How to choose your Payment Service Provider?

Louis Terme

Whether you’re starting up a new company or looking to expand to new countries, you might have to make a difficult yet critical choice: which payment provider should I choose for my business? As this decision will have a direct impact on your revenue & growth, we’ve listed in this article a few parameters you need to be aware of to ensure successful collaboration with your future payment partner.

There are dozens of great PSPs on the market. However, not all of them are relevant to your business. Keep in mind that to get the best payment performance, it is key to work with several providers (at least 2 to avoid technical downtimes and have bargaining power on fees).

At ProcessOut we’ve helped dozens of companies build flexible and scalable payment infrastructure. Through our API, merchants can easily implement and manage new PSPs. So if you’re in the process of redesigning your payment infrastructure_ drop me a line!

If you’re new to the payment world, we recommend you to have a look at the following articles to better understand where the Payment Service Providers sits and what it does :

1/ The geographic parameter

Geography is the first parameter to take into consideration when selecting a PSP. It’s about Legislation, Payment Methods, Acquiring Channel, Currencies Supported and Settlement Options.

Legislation: first of all, check that the country where your company is registered is supported by the PSP that you’re looking to integrate. Most PSPs have licenses for Europe, US, and Asia which means that they potentially won’t be able to onboard you if your entity is located outside of these regions.
Payment Method - it is one of the most important things you need to work on when selecting a PSP. It’s key to offer your customers a way to pay in a local payment method to maximize your chance of getting paid. WeChat, Alipay and CUP in Asia, Mistercash/Bancontact in Belgium, iDeal in the Netherlands or Boleto, RapiPago, OXXO and many others in LATAM are just examples that people have very different payment habits around the world.
Acquiring Channel & local connections - To process transactions, PSPs rely on Acquirers. Some PSPs are Acquirers and some rely on third parties. To maintain good financial and technical performance, it’s key to use a PSP that has good connections in the regions you’re targeting. Indeed the performance of traditional payment methods like Visa, Mastercard, American Express (…) can change depending on that parameter. You can judge that by asking if the acquiring channel is local or not and by inquiring about the authorization rate (% of successful transactions) for companies like yours.
Currencies supported - Make sure that your PSP offers the ability for your customers to pay with their preferred currencies. Some PSPs only support the biggest currencies (€, $, …) and it can have a negative impact on your conversion rate in some specific countries.
Settlement options - Last but not least, make sure your PSP gives you the ability to collect money in your preferred currencies and if an exchange rate is applied. Some PSPs will allow you to accept transactions in local currencies but will only accept to settle in a specific currency and you will be charged for it.

2/ Features & integration

Depending on your business model you might need specific features (recurring payments, 3DS, etc…). Some of them might not be supported by your PSP or if available, quite complicated to integrate.

Recurring payments are popular nowadays especially for SaaS businesses, however, not all payment providers support it. Check if the PSP can offer you a flexible way to handle your card subscriptions, including upgrades, change in subscription periods, discounts, etc…

If you’re operating as a Marketplace, can the PSP let you create wallets for your vendors? How can you handle settlements to their bank account? Who does the KYC and do they charge you for that service? (…)

Regarding fraud, most PSPs now offer anti-fraud tools to their customers. Just make sure that you will have full control over your fraud settings. Also, make sure that the PSP can enable 3D Secure for your transactions as this is the first thing you’ll need to do to block fraudsters.

We recommend you to list all the features you need for your company and put it on the table early in your negotiation with a PSP so you don’t waste your time integrating a payment partner that will not be able to give you the flexibility you need to handle your payments.

There are a lot of PSPs out there. Some of them were born in the ‘90s and are quite hard to integrate due to their old infrastructure when more recent PSPs have developer-friendly APIs much more appreciated by developers. If you’re using a CMS like Magento, Prestashop, Shopify or Woocommerce (…), then you should check if the PSP offers a plugin to add its solution to your webshop. If you want to go further on this, we gave some tips about how to integrate Payment Service Providers the right way.

