Merchant Account vs. PSP vs. Payment Gateway: A side by side comparison

Merchant Account vs. PSP vs. Payment Gateway: A Side by Side Comparison

merchant account and IPSP comparison

Every business accepting online payments needs to have at least one of these: a merchant account, a payment service provider account, or a payment gateway.

In most cases, at least two of them overlap and are used as a part of the same platform. But for the uninitiated, it could be hard to grasp, which is which and how these three moving pieces of online payment system mesh together.  

In this blog post, we will break down the key differences and similarities between the three, and make some recommendations based on your merchant needs. Below you will find a comprehensive comparison in the form of an easily digestible table. Let’s start by giving a word of explanation for each of the 3 elements of online payments.

What is a merchant account?

A merchant account can be thought of as a special bank account dedicated to accepting payments by online merchants. Funds from your online sales are collected on this account, and it doesn’t matter whether you are selling physical goods, subscriptions, or online access to digital products. This is just an account to collect the transaction stream coming from your online clients. The revenue from all the merchant’s online transactions is being deposited until the settlement date, which usually happens once every week. Only then can the funds be transferred to merchants’ regular accounts. 

Only merchant accounts are allowed to collect online payments using the most popular credit and debit cards like Mastercard, Visa, or American Express and later on transferring them to account of your choice. Each merchant is assigned an individual Merchant ID after successfully applying for a merchant account.

“A merchant ID is a unique code provided to merchants by their payment processor. Often abbreviated as MID, this code is transmitted along with cardholder information to involved parties for transaction reconciliation. The MID can help identify a merchant when communicating with their processor and other parties…” (Quote Source

Merchant accounts with an individual MIDs can only be provided by the payment processors in partnership with, or by an acquiring bank.

You can also encounter a distinction between a regular merchant account and the one called a high-risk merchant account. A regular merchant account is an account for the most common business types on the internet like e-commerce shops and platforms, SaaS products, i.e., businesses with high transparency, low risk of chargeback and refund claims from the customers. On the other hand, high-risk merchant accounts are dedicated to businesses where the risk of chargeback or refund claim is relatively higher. Some of the more noticeable high-risk merchants involve adult content, online dating, online gambling, forex trading. You can check the full list of online businesses considered by acquiring banks to the high-risk in this blog post

What is a PSP, aka payment aggregators?

Payment Service Provider allows merchants to start accepting online payments without having to set-up a dedicated merchant account. Instead, a PSP operates using a single merchant account with a single MID. Whenever onboarding a new merchant, a PSP simply creates a new sub-account within one big merchant account,  aggregating all the other sub-merchants. This is why Payment Service Providers are often referred to as payment aggregators because they aggregate all the transactions from hundreds or thousands of different merchants under one account.  

This is perhaps one of the fastest methods to start accepting online payments, but it comes with some serious drawbacks. When accepting payments with PSP, you share a single MID with hundreds or thousands of other merchants who are your neighbors on the same merchant account. Because all of you use the same MID, the acquiring could see you as the same merchant. This is why, on aggregated accounts, collective responsibility is in force. If you end up in a bad neighborhood of merchants generating too many chargebacks, frauds, and refunds, you may see your transactions declined and your sub-account suspended. 

Another drawback may be the lack of any customization and flexibility. With PSP, merchants usually cannot negotiate the terms and conditions of cooperation, nor can they negotiate to price. The pricing is generally fixed in favor of smaller merchants. Also, in terms of technical set-up and implementation, it’s an out-of-the-box solution that does not offer any customization and imposes a lot of technical restrictions. 

The most popular PSPs are PayPal and Stripe. 

What is a payment gateway?

A payment gateway can be thought of as a technological overlay working on top of a merchant account or a PSP. It is a technological component required to securely collect all the transaction details and pass them to the payment processor or acquiring bank. Customers making online payments do not interact with your merchant account or PSP. Instead, they interact with the payment gateway. In general, a payment gateway can be associated with credit card payment forms on the front end, and transaction encryption and verification systems on the backend. 

