In 2024, digital payments have transformed into a necessity instead of a convenience. Today, almost 75% of total payments are conducted digitally, with customers opting in for virtual payment solutions more and more. As a result, even small and mid-sized businesses are now obligated to have some sort of payment system set up for digital operations. Otherwise, you will be missing out on a large revenue stream from digital customers across the globe.
It no longer makes sense to avoid the opportunity to go digital and leave the confines of your local market as a business. You must consider adopting a payment processing solution to accelerate your growth internationally and acquire an even bigger share of your local market. This piece will discuss two major options - payment gateways and payment service providers and which alternative is best for your business operations.
What are Payment Services, and Why Do You Need Them?
First of all, let’s discuss the technical nature and role of payment services for modern businesses. Payment services are software solutions that integrate within your payment infrastructure and allow you to receive online payments from digital customers. If you don’t have any payment systems available, digital solutions can help you set up an entire payment process from square one.
Payment systems can directly connect to your business bank account, letting you swiftly receive the funds from client payments for your products or services. On the customer side, the payment system allows client accounts to pay directly for your offerings. Finally, the payment system transfers the client funds into your bank account. In many cases, payment systems have automated KYC, KYT and other compliance checks to verify the authenticity of transactions. There are two major examples of payment systems that your business can acquire. Let’s discuss.
Understanding Payment Gateways
So, what is a payment gateway? Payment gateways are digital software facilitating online payments in a thorough form. The payment gateway integration lets businesses automate the data verification of client credit cards or digital wallets and the subsequent payment processing.
Once the transaction is initiated, the online payment gateway encrypts the request, sends it to the payment processor and finalises the transfer.
Lastly, the gateway transfers the payment amount to the merchant account, finishing the transaction. In simple terms, a secure payment gateway connects both merchant accounts and client accounts within a single continuous system, ensuring transaction security and optimal speed.
Due to this reason, payment gateways play an invaluable role in setting up online payments for businesses that don’t have the native ecosystem to achieve this goal.
How Do Payment Service Providers Work?
Now, let’s discuss - What are PSPs? A payment service provider (PSP) is a full-stop payment solution for businesses. A PSP processor is not just a piece of software but an entire ecosystem for your payment needs. PSPs deliver a comprehensive suite of services that streamline businesses' entire payment processing flow, going beyond a simple payment gateway offering.
Aside from the payment processing services presented above, PSP integration can help you set up merchant accounts, enhance fraud prevention practices and provide numerous complementary services to catalyse your payment system efficiency. In short, PSPs offer a much more expanded service, covering a wider range of payment processing needs for businesses.
Payment Service Provider vs Payment Gateways
Both a payment gateway and payment service provider can deliver payment processing services for your business operations. However, choosing between the two options requires careful consideration. While the payment service providers offer a bigger ecosystem of services, you should still assess both solutions and determine which suits your immediate and long-term needs.
Extent of Features
As mentioned above, both payment gateways and PSPs offer payment processing solutions. However, where payment gateways strictly serve companies to execute client transfers, PSPs handle all operations related to digital payments from A to Z. PSPs provide a dedicated merchant account for businesses to accelerate the fund retrieval process. Merchant accounts are integrated within the PSP’s payment system, allowing businesses to receive customer payments much faster compared to external payment gateways.
Moreover, the settlement is automatic with PSPs, letting businesses receive client transfers without manually managing the money flow. Fraud prevention is another massive feature of PSPs, as well as screening transactions for KYC, KYT, anti-money laundering, and anti-terrorist funding. As a result, payment network operators handle most of the security checks and minimise the involvement of businesses in the compliance process.
Customisation Options
It is crucial to have choices when it comes to your payment processing systems. Customising the payment flow, automating settlements, choosing currencies and setting up fixed payment schedules are a small part of the crucial options that every business requires. Payment gateways can accommodate a fraction of these requirements, but they are mostly limited to direct payment customisations.
On the other hand, since PSPs have access to the entire payment ecosystem, they can provide maximum flexibility, letting you set up payment schedules and seamlessly adopt different payment methods. Moreover, PSPs let you customise payment processing to fit the rest of your ecosystem better, swiftly integrating with your CRM tools and other crucial operating modules.
Niche Capabilities and Ease of Integration
Up to this point, the advantages and offerings of PSPs have clearly overshadowed payment gateway alternatives. However, not every business requires robust and varied features to set up their digital payments. In some cases, it is enough to acquire a niche solution to solve your specific payment problem.
For example, businesses with existing digital payment systems might gain more by integrating a specific payment gateway to add another payment option, including cryptocurrency offerings or different payment methods like swaps.
In such a case, it is much easier to acquire and integrate a payment gateway that will swiftly connect with your infrastructure. On the other hand, PSPs are a more robust and sometimes clumsier set of services that might be too much hassle if you wish to acquire a smaller improvement for your existing payment system. Moreover, you might need to get a PSP license, which will take even more time and money to set everything up.
Affordability
Finally, the biggest advantage of gateways over PSPs is the pricing factor, allowing businesses to equip payment options without extra costs. While PSPs offer a comprehensive package of payment processing, integration options, customisation and improved execution of transfers, the entire service is considerably costly.
On the other hand, payment gateways are much more affordable, requesting lower transaction fees and monthly expenses for their rendered services. It is even possible to acquire a free payment gateway through open-source software.
However, open-source solutions are generally not recommended due to their lack of security and inability to produce low-risk merchant accounts. So, adopting a white-label payment gateway is much more cost-effective if you require limited payment services instead of an entire ecosystem.
Final Thoughts
To decide between a PSP or payment gateway provider, you need to assess your own needs carefully, deciding the scope and extent of your payment processing requirements. While PSPs offer a more comprehensive service that can tend to your payment needs, gateways are more concentrated and less costly.
So, if you wish to implement an entire payment system, PSPs are your best bet, whereas if you simply wish to acquire a single payment solution, gateways can accommodate your needs at a fraction of the cost.
