What is an Acquirer?
An acquiring bank (acquirer) works as the middleman in payment card transactions. They link merchants with issuing banks (those that issue credit and debit cards to consumers).
While issuing banks work directly with cardholders, acquirers provide the financial backing and infrastructure for merchants to accept credit cards. They also assume much of the financial risk involved with credit card purchases, responsibility for securing the flow of data, and initial liability in the event of a dispute.
- Acquiring Bank
An acquiring bank is a financial institution which accepts and processes credit and debit cards transactions on behalf of merchants. Sometimes referred to as an “acquiring bank” or "merchant bank."
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Acquiring Banks: Part of a Larger Puzzle
The role acquirers play in a transaction is vital, but they hardly work in a vacuum. In fact, there is an entire complex process going on behind the scenes of every card swipe involving multiple parties. Besides the bank, some of the other key players include:
Also called an association or network. Licenses and oversees their credit card brand (Visa, Mastercard, etc.) and defines the parameters of use and processing.
Issues credit cards to consumers.
Commercial payment card acceptance point, where credit/debit cards can be used to purchase goods or services.
Submits bankcard transaction information to the card network, where it can be routed to other parties as necessary.
There are other third-party service providers, which supply things like web hosting, SSL certificates, shopping carts, payment gateways, and more. And of course, there is the actual cardholder, who uses a payment card to purchase goods or services.
Understanding the Process & Acquiring Bank Meaning
A typical transaction starts when the cardholder uses a payment card for a purchase. After the customer submit his or her transaction:
- Card information is sent from the merchant to the payment processor.
- The processor submits the request through the card scheme, then on to the issuing bank.
- Issuing bank checks whether the card account is active, whether the requested amount is available to the account, and more.
- The transaction is either authorized or denied, with the decision being transmitted back the way it came, from card scheme, to acquirer, to merchant.
- The merchant sends batches of authorized transactions to the processor, and eventually funds are transferred from the cardholders’ accounts to the merchant account.
The scheme, for its part, oversees the entire system, provides customer service, and sees to it that cardholders can use their cards as universally as possible. But what is the role of the acquiring bank?
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These are not consumer-facing “banks” in the sense of having branches with drive-up windows and ATMs. Rather, they are the middle-man for all credit card processing involving a merchant. Payment card transactions—including purchases, refunds, chargebacks, and more—don’t only involve the cardholder and the merchant; between the two, there will always be an acquirer.
Acquiring banks are named for the function they perform in credit card processing. These banks accept credit card transactions from issuing banks, then process those transactions for their merchant customers. In reality, it would be more accurate to label these banks something like “acquiring and transaction-processing bank,” but that’s quite a mouthful...and it still doesn’t fully cover what they do.
Enter the Payment Processor
Before we get too deep into our subject, some clarification is in order. While acquiring banks are often referred to as “processing” transactions, there is another factor to this equation: the payment card processor. The terms “acquirer” and “payment processor” are often used interchangeably, but in reality describe two different entities, performing two different functions:
The financial institution that underwrites and processes payment card transactions.
A company that facilitates communication between the merchant and the cardholder's bank.
A payment processor acts as the intermediary, securing payment data and making sure transactions comply with security standards. These companies do a lot of the legwork such as verifying card details, facilitating transfers, passing information back and forth between parties, and keeping that information secure in the process.
The acquiring bank maintains their customers’ merchant accounts. This is an open line of credit allowing the bank to accept transactions and deposit funds on behalf of each business it works with. Think of a merchant account as a virtual bank account linked to a physical bank account and used to process payment cards. The acquirer takes transactions that are approved by the payment processor and settles the relevant accounts.
Why Are Acquiring Banks Necessary?
Payment processors do much of the actual processing of payment card transactions. So, if payment processors are handling the work load, what do acquiring banks bring to the table? Financial backing, for one thing.
Processors are not banks; they’re limited in the services they can provide. Some acquirers may offer payment processing solutions, and many larger ones do. Ultimately, though, merchants need someone to facilitate payments (the processor), and someone to extend credit and receive payments (the acquirer). Acquirers provide the funds that allow for the timely settlement of payment card transactions. It’s comparable to extending a loan to the merchant or PSP until the card transaction can be settled.
Obviously, there’s a certain amount of risk involved with that, and the banks also assume the responsibility for processed transactions. Since merchant accounts are considered lines of credit (as opposed to holding accounts), acquirers also take on the inherent risk associated with transactions they process.
For example, let's say a business goes bankrupt and is unable to pay out customer refunds, disputed transactions, or bank chargebacks. That merchant’s acquiring bank must accept those liabilities and provide funds to settle all accounts. That explains why businesses with the most risk have the fewest options when it comes acquirers. It also explains why the options available will be costlier and have more restrictions.
Understanding the Essentials
If all of this sounds confusing…you’re not alone. Unfortunately, your payments management efforts won’t be as effective as they should be if you’re struggling to master the labyrinth-like processes and terminology associated with chargebacks. It’s quite possible you’re throwing away profits.
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