Most merchant account providers and PSPs offer their own payment gateways on top of their services. But if you own a merchant account, you have a much bigger choice of payment gateways you can connect to. In most cases, merchants who own a merchant account can choose if they want to use an out-of-the-box solution provided by the payment processors or integrate with a third party payment gateway, for instance, API. This creates a lot of room for customization and optimization of the payment gateway’s UX and performance. 

On the other hand, if you are collecting payments through a PSP, more often than not, you are forced to use an out-of-the-box solution. As a merchant, you need to adjust and fit into the set-up provided by the payment service provider, not the other way round. This leaves you with very little room for customization, especially for UX and performance optimization. If your PSP is offering a lot of integrations with the most popular CMS and e-commerce platforms, this might be very convenient. But if you are using a custom website or app developed by your in-house team, you may encounter a problem.

Your pre-approved high risk merchant account

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How to compare a merchant account to a payment service provider to a payment gateway?

Perhaps there is no better way than a side-by-side comparison with a list of pre-defined features and components. And this is exactly how we approached this comparison in the table below. 

Merchant Account vs PSP vs Payment Gateway

Features Merchant Account PSP / aggregated account Payment Gateway
Account approval & onboarding Merchant has to go through compliance & verification process that can last even a few weeks Usually instant account approval, no additional compliance required Instant access to the payment gateway even before your account gets approved
Implementation Full freedom of implementation –  integration with a gateway of your choice Need to use an out-of-the-box solution – no freedom or flexibility of deployment Can be a breeze or very painful depending on the technology
Account stability Low risk of sudden account termination or freeze High risk of unexpected holds, freezes, and terminations Varies depending on if you are integrating with a PSP or merchant account
Merchant IDs A dedicated MID (or even several MIDs) and account A single MID shared with hundreds or thousands of other merchants Varies depending on if you’re integrating with a PSP or merchant account
Pricing & costs Flexible pricing and costs depending on your business model and processing volume Fixed, not negotiable pricing, that favors small merchants Integration and usage costs can apply if using a 3rd-party solution
UX & Conversion AFull freedom to optimize the UX, conversions, and performance Out of the box setup, little to no UX optimization possible Varies depending on if you’re integrating with a PSP or using a gateway of your choice
Chargebacks Full control and ownership of chargeback threshold = low risk of account  termination or freezeA dedicated MID (or even several MIDs) and account Shared chargeback rate threshold with hundreds of merchants = significant risk of account termination or freeze Can optimize your gateway towards fewer chargebacks if possible, i.e. via 3D secure implementation
Processing Volume Fully negotiable transaction limits and processing volume = low risk of account termination or freeze Strict limits on processing volume and transaction size = big risk of account termination or freeze Dos not apply
Fraud & Risk Management Customizable fraud filters and ownership of risk management = higher payment acceptance rate Pre-defined and not customizable fraud filter = lower payment acceptance rates Can be highly customizable depending on your provider
Subscription & pricing plans customization 100% customization for each part of the payment set-up Forced to use pre-defined subscription models and pricing Depending on your provider this can be highly customizable or not
Terms & conditions Negotiable terms and conditions depending on the business model and processing volume Fixed, non-negotiable conditions and contract terms for all merchants Dos not apply
Support A direct contact (an account representative) to talk to if you have any questions or problems A ticketing system with long response times Varies depending on if you’re integrating with a PSP or merchant account

Now let’s go through each of the comparison criteria to understand the differences and similarities better.

Your pre-approved high risk merchant account

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Account approval and onboarding

Every time you need to set-up an account that will be used to handle financial operations, some compliance and formalities are involved. If we are talking about setting up a virtual online merchant account, the significance of this process only rises. 

