How do Payment Service Providers (PSPs) manage your online payments?

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Would you like to choose a payment service provider (PSP) to manage your online payment services but don’t know where to start, or are you wondering what makes them different?

If you are a merchant looking for an online payment solution with high expectations in terms of transaction security and customer experience, you should know that PSPs are a good alternative to traditional financial institutions, including banks.

In this article, we will explain what a Payment Service Provider (PSP) is and what you should consider before choosing one to manage your online transactions.

But before getting to the heart of the matter, we need to take a look at the regulations to understand the impact of these payment institutions in today’s banking world and how they are regulated in France.

PSD2: driver for the development of Payment Service Providers  

The ongoing evolution of the online payments industry has been profoundly influenced by regulation and oversight, including directives such as the Second Payment Services Directive (PSD2), which came into force in France in 2018.

This directive, introduced to promote innovation, security and competition in the payments market, has had a significant impact on the business of Payment Service Providers (PSPs).

It has opened the door to the emergence of new players in the payments market, which had previously been mainly covered by the traditional banking sector. 

By forcing banks to share their data with third parties such as payment service providers, the competition between these different players has grown.

Third-party Payment Service Providers have grown in importance, offering innovative solutions and an improved payment experience by using personal data previously only accessible to banks.

What is a payment service provider?

A Payment Service Provider is a company authorised to offer services using online payment data, in particular to merchants.

Payment Service Providers often offer more innovative solutions than traditional banks, with payment methods such as bank cards, credit transfers and direct debits, depending on the services and players involved.

The scope of application covers all digital payments, in the context of e-commerce and the sale of services or subscriptions.

Today, in addition to PSD2, the French Monetary and Financial Code regulates      the PSP profession by defining three types of payment service providers: 

  1. Payment institution: it enables a company to offer payment services, including the new services made available by PSD2 (account information, payment authorisation and initiation).
  • This status is currently very popular with fintech companies.
  1. Electronic money institution: the first status to break the banking monopoly, the electronic money institution provides services linked to payment information and guarantees the issue and management of electronic money.
  2. Credit institution: this is the traditional status for banks. It offers the most comprehensive range of services, including banking transactions, payment services and the issuing and management of electronic money.

Each status enables third-party payment institutions, depending on their type, to act as an Account Servicing Payment Service Provider (ASPSP) or as a Third Party Provider (TPP) providing aggregation and/or initiation services.

Payment Service Providers may appoint third parties to provide online services on their behalf and under their responsibility by delegation. 

Note that to be recognised as a PSP, authorisation from the ACPR (French Prudential Supervision and Resolution Authority) is required in order to legally exist, as is the case for SlimPay, for example. 

One of the strengths of payment institutions is their ability to play an integral part in the payment value chain.

The PSP is responsible for protecting buyers and sellers, and for managing the collection of funds. It is up to the PSP to place the payments in an escrow account and then distribute them to merchants.

In this respect, two concepts are fundamental to a good understanding of PSP issues: the coverage rate and the ring-fencing rate at SlimPay.

Coverage : a measure of stability at SlimPay

The coverage rate, or reserve, represents the funds in reserve as a proportion of the total volume of transactions processed for a given merchant. This is fixed at the start of the relationship and adjusted over time according to the level of unpaid debits on the account.

→ Overall, this is a crucial measure of a payment institution’s (PSP’s) ability to honour its financial commitments to merchants and consumers in the event of a dispute or refund. 

→ SlimPay imposes coverage      on its merchants and this is an advantage: it      is essential for dealing with rejected direct debits and requests for refunds from end consumers without merchants having to worry. 

It is a measure to protect the merchant and simplify the management of rejections (R-transactions) that is inherent to the SlimPay platform. 

The coverage system allows you to take hold of the funds collected, while still dealing with failed and disputed transactions.

→ When considering which PSP to choose, it is important to be wary of PSPs that don’t offer a reserve or coverage. What happens when there are rejected payments or disputes?  

It should be noted that several factors influence the level of coverage     , in particular the volume of transactions, the frequency of refunds, the PSP’s risk management policy and regulatory requirements. 

An in-depth analysis of these factors can help you assess the financial robustness of a payment provider before selecting it for your business.

Ring-fencing rate: a security indicator

Ring-fenced accounts, or escrow accounts, are additional security mechanisms. 

→ These accounts separate client funds from the payment service provider’s operational assets, thus ensuring that client funds are protected in the event of bankruptcy or litigation.

This layer of security strengthens client confidence and provides essential financial protection, as funds will not be mixed within the company’s finances.

Now that you are aware of these two concepts, you need to take stock of the online payment services offered by the various payment service providers.

As a merchant, choosing a Payment Service Provider that meets your needs is an appropriate solution for setting up secure recurring payments
For example, if you are looking for a solution to manage your direct debits, a PSP such as SlimPay can help you secure recurring transactions and future payments.