The purpose of this article is to explain some essential components and mechanisms needed for a business to become a payment service provider.
With the increased use of electronic payments worldwide, there are more and more companies that are contemplating the idea of becoming payment service providers. However, many people, pondering the idea, lack the conceptual understanding of the essential components of the process that have to be implemented in order for these potential payment service providers to be able to operate.
There are three aspects to the formation of a payment service provider that can be called creation, conveyance and collection each dealing with various types of relationships, namely relationships with future clients (merchants), payment gateway provider(s) and an underwriting banks/processors.
The 1st group of relationships consists of the actual merchants and, in many cases, software vendors, through which the future payment service providers are going to service these merchants.
Basically, creation aspect of the process deals with the systems from which transactions originate. Some software products are necessary to originate transactions (for processing) or subscriptions (for recurring billing).
In case of a payment service provider servicing charities it might be as simple as just a web-site, a single page which will accept credit card donations and pass them on for processing. In the opposite “extreme” case, it can be as complicated and elaborate as an enterprise-scale POS or recurring billing software system.
The 2nd group of relationships involves either a gateway software provider, or a gateway services provider. A gateway software provider is a company that is going to supply gateway software product, while the gateway services company is going to provide the hosted offering for the gateway.
Conveyance of payments is conducted via a payment gateway through which payments are actually delivered from the originating system to the transaction processor.
Usually, PSPs will need to communicate with a multitude of payment processors and banks as well as with a multitude of the originators of the transactions (or, usually, the customers of the PSP – other software companies, POS vendors etc.). Consequently, there is a need a unified API and a unified approach that the originators could use to potentially communicate with a multitude of back-end processing systems.
That is where the need for a payment gateway software, or a payment gateway services provider (a.k.a. payment gateway) comes from.
In addition to gateway software provider, the potential future PSPs will also need to work out the PCI compliance strategy.
Lastly, the 3rd group of relationships will be banking relationships, i.e. banks willing to underwrite merchants and facilitate the process of subsequent merchant funding (settlement).
Collection of the payment is the phase during which the payment is actually processed and the merchant is funded. It requires a relationship with a bank.
Unless a PSP has direct relationships with card associations, it will need to rely on an existing account underwriter, usually a bank. While there are different arrangements around who takes/accepts the underwriting risk, some third party would be required to verify and approve the initial merchant application, and subsequently facilitate actual money transfers that follow settlement of authorized transactions.
While many people, who come from the small-business transaction-processing world tend to see the creation/conveyance/collection system as one complete piece (such as PayPal or Authorize.Net), in reality, there are 3 separate aspects involved, and any business wanting to become a PSP will need to search for solutions specific to each of these aspects.