Merchant Account Onboarding

In terms of merchant account, it is up to the payment processor and acquiring bank to make sure that:

  • You are not going to use your account to launder money
  • You are not going to use this account to run online scams
  • You run a legitimate business with a physical office and not a temporary, virtual company
  • What you sell is legal and does not validate any international laws and internal bank regulations

This often requires merchants to provide quite a bit of documentation proving all of the above. Some of the items that you may need to provide at the beginning of the application process include:

  • URL of the website or app where the payments will be accepted
  • Detailed business model description – when is the user paying and for what exactly?
  • Payments processing history which involves items like “the average value of transactions” and monthly turnover in EUR or USD
  • Country of company incorporation and office location – this often has to be a real physical location and not a virtual office 
  • Customer source split between EU, US and other countries.

This initial compliance check is then followed by an additional bank compliance verification:

  • Do your business and website meet the compliance requirements of the major card providers like Visa, Mastercard, or American Express?
  • Other compliance requirements like GDPR compliance
  • Your chargeback history – have you maintained a healthy level of chargebacks?

Altogether, this process can take up to one month. So as you can see, getting a separate merchant account is not an easy process, but it’s definitely worth the effort. 

Payment service provider onboarding

In terms of applying for a PSP aggregated account, there is usually a much lower entry-level. Usually, there is a much shorter online application form you have to fill in, and, in a matter of minutes, you are granted access to your sub-account. So in terms of time needed to start accepting payments, the aggregated account is one of the fastest methods. But it comes with a price. Here is what you need to know about the consequences of this hassle-free onboarding  process:

  • There is little to no merchant verification at the beginning 
  • Merchants who “light the red light” eventually get picked up and verified and, in most cases, their accounts are terminated or frozen
  • PSP may all of a sudden decide that you are not compliant and terminate your account without prior warning. Imagine this happening to your business after 1 or 2 years of payment processing in the middle of a high sales season. This happens to merchants who, all of a sudden, get qualified as “high-risk” merchants by the mainstream PSP like Stripe
  • Because you are sharing your merchant account with other merchants, if some of them start violating the rules (i.e., increasing chargeback rate or frauds), everyone pays the price. Fewer payments get accepted, and funds get blocked.

So you may receive access to your account and start processing almost right away with your PSP, but you are putting your business under constant risk of losing the ability to accept payments and getting your funds blocked. 

Implementation

With a merchant account, you will get access to either a snippet of code allowing implementation on your website, or full access to API and testing sandbox. The non-tech-savvy merchants or those without relevant IT resources get an out-of-the-box solution with some customization options. If you are a more demanding merchant, you will get a plug and play access to API and full freedom to perform custom integration with your website or app. 

With the PSP, in most cases, you will be provided with a ready solution. This solution is designed for high compatibility with the set-ups of hundreds and thousands of different merchants. It is like the first ford car models, easy to implement as long as you want it in black. The set-up is the same for all the PSP merchants. It is unlikely you are allowed to perform any customization. So if you have a custom business model, pricing, or payment set-up, you may have problem integrating. 

Account stability

Account stability, in the context discussed here, has nothing to do with technical uptimes and availability. It is about being sure that your account will not be shut down or put on pause all of a sudden without any prior warning. 

With an individual merchant account, you will always be contacted by your provider or account manager in case of any issues. Most likely, you will be assisted to fix anything that may be related to:

  • Increased chargeback rate and chargeback disputes
  • The rising number of fraudulent transactions
  • Other compliance issues 

Like we have already mentioned, with a PSP shared account, you can expect to be hit any time without prior warning. PSPs are famous for mass account termination, and fund freezes. It is usually a sinusoid cycle. First, merchants are accepted without prior compliance verification or any safety check. Next, some merchants are starting to cause trouble, and a mass purge begins. 

This usually happens due to several reasons:

  • Merchants are not checked towards Visa / Mastercard compliance and, after some time, instead of helping them to comply with the rules, mass account termination begins without much explanation
  • At the account approval, stage merchants are not checked towards business model compliance. And randomly, e.g., after a year of successful payment acceptance, they get terminated because they have been marked as high-risk businesses. This is very controversial because this high-risk assessment is often very arbitrary, and the line between mainstream and high-risk merchants are very blurred. 
  • A few black-hat merchants may have slipped through and are causing trouble on the whole aggregated account, scamming clients and exceeding chargeback limits. What does a PSP do? They are taking down all the merchants with similar business models or block their transactions to decrease the overall number of chargebacks. 

