What Is a Payment Service Provider and How Do I Choose One?
Kyrelos Khir
Manager · Nov 10, 2024 · 7 min read
A payment service provider (PSP) is a company that enables businesses to accept electronic payments, primarily card payments, from customers. PSPs sit between the merchant, the card schemes (Visa, Mastercard), and the banking system, providing the technology, compliance infrastructure, and banking relationships that make card acceptance possible. Well-known PSPs include Stripe, Worldpay, SumUp, Square, PayPoint, and Adyen. Understanding what a PSP does and how to choose the right one is increasingly important as card and digital payments dominate UK consumer spending.
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What a PSP does
A PSP provides several functions simultaneously. It processes payment authorisations in real time, routing the transaction request from your card terminal or online checkout to the relevant card scheme and issuing bank. It handles settlement, aggregating your card takings and transferring funds to your business bank account, typically within one to three business days. It manages fraud detection and chargeback handling, reducing your exposure to fraudulent transactions.
Some PSPs act as their own acquiring bank, holding the merchant account in-house and settling funds directly (PayFac or payment facilitator model, used by Stripe and SumUp). Others connect merchants to an acquiring bank and act as the technology and compliance layer between them (gateway model, used by many traditional PSPs). The distinction matters because it affects settlement speed, pricing structure, and your contractual relationship with the entity holding your funds.
PSPs vs acquiring banks
An acquiring bank is a bank that holds a merchant account and settles card payments into it on behalf of the merchant. Historically, to accept card payments, a business needed a merchant account directly with an acquiring bank (such as Barclaycard, Lloyds Cardnet, or WorldPay's acquiring arm). This required a formal application, credit checks, and a merchant services agreement.
PSPs in the PayFac model (Stripe, SumUp, iZettle) aggregate many merchants under a single master merchant account, removing the need for individual merchant accounts. This makes onboarding faster and simpler, but also means funds are technically held in the PSP's account before being settled to you. For most SMEs this distinction is academic, but for higher-volume businesses it can affect settlement speed and what happens to funds if the PSP experiences a financial or regulatory problem.
"The PSP you choose affects your cash flow through settlement speed, your cost base through transaction fees, and your compliance burden through PCI DSS. It is worth reviewing annually, not just at startup."
- Kyrelos Khir, Manager
How to choose a PSP
Transaction fees are the most obvious comparison metric. Card reader PSPs charge a flat percentage per transaction (typically 0.75% to 1.75% for UK consumer cards). Traditional acquiring bank agreements offer interchange-plus pricing at higher volumes, which can be significantly cheaper above £500,000 per year in card turnover. Always request a breakdown of fees by card type: consumer debit, consumer credit, and commercial cards each carry different interchange rates, and some PSPs blend these into a single flat rate that may disadvantage you if your card mix skews toward premium or commercial cards.
Settlement speed matters for cash flow: some PSPs settle daily, some settle on a two to three business day delay, and others offer instant settlement for a fee. Integration capability matters if you sell online: check that the PSP integrates with your e-commerce platform, accounting software, and any other systems you rely on. Customer support matters when things go wrong: a payment failure on a peak trading day requires a provider with accessible, competent support.
PCI DSS and security compliance
Any business that accepts card payments is required to comply with the Payment Card Industry Data Security Standard (PCI DSS). This is a set of security standards designed to protect cardholder data. The compliance requirements vary by transaction volume and how your business processes payments. Businesses that use a hosted payment page (where the customer enters card details on the PSP's page rather than yours) or a card terminal that the PSP manages have significantly lower PCI DSS compliance obligations than businesses that handle raw card data themselves.
Most PSPs provide guidance on PCI DSS compliance as part of their service and include tools to complete the required self-assessment questionnaire. Non-compliance can result in fines from the card schemes and your acquiring bank, and also increases your liability in the event of a data breach. Using a reputable, compliant PSP substantially reduces your PCI DSS burden.
Frequently Asked Questions
Can I use multiple PSPs at the same time?
Yes. Some businesses use different PSPs for different channels: for example, one provider for in-person card payments and another for online transactions. This can optimise fees by channel but adds administrative complexity. Most SMEs benefit from consolidating with a single provider to simplify reporting and reconciliation.
How long does PSP settlement take?
Settlement timescales vary by provider. Most PSPs settle within one to three business days. Some offer next-day or same-day settlement, sometimes for a small additional fee. The settlement period directly affects your working capital: a business settling daily has access to yesterday's takings today, while one settling on a three-day delay is effectively extending short-term credit to its PSP.
The bottom line
While Spark Finance does not arrange payment processing, understanding your payment infrastructure is directly relevant to your access to merchant cash advance and other card-linked finance products. If you want to explore how your card processing history can support a funding application, start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Kyrelos Khir
Manager
Kyrelos is a finance manager at Spark Finance with a focus on invoice finance and working capital solutions for UK businesses. He helps businesses in professional services, recruitment, and manufacturing unlock cash tied up in their debtor books through factoring and discounting facilities.
