned terms arises regarding the global industry leaders such as PayPal, Stripe, Square and Amazon Payments. Due to their multi-functionality, they may be mentioned in different roles. The main thing for a business owner is to figure out what kind of service fits their business model best. Hopefully, our article has helped you with that.