Online payment processing explained (part 2 - payment methods integration)

Payment Methods Integrations: Direct Integration vs. PSP Integration

When it comes to integrating payment methods into your business, you have two primary options: direct integration and integration via Payment Service Providers (PSPs)/Payment processors/PayFacs. Both approaches offer distinct advantages and challenges, which means the best choice depends on your business needs, technical capacity, and long-term goals.

Direct Integration

Direct integration refers to the process of building and managing your payment infrastructure in-house. This method allows you to create a fully customized payment experience that aligns with your brand, customer preferences, and specific business requirements.

Benefits of Direct Integration

• Unmatched Control:

  • Design a customized checkout process that aligns perfectly with your brand identity.

  • Tailor the payment experience to meet customer preferences, offering flexibility that PSPs may not provide.

  • Examples: You can integrate niche or emerging payment methods or create bespoke flows for specific customer journeys (e.g., loyalty programs, upsell options at checkout).

• Potential Cost Savings:

  • No intermediary fees: By handling payments directly, you avoid the fees associated with using a PSP. This can result in lower transaction costs over time, particularly for high-volume businesses.

  • Long-term efficiency: Once established, maintaining your system might be more cost-effective than paying ongoing fees to a PSP, but this heavily depends on your business model.

• Greater Data Ownership:

  • Access to detailed transaction data provides deeper insights into customer behavior and spending patterns. This information can be invaluable for tailored marketing strategies, personalization, and optimizing your sales funnel.

  • Advanced analytics: Control over data allows for more refined and customized analytics that can give your business a competitive edge.

Drawbacks of Direct Integration

• High Initial Costs:

  • Building and maintaining an in-house payment system requires substantial investment in technical resources, including developers, security specialists, and ongoing system maintenance.

• Security and Compliance Challenges:

  • PCI DSS compliance: You’ll need to ensure compliance with stringent regulations like the Payment Card Industry Data Security Standard (PCI DSS), which governs the security of cardholder data. This requires continuous updates, monitoring, and security infrastructure.

  • Fraud prevention: Handling security in-house requires robust measures for fraud detection and prevention, which can be complex and costly to implement and manage.

• Complexity with Multiple Payment Methods:

  • Regional payment variations: Integrating multiple local or regional payment methods (e.g., iDEAL in the Netherlands, Boleto Bancário in Brazil) can be technically challenging, time-consuming, and costly.

  • Global reach limitations: Scaling to handle international payments may require additional integrations with local banks, acquiring institutions, and foreign currency handling systems.

Integration via Payment Service Providers (PSPs)

PSP integration involves partnering with a third-party provider that handles the payment processing on your behalf. PSPs offer ready-made infrastructure and services that simplify the complexities of payment processing.

Benefits of Integration via PSP

• Faster Implementation:

  • PSPs offer pre-built solutions that streamline integration, often requiring minimal technical resources. This allows businesses to quickly start accepting payments, reducing time to market.

  • Lower technical burden: PSPs typically offer developer-friendly APIs and plug-ins for popular e-commerce platforms (e.g., Shopify, WooCommerce), which can reduce the complexity of setup.

• Compliance and Security:

  • PCI DSS compliance: PSPs manage PCI compliance, significantly reducing the burden on your business. They take responsibility for securing sensitive cardholder data and adhering to regulations.

  • Fraud protection: Many PSPs provide built-in fraud detection systems, protecting your business from fraudulent transactions and chargebacks.

• Global Reach:

  • PSPs provide access to a wide range of payment methods, including local and alternative payment methods (APMs). This is particularly beneficial for businesses looking to expand internationally.

  • Localized expertise: PSPs often have in-depth knowledge of regional payment preferences, ensuring you can offer methods preferred by local customers (e.g., WeChat Pay in China, Giropay in Germany).

Drawbacks of Integration via PSP

• Fees:

  • PSPs typically charge for their services, either through per-transaction fees, monthly subscription fees, or both. These fees can reduce profit margins, particularly for businesses with tight cost structures.

  • Fee structure variations: Depending on the PSP, fees might vary based on transaction volume, payment methods used, or geographic locations, which could complicate financial forecasting.

• Customization Limitations:

  • PSP platforms may restrict customization of the checkout process. You may need to adhere to predefined templates or flows, which could limit your ability to fully align the payment experience with your brand.

  • Custom integrations: Some PSPs offer customization options, but these can come at an additional cost or require more complex integrations.

• Data Dependency:

  • Limited access to data: Depending on the PSP, access to transaction-level data might be restricted, impacting your ability to fully analyze customer behavior or identify trends.

  • Data sharing limitations: Some PSPs may not provide full data transparency, making it difficult to perform in-depth analysis or integrate that data with your existing CRM or analytics tools.

Real Example: Payment Method - Apple Pay

• Direct Integration Example: A large tech-savvy company like Uber could directly integrate Apple Pay into its payment system by setting up relationships with Apple and card networks. Uber's engineering team would need to implement Apple Pay's APIs, manage encryption for Apple Pay tokens, and ensure the back-end can interact with Visa, MasterCard, or the customer's bank. Uber would also be responsible for PCI compliance and securing the payment data.

• PSP Integration Example: A small online retailer using Shopify (which is powered by Stripe) could add Apple Pay as a payment method through Stripe's API. Shopify/Stripe manages all backend processes—communicating with Apple, handling tokenization, and routing the payment to the appropriate card networks or banks. The retailer simply needs to activate Apple Pay within the Shopify admin panel, with no direct handling of the payment data.

Key Takeaways:

• Direct Integration is technically complex, requiring substantial resources for development, maintenance, and security, but offers unmatched control and potentially lower long-term costs.

• PSP Integration simplifies the payment process with faster implementation, built-in security, and access to multiple payment methods but comes at the cost of control and ongoing transaction fees.

Payment Methods Integrations: On-site vs redirect integration

On-Site Integration

• Definition: With direct integration, the customer stays on the merchant's website or app throughout the payment process. All payment data is entered directly on the merchant's checkout page.

• Flow: The payment is processed in the background by the PSP, but the customer remains on the merchant's platform without being redirected to an external site.

• User Experience: This provides a seamless user experience as the customer does not leave the site to complete the payment.

• Complexity: This method typically requires more complex integration because the merchant's website needs to securely handle sensitive payment data (e.g., credit card information).

• Security: Since the payment data is processed on the merchant's platform, stringent security measures (like PCI DSS compliance) must be in place to protect the data.

2. Redirect Integration (Off-Site Payment)

• Definition: With redirect integration, the customer is temporarily redirected to a third-party payment page (e.g., a hosted page by the PSP) to complete the payment.

• Flow: After selecting the payment method on the merchant's site, the customer is taken to a secure payment page hosted by the PSP. Once the payment is processed, the customer is redirected back to the merchant's site.

• User Experience: This method adds an extra step as the customer is taken away from the merchant's site to complete the transaction, but it can still offer a relatively smooth user flow, depending on the PSP's design.

• Complexity: This integration is generally simpler for the merchant since the PSP handles the payment data. The merchant does not need to handle sensitive payment information directly.

• Security: Since the PSP handles the entire payment process on their secure platform, the security burden (e.g., PCI DSS compliance) is mostly on the PSP, making it easier for the merchant.

In practice direct integrations are also on-site integrations which keeps the customer on the merchant's site, providing a seamless experience. PSP integrations on the other hand can be both on-site and redirect since most modern PSPs offer both as alternative.