What is an Acquiring Bank?
An acquiring bank is the merchant account provider and processor of card transactions on behalf of the merchant. The acquirer, as it is commonly called, provides businesses with a merchant account, where all their revenues are deposited. The acquirers work with payment processors in offering the technologies and payment methods needed to process online transactions. This works for merchants with either a physical store, an online store, or both.
The acquirer routes these online transactions to the appropriate card issuing bank to authorize the payment. As payment facilitators, their work is in the backend processes in the exchange of funds. The parties involved are the acquirer and card issuers, the customer, and the merchants who process these payments.
Given the complexity of eCommerce, acquirers usually do not process these payments on their own. Third party organizations such as a payment processor or payment gateway is needed to effectively sign up and integrate merchants to all their needed payment services, and help them with customer service such as PCI DSS certification, payment disputes, and data reporting.
The acquirer charges a small fee for every processed transaction, and interchange fees. Being the merchant account providers, they are also called the settlement bank. They hold most of the risks associated with eCommerce on behalf of the merchants.
And as for high-risk businesses, it is with the expertise of payment processors that they can have the chance to get a merchant account with an acquiring bank. They know the ins and outs of these financial institutions and conducts the Know-Your-Customer (KYC) process in order for a merchant to be qualified to process online payments. Some acquiring banks will accept high-risk merchants but would require a minimum deposit amount for security, in case of chargebacks and other disputes that come with the business.
Before a merchant is granted a merchant account and a MID (Merchant ID), they must first sign a tripartite agreement with the acquire, and payment processor, which details the terms and fees for processing and payment settlement. This usually comes with a one-time set-up fee, the per-transaction fee, and a monthly service fee.
Acquiring Bank Back-end Processing
The merchant acquiring bank is connected to and operates with the biggest payment networks. These are Visa, MasterCard, American Express, Discover, JCB, and China UnionPay. From the customer’s payment, the acquirer contacts the assigned card network of the customer’s card — say for example, Visa. The card network then contacts the customer’s card-issuing bank to see if the account has sufficient funds. When the confirmation of sufficient funds are sent, the charged amount is then deducted to the account and sent through the acquirer’s processing network to settle the transaction on behalf of the merchant.
The amount charged is then deposited to the merchant account. This is usually done immediately. For others, it can take around 24 to 48 hours, depending on the agreement. The acquirer then confirms the settlement of the transaction to the merchant once everything is cleared. This process is done in real-time.
What is a Credit Card Issuing Bank?
Another important participant in eCommerce is the Issuing Bank. These are banks that provide the credit cards for consumers. They are also the ones processing the card authorization when a customer transacts using the card they issued.
The issuing bank, also called the cardholder’s bank, or simply, issuer, is also partnered with the payment networks mentioned above (Visa, MasterCard, etc.). What they do is come up with their own brand or line of credit cards, loaded with their very own perks, privileges, and exclusive partnerships with other establishments, e.g. a credit card for gas, or one that’s partnered with airlines as a travel credit card.
The main role of issuers with these cards is to provide a line of credit for consumers. If the role of the acquirer is to assume responsibility on behalf of the merchant, then the issuer assumes the responsibility on behalf of their consumers.
Given the risk involved, they conduct the whole KYC process for consumers, in verifying their creditworthiness. Once the customer transacts online using a card a certain bank issued, they deduct the amount purchased from the cardholder’s account, and pays the acquirer. They also provide customer service, in partnership with the card network.
In cases of disputes, it is the issuing bank that contacts the acquirer to settle the issue and get any reimbursement when necessary.
Payment Networks/Card Associations
The payment networks, card network, or card associations Visa, MasterCard, American Express, and Discover, act as the authority and central governing body for online payments. This is why they are called “card association”. Individually, they are the clearing house for cards processed under their network.
The difference between Visa/MasterCard and American Express/Discover is that Visa and MasterCard are not banks, despite being the most popular card networks. They do not issue credit cards or merchant accounts. Instead, they partner with banks and provide these technologies for them to create their respective credit card brands.
Visa and MasterCard work behind the scenes in making sure that payments are routed correctly and settled timely. Transactions for Visa are routed and processed through the VisaNet network, and MasterCard’s are through Banknet.
On the other hand, Discover and American Express are both the payment network and issuing bank. These are financial institutions that can issue credit cards directly to consumers, and partner with banks at the same time.
These card associations govern and regulate the interchange fees, and maintain the online payment guidelines. One of these is the creation of the Payment Card Industry Data Security Standard (PCI DSS), which is the biggest mandate for data security that is followed by financial institutions and merchants around the world. Anyone processing card data and online transactions must get a PCI DSS certification, and adhere to its security standards and practices.
Merchants need to partner with a competent payment processor to get them the right acquirer for merchant account set-up, and get them started with payment processing. Time is of the essence. Allied Payments is partnered with different types of merchants across the world, including the high-risk businesses. They are experts in getting a merchant account for any type of business, and mitigating the risks that come with many of the credit card issuers. Talk to one of their sales representatives to learn more.