A payment service provider (PSP) is a company which provides merchants with individual merchant accounts, helps them with merchant underwriting and payment processing but does not fund merchants directly. In order to become a PSP one needs to build or license some payment processing software, integrate with different banks and processors, undergo multiple audits and certifications. If you want to plan your budget correctly you need to be aware of the costs involved. The top 5 costs are gateway software license, tokenization appliance, annual PCI audit, monthly PCI hosting fees, integrations with banks and processors. Besides them, there are other cost items that a prospective PSP should take into account.
Why becoming a payment service provider makes sense
Becoming a Payment Service Provider (PSP) can be a lucrative option for businesses looking to benefit from active participation in payment processing. These include startups, ISOs, SaaS companies and other business types. At the same time, becoming a PSP involves numerous costs that such a business has to take into consideration. On this page, we take a closer look at the key costs associated with becoming a payment service provider and give insights into the main cost items and investments required.
The main aspects of becoming a PSP
The process of becoming a payment service provider involves two important aspects. Business aspect concerns partnerships, while technical aspect concerns technological solutions that the prospective PSP has to implement. So, the main costs of becoming a PSP are focused around these aspects.
In order to become a payment service provider, a business needs to find an acquiring bank, that is authorized to underwrite it as one. Newcomers in the industry often confuse acquiring banks with regular commercial banks. While the term “payment facilitator” (or PayFac) is commonly used, the official term is payment service provider. Keep in mind that merchant certification and PSP certification are different procedures.
Besides the acquirer, a prospective PSP should establish relationships with a selected gateway partner as well as target banks and processors. Integrations with banks and processors will add more cost items to the “bill”, as we explain below.
The gateway partner you select, should support all your target merchant category codes (MCC), payment types and methods. Alas, gateway license is one of the most significant cost items.
Technological aspect of becoming a payment service provider includes several components. Let us briefly describe them.
A gateway solution you select might be a third-party solution, or a white-label one. It can also be a licensable open source code solution, which you can customize according to the needs of your business and your customers. Startup businesses usually choose hosted gateway solutions. Larger and enterprise-level companies need gateway solutions that can be easily customized. That is why they opt for licensed (preferably, open-source) payment gateway solutions. The cost of your gateway license will depend on the option you select and the functions you need it to support. The gateway software license cost may range from $50K to 250K.
Some payment gateway software solutions, such as UniPay Gateway, are available in both hosted and licensable open source code versions. So their users can easily switch from one version to the other.
In order to be able to handle payments, you will need to follow the payment card industry standards. PCI compliance calls for regular audit of your payment solution and software. So, PCI audit is another of the key cost items related to becoming a PSP. A payment service provider might need to handle millions of transactions for multiple merchants, so a PSP’s PCI exposure is quite high. Depending on processed transaction volume, a PSP usually, belongs to PCI level 1 or 2. That is why the average cost of annual PCI audit for a PSP is about $25K or more. A prospective payment service provider might also need a PCI specialist or consultant assigned to the project.
Card data protection
As part of PCI compliance measures, a business should be able to handle sensitive cardholder data in a secure way. Credit card number tokenization is an essential step for any company that “touches” this data, including a PSP. One of the ways to replace card numbers with tokens is by using a tokenization appliance. Another way is usage of a third-party tokenization service. For most PSPs tokenization appliance is the more preferrable option. The cost of a tokenization appliance might rage from $50K to 100K.
In order to be able to service all target merchant category codes and to support all their target payment types, a PSP should have integrations with all respective banks and processors. That is, every bank or processor partnership should be backed by the respective integration. Integration might, sometimes, call for additional development efforts. Depending on the range of target features a PSP has to support, it needs to spend, roughly, from $5K to 15K on each separate integration with a bank or processor.
In addition to PCI-imposed security measures, a PSP should have consumer and merchant fraud protection means at hand. Basic consumer fraud protection means include verification of card details, IP-addresses, geographical locations and other data. Merchant fraud detection algorithms are mostly based of detection of deviations from established business patterns. These might include operations outside business hours as well as unexpectedly large or small transaction amounts and volumes.
We would like to mention several other important cost items, related to becoming a PSP.
- Just like any other business, a payment service provider should pay transaction processing fees to banks, processors, and networks.
- It might also need to handle chargebacks for its merchants and provide 24/7 customer support through diverse channels.
- Finally, a PSP should pay for a PCI-compliant hosting for its server infrastructure and data center.
Becoming a payment service provider might be a complex process, that requires huge upfront costs and includes multiple steps. Careful planning, clear step-by-step strategy and a transparent budget, taking all important cost items into consideration, improve a business’s chances of successfully implementing a PSP model.
If you want to learn more about the costs of a payment gateway solution, here is a short video guide for you.