What's the Difference between an Issuing Bank vs Acquiring Bank?
Every payment card transaction involves two key players: the issuing bank, representing the cardholder, and the acquiring bank, which represents the merchant. That’s not to say it’s a clear-cut contest of issuer vs acquirer, though. In some cases, one bank might play both roles for parties in different transactions.
So, how do these types of financial institutions differ? What are their specific roles in the transaction process? We can start by examining the basic functions of the two banks, which we can break down like this:
|The issuing bank:||The acquiring bank:|
|Provides payment cards to customers||Maintains your business’ bank or merchant account|
|Approves or denies credit card applications||Processes payments|
|Authorizes or denies a cardholders’ ability to pay for a particular transaction||Passes along consumer transactions, allowing you to receive payments|
|Releases the transaction amount to acquiring banks once approved||Provide you with a line of credit to offset unexpected processing costs, such as chargebacks|
|Allows customers to make payments through card networks||Allows merchants to accept payments through card networks|
Those definitions are accurate, but they’re only partially complete. They fail to capture the true scope of banks’ contributions to the process. With that in mind, let’s delve deeper and compare acquiring banks vs. issuing banks. We’ll see why that difference is important, and offer tips to help you keep the payment process running smoothly between these two parties.
Issuer vs Acquirer: Important Parts of the Payment Process
To understand what the different financial institutions bring to the payment process, it helps to first understand how that process works.
When a cardholder makes a purchase, the data from that transaction goes to your acquiring bank. This is the bank that holds your merchant account (if you have one). With some payment facilitators, you may not have your own merchant account; in that case, the processor’s bank will function as the acquirer.
Once the transaction gets batched and settled, the acquiring bank submits it to the card network (Visa, Mastercard, etc.). The network, in turn, forwards it to whichever bank issued the card used in the transaction.
Issuers are gatekeepers to cardholder payment accounts. They make sure the customer has a sufficient balance or enough available credit to cover the transaction cost. If so, the issuer authorizes the transaction and releases the funds from the cardholder’s account. However, you don’t get your money right away.
The transaction funds (minus the issuer’s interchange fee) get transmitted to the card network. The network collects a fee for their services as well. The network then sends everything to the acquirer, at which point the authorized amount finally shows up in your account.
There are other parties involved in the process, including payment processors, gateways, and other facilitators. That said, the five main interaction points during the transaction process include the cardholder, the merchant, the issuer, the acquirer, and the card network. Your money goes through almost every point twice before it reaches you. But…why is that really necessary?
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Acquirer vs Issuer: Different Banks, Different Roles
Each credit card transaction travels a long, winding path before you get paid. At first glance, it seems that having two banks involved only complicates the matter. In reality, both banks play an important role in the payment process.
Issuing Banks: Roles and Risks
Issuing banks work for the customer. The card networks themselves are not heavily involved in individual transactions. They simply provide the framework for consistent, regulated usage, plus rules and standards for payments conducted on their network.
Issuers take on the inherent risks of issuing credit to customers. Issuing banks must accept, restrict, or deny card applications based on the credit-worthiness of the applicant. After approving a customer, the issuer’s role includes assessing the cardholder’s account and ensuring the customer has enough resources to cover the cost of each transaction.
The issuing bank essentially provides unsecured, short-term loans to cardholders. In return, they collect monthly interest fees as long as the debt remains unpaid. If the customer completely defaults, however, the bank could be liable for all unpaid debts. In other words, if the cardholder can’t pay the bill, it becomes the bank’s problem.
So, that gives a rough overview of the issuer's role in the transaction process. What about the other half of the "issuer vs acquirer" question, though?
Acquiring Bank: Role and Risks
Acquiring banks provide merchant accounts to businesses and are authorized to process credit or debit card payments on your behalf. They ensure your transactions are routed to the card network appropriately. Once the issuer releases the transaction amount from the cardholder’s account, the acquiring bank accepts the payment and makes sure the money gets to your account.
In some instances, acquirers process transactions themselves. More typically, they will work in tandem with third-party payment processors. They then serve as a middleman between you, the processor, and the card network.
Like issuers, acquirers assume some of the financial risk associated with payments. If a data breach occurs somewhere in the transaction flow, for example, the acquiring bank could be liable for the compromised transaction. To mitigate this risk, acquiring banks must stick to strict PCI-DSS mandates.
Also, they could be liable for any outstanding refund or chargebacks if a business fails. Thus, acquirers must focus on the bankruptcy potential of the merchants they represent. Any business applying for a merchant account is carefully vetted. Potential gains are weighed against possible future losses. If the risk factor is deemed unacceptable, the account will not be granted. The merchant might be forced to use the services of a “high-risk” acquirer, at substantial additional cost, or to maintain an account reserve to offset the costs of chargebacks.
