A payment service provider is a company that, as the name implies, acts as the layer through which payments are handled. A payment service provider has already made the connections to different payment methods and generally has a plugin available for Magento. This means that by installing the payment service provider's Magento plugin, you have access to all of the payment methods the payment service provider is connected to! This can help a great deal in serving all of the right payment methods applicable to your country and market. A payment service provider automates as much as possible, so using one ensures you will not have the same manual workload as you would with most of Magento's default payment methods.
An important distinction between payment service providers is whether they are collecting or processing. A collecting payment service provider will transfer the funds they captured for you once per period, while a processing gateway will immediately transfer the funds to your account. Per transaction, a collecting payment service provider is usually cheaper.
Usually the payment flow using a payment service provider works like this:
The same would be valid for other payment methods as well: the payment service provider will notify Magento about the status of the payment handling of your customer's orders. Besides offering a multitude of payment methods, a payment service provider can also help you arrange the necessary contracts for accepting certain payment methods, such as credit cards, and is able to provide detailed reports about the transactions that have been performed for your store, which can be a huge administrative hassle otherwise.
Selecting the proper payment service provider can be difficult, especially without prior experience with them. It's advised to consult somebody with knowledge of your market and payment gateways. The most important questions that should be answered are as follows:
The last point warrants special attention as the PSP will be useless for you if you cannot integrate your Magento installation with the PSP. Judging the quality of a Magento module is best done by somebody with knowledge of the technical aspects of Magento extensions. These are the things to look out for, at a minimum:
Most of these checks are useful for any Magento module you may wish to install! A good way to find out more about the quality of a payment gateway's Magento integration is to google the keyword "Magento" combined with the name of the payment gateway. If the module is available on MagentoConnect, browsing through the release history and reviews for that module is also a good idea.
As an example of working with a payment service provider that is not included by default in Magento, we'll install the ICEPAY payment module. ICEPAY (www.icepay.com) is a payment service provider that is especially strong in Europe. Their Magento module is available on MagentoConnect at http://www.magentocommerce.com/magento-connect/icepay-advanced-8489.html. The big advantage of situations like these is that you can take a look at their payment extension before deciding to do business with them. Ask the PSP you are considering if you can take a look at their extension beforehand as well!