With an individual merchant account, you are always in full control of your account stability and performance. With a payment service provider, you have to beat the risk of various ad-hoc compliance checks or cleaning operations after too many dirty merchants slip through. 

Merchants IDs

This is perhaps the most significant difference between a Payment Service Provider aggregated account and an individual merchant account. In the first case, you are just another sub-merchant using the same Merchant Account ID as all the other sub-merchants. The problem with that is that all the transaction, processing, and chargeback limits are defined per MID. So if your neighbour’s sub-merchant account is generating an excessive number of chargebacks, it is also counted against your limit. Also, as mentioned before, if the chargeback rate for the shared MID is exceeded, the clean-up operation takes place. The PSP needs to comply with Visa and Mastercard limits, so accounts are terminated, and funds and transactions are blocked. 

When owning a separate merchant account, you are also owning your own MID. You are in full control of your chargeback and transaction limits. More often than not, your account manager will contact you in case you are reaching the limits and will help you or provide advice on how to decrease the numbers. What is more, the same merchant account provider can often offer multiple merchant accounts with several banking partners. Multiple accounts mean owning multiple Merchant IDs, and each additional ID allows you to:

  • diversify risk and split your transaction limits between your accounts and MIDs
  • diversify risk and split your processing volume limits between MIDs
  • diversify risk and split your chargeback limits between MIDs

As you can see, with and individual merchant account and separate MIDs, your business is covered on all sides. 

Pricing & costs

When partnering with a payment service provider, you can expect a flat-rate pricing model, i.e., you will be charged the same amount for every transaction regardless of card type. This would be something in the area of 5-7% per each transaction. Payment service providers have very low or no monthly fees, and no other costs on top of the transaction costs, which are typically deducted from each transaction. This pricing model (also known as pay as you go) allows small businesses to save lots of money, but in some cases can also benefit bigger businesses.

The merchant account pricing model works in favour of bigger merchants. The pricing is usually flexible and entirely negotiable, depending on the merchant’s business model and transaction volume. We recommend that you read more about merchant account fees and charges in this article. 

UX & conversion

With a payment service provider, you are often forced to use a pre-defined template to which you have to adjust. It is you who has to redesign the payment gateway on the front-end and backend to fit the requirements of the PSP, rather than the other way around.  

Here is what you can do in terms of UX & Conversion with a merchant account. The PSP will usually not allow you to do:

  • Choose if you want to redirect your customer to a third-party website or keep every step of the payment process on your website
  • Decide how many steps are required during your payment process
  • Optimize design and UX of your payment forms, and even cut down on form fields that are unnecessary for the payment process
  • Experiment with popup and overlay payment forms
  • Optimize your payment experience and UX for mobile devices
  • Use 1-click payment, cross, and up-sell for your returning customers

Please also read our extensive guide to optimizing the UX of the credit card payment forms and an extensive guide to optimizing the conversion rate on your payment gateway.

Chargeback limits

As already mentioned, if your primary payment solution involves a payment service provider and an aggregated account, you are sharing your chargeback limits with all the other sub-merchants. Even if you play by the book and keep your chargebacks rates up to scratch, your neighbor still makes it all for nothing. A few renegade sub-merchants using the same MID can put chargeback limits for the whole account off the charts, which will trigger a PSP to launch a compliance purge. Everything is as usual – terminated accounts, frozen funds, and declined acceptance for many payments. 

But that’s not all. Even if you become a victim of too many chargebacks, you will not be warned in advance that you need to optimize your chargeback rate. Instead, your account will be suspended without prior warning. Due to the fact that 80% of all the chargebacks are, in fact, “friendly chargebacks,” the risk of surpassing limits by accident is very real.  

With an individual merchant account, you usually have to stick to a 1% chargeback rate limit. And you take full ownership of these metrics. If your limit is exceeded, your account provider will usually contact you immediately to help you resolve this issue. You will either receive assistance with optimizing your payment gateway or advice and help on winning future chargeback disputes. 

