What are payment service providers?
Confused about the players in the payments ecosystem? We’re here to help.
They work behind the scenes in the engine rooms of commerce. Most consumers never give them a second thought, or even a first. Quiet and unassuming, payment service providers represent essential links in the global financial chain.
Payment service providers connect merchants to the electronic financial system so they can accept credit and debit card payments. Invisible to most but essential to all, payment service providers make modern commerce possible by providing the connective financial tissue between merchants, consumers, card brand networks and financial institutions.
Payment service providers bring all financial parties together to deliver a seamless experience for merchants and their customers by processing payments quickly and efficiently. Let’s take a closer look…
Who are payment processors and merchant service providers?
The terms “payment processors,” “merchant service providers” “merchant acquirer” and “payment service providers,” all refer to the same entity in the payment chain. Payment service providers act on behalf of merchants and are paid by merchants for their services.
A payment processor acts as the mediator between merchants and the financial institutions processing a payment transaction. Processors handle the entire payment transaction to ensure merchants get paid. From authorization to settlement, payment service providers are third parties that facilitate transfer of funds from customers’ accounts to merchants’ accounts.
Some payment service providers offer just the basics, while others provide comprehensive consultation and support services to their merchant clients. Basic payment processing is increasingly considered a commodity service. Beyond that essential service provision, however, payment service providers are differentiated by offerings such as merchant financing, security and fraud protection services, and regulatory compliance assistance.
When choosing a payment service provider, merchants should consider a variety of factors including customer service, security offerings, flexibility to accommodate future growth, and of course pricing and fees.
How do the card brand networks fit in?
The card brand networks are the most visible actors in the payments ecosystem. The card brand network acts as the intermediary between a payment service provider and an issuing bank. There are two types of card networks: credit card associations that include Visa, MasterCard, Discover, and American Express, and PIN-less debit card networks that include NYCE, Interlink and Cirrus.
What is an issuing bank?
Typically a financial institution, bank, or credit union, the issuing bank provides credit and debit card to the consumer on behalf of the card brand networks. The issuer is responsible for approving or declining each transaction request based on the customer’s available credit (or debit) and ultimately providing the appropriate funds to the merchant for each transaction.
Issuing banks will often co-brand with one of the card brand networks, i.e. “Citibank VISA” or “Chase Mastercard.” Discover and American Express utilize a different model, acting as both the card network and the issuing bank.
What about ISOs and VARs?
An ISO (Independent Sales Organization) is a third party that a payment service provider contracts to procure new merchant relationships. ISOs resell products and services from one or more payment processors, and receive commission from the processors for which they sign up merchants.
Value Added Resellers (VARs) work in partnership with one or more payment processors to provide payment products and services to merchants. VARs offer additional features that complement payment processing such as point of sale hardware, inventory management and accounting tools, and professional services.
What role do banks play?
Issuing banks and acquiring banks work closely together in a payment transaction. The issuing bank issues credit or debit cards to consumers. The acquiring bank—also known as a merchant bank or simply acquirer—processes credit and debit payments on behalf of a merchant. A merchant enters into a contract with the acquiring bank in the form of a merchant account. The acquiring bank exchanges funds with the issuing banks and ensures the merchant receives payment for payment card activity, minus interchange and other fees.
Vantiv, now Worldpay, is the leading payment service provider by transaction volume and long-standing relationships with all the participants in the payment service provider ecosystem. Connect with one of our payments experts to learn how your business can enjoy seamless commerce and processing today.