Payment Service Provider

A payment service provider (PSP) is a vital entity enabling merchants to efficiently manage payment operations. To establish oneself as a reputable PSP, several key factors need to be considered, including developing or licensing robust payment processing software, seamless integration with multiple banks and processors, and successfully completing rigorous audits and certifications. While these steps are crucial, knowing the various cost elements involved in becoming a PSP is essential. 

The top five expenses include:

• Obtaining gateway software licenses.
• Implementing a reliable tokenization appliance.
• Conducting annual PCI audits to ensure compliance.
• Covering monthly PCI hosting fees.
• Investing in the necessary integrations with banks and processors.

However, it is essential to recognize that additional cost items may also arise throughout this process.

Why becoming a payment service provider makes sense?

Becoming a Payment Service Provider offers a promising avenue for businesses seeking to actively participate in payment processing and capitalize on its potential benefits. This opportunity extends to various businesses, including startups, ISOs, SaaS companies, etc. However, it’s crucial to acknowledge that becoming a PSP involves a comprehensive assessment of the associated costs. This resource delves into the key expenses that aspiring PSPs need to consider carefully. By gaining insights into these costs, entrepreneurs can make informed decisions and effectively navigate the path toward establishing themselves as successful payment service providers in the competitive market. 

The main aspects of becoming a PSP

Becoming a payment service provider encompasses two crucial aspects: the business aspect, which involves establishing partnerships, and the technical aspect, which entails implementing the necessary technological solutions. As a result, the primary costs associated with becoming a PSP revolve around these critical areas. By understanding and addressing these aspects, prospective PSPs can effectively allocate their resources and navigate the journey of establishing themselves as successful players in the payment service provider industry. 

Partnerships

To become a payment service provider, a business must secure an acquiring bank with the authorization to underwrite it. However, it is worth noting that newcomers to the industry often mistake acquiring banks for traditional commercial banks. While the term “payment facilitator” or PayFac is commonly used, the official term for such entities is a payment service provider. It is essential to differentiate between merchant and PSP certifications, as they involve distinct procedures.

In addition to establishing a relationship with an acquiring bank, prospective PSPs should also focus on building connections with a selected gateway partner and target banks and processors. The integration process with these banks and processors will introduce additional cost elements that must be accounted for.

When selecting a gateway partner, it is important to ensure that they offer support for all the desired merchant category codes (MCC), payment types, and methods. 

Technology

Here is a brief aspect of the technology that encompasses other key elements also, 

Gateway Software 

When choosing a gateway solution, businesses have options like third-party, white label, or licensable open-source code solutions. Startups prefer hosted gateways, while larger enterprises prioritize customization with licensed open-source solutions. Gateway license costs range from $50,000 to $250,000 based on features. UniPay Gateway offers hosted and licensable versions, allowing users to switch as needed. 

PCI compliance

Ensuring compliance with the payment card industry standards is fundamental for handling payments as a service provider. PCI compliance necessitates regular audits of payment solutions and software. Depending on the volume of processed transactions, a PSP typically falls into PCI level 1 or 2. Consequently, the average annual cost of a PCI audit for a PSP is approximately $25,000 or higher. It is worth considering that a prospective payment service provider might also need to engage a PCI specialist or consultant to assist with the project. 

Card data protection

Maintaining secure handling of sensitive cardholder data is crucial to PCI compliance for any business, including payment service providers. Tokenizing credit card numbers is a crucial measure in guaranteeing data security. This process involves replacing card numbers with tokens, which can be achieved through a tokenization appliance or a third-party tokenization service. While both options are available, most PSPs prefer using a tokenization appliance. The acquisition cost for a tokenization appliance generally falls between $50,000 and $100,000. 

Integration works  

A payment service provider must establish integrations with the relevant banks and processors. Each partnership with a bank or processor must be backed by a corresponding integration, ensuring seamless connectivity and functionality. The cost associated with each unique integration can vary depending on the scope of features that the PSP needs to support. On average, a PSP can expect to allocate approximately $5,000 to $15,000 for each integration with a bank or processor. 

Fraud prevention

Furthermore, a payment service provider needs to implement robust measures to safeguard against consumer and merchant fraud. Fundamental consumer fraud protection mechanisms involve verifying card details, IP addresses, geographical locations, and other relevant data points. On the other hand, merchant fraud detection algorithms primarily focus on identifying deviations from established business patterns. These anomalies may include transactions outside regular business hours, unexpectedly large or small transaction amounts, and unusual transaction volumes. 

Other costs 

Similar to other businesses, a payment service provider is obligated to pay transaction processing fees imposed by banks, processors, and networks. Additionally, the PSP may manage chargebacks on behalf of its merchants and offer round-the-clock customer support through various communication channels. Furthermore, ensuring PCI compliance requires the PSP to invest in secure hosting services for its server infrastructure and data center, leading to effectively managing transaction costs, providing excellent customer service, and maintaining the security and integrity of its payment operations. 

Conclusion

Embarking on the journey of becoming a payment service provider is a multifaceted process involving significant upfront costs and various essential steps. By carefully considering and accounting for all vital cost elements, businesses can better navigate the complexities involved and enhance their prospects of establishing a thriving payment service provider model.