Processing volume

There is a fixed monthly processing volume and fixed value limit for each individual transaction if you are working with a payment service provider. Even if your sales are doing extremely well in a particular month, exceeding the value of transactions or processing volume means violating the rules. These limits are usually placed to prevent money laundering. But it may as well happen that you will launch a successful marketing campaign, and your sales will soar, or you will close a high-value client in a single transaction. No questions asked, your sub-account will be shut down or at best put on hold until further notice. It sounds very harsh, but this is the reality of most PSPs. 

When working with merchant accounts, all the processing and transaction limits are fully negotiable. You can negotiate them in advance or simply explain why you are exceeding your limits once they happen. If you can prove that this is simply because your business is doing so well, then you are good to go. 

Fraud & risk management

If you have an unusual business model or very specific customer base, you may run in trouble with your payment gateway fraud filters. For example, you have customers who, for the sake of their privacy, are using VPNs to hide their identity while browsing the internet. They may not be able to access your offer or content from where they are right now. Or maybe what you are selling requires them to place a lot of transactions in a very short time – e.g., tipping online influencers and models, and making multiple microtransactions in games. 

All of these cases can raise alarm for the anti-fraud filters at your payment gateway. This will result in a lot of transactions being flagged as fraud and consequently declined. And, of course, this means big losses to your sales and revenue stream.

When using a payment service provider, there nothing really you can do. The anti-fraud filters are fixed and cannot be customized to fit the needs of your customer base. With a full-size merchant account, you can always negotiate terms, and in many cases, you will even get access to the anti-fraud filters set-up. If so, then you can define what level of fraud risk is acceptable for you and loosen it a bit. Alternatively, you can create your own anti-fraud rules and exceptions to let the legit customers through. 

Subscription and pricing plan customization

There are several places where you might want to customize the way you charge your customers:

  • Custom subscriptions plans
  • Custom pay per use, pay per seat plans
  • Single and micropayments
  • Mixed business models
  • Custom billing frequency – e.g., from a daily basis to charging the same rate per 6 months
  • Various pricing levels – creating as many tiers as needed 
  • Custom discounts and special offers for friends or business partners
  • Automatic and custom plan upgrades and downgrades 

Your business model may be very complex, or simply what you are selling requires you to use custom pricing plans. This might be a huge roadblock if you decide to work with a PSP aggregator. With a PSP, you are usually limited to a defined pricing and subscription plan and templates. If none of them fits your business model, then you will be forced to adjust your pricing or subscription set-up; otherwise, you will not be able to integrate. 

With a fully functional merchant account, you will get the chance to build your own custom pricing and subscription plans, especially if you have access to the payment gateway API.

Terms and conditions

Other things you may take into consideration when looking for online payments:

  • Set-up fees 
  • Termination fees
  • Chargeback fees
  • Refund fees
  • Compliance terms & conditions
  • Payout periods
  • Other stuff regulated by your the contract

Support

There numerous critical situations that may affect your online payment infrastructure. You should consider where you would seek support when one of the following happens:

  • Your payment gateway may go down due to technical downtimes and timeouts
  • You may receive notice and warnings about exceeding chargeback levels
  • You may see that your payment decline rates are suddenly raising to the roof
  • Anything else may break down and not work the way it should

When working with PSP,  if any of the above happens, you can do a few things:

  • Try to find the solution on your own using your provider’s knowledge base or documentation
  • Create a support ticket and wait for a couple of days for a response
  • Search on Google…

Will you be satisfied with such a level of help if you are losing 50% of your revenue with each passing hour or, even worse, your payment gateway does not accept payments at all? In cases like that, you need immediate help. 

This is why, when setting up a dedicated merchant account, you will be assigned a dedicated merchant account manager or customer success representative. In case you encounter any problems or have any questions, you can simply write or call them and ask for help.

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Marek Juszczyński

Marek Juszczyński

Full-Stack Marketing Expert With a Strong Background in B2B & Conversion Optimization

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