3/ Security & Uptime

A PSP you want to integrate must have a PCI DSS certification Level 1, if it hasn’t it means you won’t be able to offer your customers a secure way of paying. This is the highest level of PCI certification, which means that your customer’s data is safely encrypted and stored and that the PSP is regularly audited to ensure it complies with the PCI standards.

Another important metric to watch is the uptime of the Payment Service Provider. This refers to the ratio between the time when the service has been available and when it hasn’t. The standard uptime for a PSP usually sits somewhere between 99,95% and 99,99%.

For payments, this metric is critical because if your provider has a downtime, you will automatically lose revenue with no way to recover it. The only option to prevent this kind of event from happening is to use a second PSP to keep an “emergency path” for transactions that can’t go through your principal payment provider.

4/ Fees

First of all, it’s important to understand how Payment Fees work and to know what is an Interchange+ pricing. This may help you better understand what follows.

Many PSPs claim to have transparent pricing but in reality, you’ll most probably end up with unexpected fees at the end of the month. Here is a shortlist of the fees you should mention during your negotiation:

Setup fees
Processing fees
Monthly/annual fees
Transaction fees (check if the PSP is charging you for declined transactions)
Chargeback fees
Refund fees
Deposit (Also called Rolling Reserve): PSPs sometimes hold a deposit from your revenues to protect themselves from high chargeback rates as they are financially liable for the funds if you are unable to pay (if you go bankrupt for example)
Exchange rate fees
Withdrawal fees
Wallet fees (for marketplaces)

Note that there’s also a huge price gap depending of your customers’ card types, such as:

The issuing country: the interchange is higher in the US than in Europe
The card type: business cards are more expensive than consumer cards

Benchmark your payment fees on ProcessOut

5/ Evaluate your “risk profile”

It may seem harsh but depending on your industry and/or your business area, some payment providers can simply decline you. The reason behind that is that card schemes & acquirers categorize businesses into “high-risk”, “mid-risk” or “low-risk” categories.

Indeed, they estimate that transactions of a “high-risk” business are more likely to result in a chargeback, which is bad from a provider’s perspective because it degrades a score that card schemes & issuing banks attribute them and has a negative impact on their global approval ratios.

Dating services, adult products, online gambling or pharmaceutical products are examples of high-risk businesses while airlines, ticketing or travel companies are generally considered as mid-risk businesses.

Therefore, when starting negotiations with a payment provider, it’s important to mention your business type and ask if they are willing to accept your business. Note that with sufficient volumes, some PSPs will be able to onboard high-risk or mid-risk businesses, however, it’s not necessarily the right choice for this business: what matters most is how much experience the Acquirer has with processing transactions of this specific industry and what level of performance it will be able to deliver.

Checklist

In a nutshell, to select the relevant PSPs for your business you need to follow this checklist:

Geography - Confirm that the PSP has the relevant payment methods and acquiring channels to offer good performance in your targeted countries. Pay attention to currencies.
Features - Check that your PSP offers the relevant features required by your product/payment flow (pay attention to the marketplace, recurring payment options, reconciliation, fraud scoring, 3DS…)
Integration / API - Be sure to assess the complexity of integration that it gives access to all the features and payment methods expected.
Security & uptime - Be sure to work with a PSP that has the relevant certification (PCI DSS Level 1)
Fees - Be sure to have the full picture and to take into consideration all the parameters on top of the % charged per transaction
Risk profile - Check that your business matches the PSP requirements. If you’re working in a high-risk industry or if your chargeback rate is high you should either use dedicated PSPs or integrate a fraud scoring solution to control your chargeback level

Last but not least, fast-growing merchants tend to integrate at least two PSPs. Their main objectives are to have a technical backup, to get the most of the different PSPs they’re using and to be in the best position to negotiate fees when growing.

More than happy to help if you have some questions about this article or your payments, just pick a free slot on my agenda & let’s talk! If you’re already accepting payments and want to run an audit on your PSP(s), you can use our free tool Telescope. It requires no IT effort and it will help you understand how your payments perform and how to decrease failed transactions and reduce payment fees.