How Can I Remember Which Bank Is Which?
One way to remember the roles of an issuing bank vs acquiring bank is to think of the former as the ones who issue payment cards. In contrast, the latter accepts (or acquires) payments for you. The explanation is not perfect, but it should help.
There are substantial differences between an issuer vs acquirer. However, both roles are essential. Acquirers allow you to accept payments through their relationships with the card networks. Issuers enable customers to make payments in much the same way. Acquirers authorize and process transactions but rely on issuers to validate credit cards and issue payments.
In short, they have a symbiotic relationship. Both pieces must be in place for the system to work.
Credit card networks are the link between the issuer/cardholder and the acquirer/merchant. Networks are the final authority regarding funds being routed from cardholders to merchants. In some cases—Visa and Mastercard, for example—that’s the main thing the network does. They are not banks, just a service provider and administrator.
Meanwhile, other card brands like American Express and Discover serve as both the credit card network and the issuing bank for their cardholders. They can approve applications and keep track of account balances. They can authorize or deny funds for a given transaction, and render judgments in customer dispute claims.
Simply put, transactions cannot be processed without an acquirer, but they can be processed without a separate issuing bank if the card brand is functioning in that capacity. Of course, this only contributes to the confusion between the roles of the two bank types.
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Preserving Your Relationship With Your Acquirer
Acquirers and issuers each influence the chargeback process in different ways. For example, when a cardholder disputes a purchase, the issuing bank has the right to undo the transaction, take funds directly from your account with the acquirer, and return them to the customer. Acquirers, for their part, can facilitate the process of contesting fraudulent disputes.
As a merchant, you’re better off having a good relationship with these financial institutions before customer disputes happen. There are numerous ways you can help build and maintain good relationships.
As we noted earlier, acquirers take a risk when they offer you a merchant account. If your business fails, they could potentially lose a lot of money. They’re investing in you, and one of the ways they protect that investment is by charging an ongoing fee for their services.
Even so, if your business begins showing signs of additional risk—such as an increase in chargebacks—the acquirer could raise your fees, or possibly even close your account altogether. To maintain your relationship with your acquirer, it’s in your best interest to do whatever you can to decrease chargeback risk factors. Consider downloading our free guide , which offers over 50 actionable tips for reducing chargebacks.
Working with Issuers & Acquirers to Avoid Chargebacks
We talked about issuers vs acquirers. However, managing chargebacks is really more of a collaborative process.
While your relationship with your acquiring bank will likely be your primary focus, don’t lose sight of the fact that issuing banks are the ones who actually decide customer disputes. Actions such as responding quickly to inquiries and maintaining a professional demeanor in all correspondence can positively impact your reputation and relationships.
It may seem counterintuitive, but one of the best ways to build a good reputation with banks is to contest all invalid chargebacks. Failing to challenge a fraudulent dispute can be interpreted as an admission of guilt, making you seem irresponsible. Responding to invalid chargebacks—with strong supporting evidence—helps show issuers that the problem doesn’t lie with you.
Statistically speaking, the best way to go about preventing and fighting chargebacks is to seek out professional help. The right chargeback management company will not only bring experience and expertise, but will already have ongoing relationships with issuers, acquirers, processors, card networks, and more. They’ll be in a better position to challenge chargebacks for you.
Ready to forget about chargebacks and get back to the business of running your company? Contact Chargebacks911 today to see how we can take chargebacks off your plate and increase your ROI.
What is the difference between an issuer and an acquirer?
In simple terms, the issuing bank issues cards to consumers then represents cardholders throughout the payment process. Acquiring banks process payment transactions and ensure that merchants receive (or “acquire”) funds due to them.
Can credit card transactions be processed without an acquirer?
No. Some service providers may integrate acquiring services into other products; for instance, processors who are also acquirers. To process a payment, though, you need a bank account to into which the funds can be deposited.
Can issuer and acquirer banks be the same?
Yes. Many banks offer issuing services to consumers, as well as acquiring services to merchants.
Is Visa an acquirer? Is MasterCard an acquirer?
No. Visa and Mastercard are card networks, meaning they operate the infrastructure used to transmit payments and transaction information between banks. However, they are not banks on their own, as they do not issue payment cards or provide banking services.
Can credit card transactions be processed without an issuer?
No. A cardholder must have an issuing bank that issued their payment card. However, the issuer does not necessarily have to be separate from the card network. Certain brands such as American Express and Discover function as an issuer and maintain their own proprietary card network.
Can issuers help me avoid chargebacks?
Yes, indirectly. Maintaining mutually respectful relationships with banks can alter their perception of your business. Issuers by default are primarily concerned with their customers. If banks recognize that your business has a history of satisfied customers, you may give issuers a reason to examine a suspicious claim more closely before filing a chargeback.