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An acquiring bank deals with merchants to request and authorise payments for cardholders. The issuing bank deals with the cardholder to ‘issue’ funds and complete the transaction.
Both the acquirer and the issuer are key players in processing payments. Both of them have specific roles in a transaction. However, that doesn’t mean that a single entity has to stick to one role. Many times, the same financial institution might be both the issuer and the acquirer.
As a merchant, it is very important to understand the process of card payments. Knowing how the issuing bank and the acquiring bank work together is critical to optimising transaction flow. Merchants that understand this process can look for better deals and save a lot of money in the long run.
What is an acquiring bank?
The modern financial system is incredibly complex. Many entities are involved in each transaction. Two of the most important ones are the issuing and acquiring banks.
The acquiring bank serves the merchant. Its job is to ‘acquire’ the funds from the cardholder’s bank.
The process itself is a little complex. However, the main thing to remember is that the acquiring bank then deposits the funds into the merchant account.
For its services, the acquiring bank charges the merchant a fee. The fee structure can vary depending on the bank. Certain banks may charge a payment processing fee for each individual transaction, while others may offer plans that cover various services for a fixed amount.
Merchants should also note that they are rarely in direct contact with the bank. Instead, they use an intermediary known as a merchant services provider. However, the bank may take on both roles in certain cases.
Other responsibilities of an acquirer
There are many responsibilities that an acquirer must undertake. Here are the major ones:
- They are responsible for maintaining the merchant’s bank account
- Receiving chargeback notices and managing the response
- Setting rules and limits for the account
- Recording all account activity
Acquiring bank vs. payment processor
It may seem that an acquiring bank and payment processor are the same thing. However, that is often not the case.
The bank is responsible for accepting the payment on behalf of the merchant and depositing it in the account. The transaction itself is completed by the payment processor.
In many cases, the same entity might be performing the task of both the payment processor and the acquiring bank. In certain cases, a bank may perform both roles for certain payment methods but may have to use a different processor for others. For example, the bank may be a payment processor for all credit card payments. However, PayPal payments would be processed by PayPal itself.
What is an issuing bank?
An issuing bank is the counterpart of the acquirer in the transaction. In essence, the bank has two jobs.
- The first is to issue cards to the customer. While this applies to both debit and credit cards, we will primarily be focusing on credit cards here. It is important to note that entities such as Visa and Mastercard are not issuing banks. They are brands of cards that issuing banks use.
- The second is to deal with the cardholder themselves. Once the card has been issued, the bank is also responsible for approving and then transacting the amount that has been requested by the acquirer.
Other responsibilities of an issuer
Here are some of the other actions undertaken by the issuer:
- Managing the cardholder’s account
- Issuing the cards through a credit card network (e.g., Discover or American Express). Of course, this is done after the issuer has approved the credit card application
- Releasing the funds once a transaction has been approved
- Initiating and managing chargebacks for cardholders
Banks can serve as both the issuer and the acquirer
Remember that just because the issuing and acquiring bank deal with each other in a transaction, it doesn’t mean they cannot be the same bank.
Many large banks do both jobs. On one hand, they will be dealing with and providing their services to merchants. On the other, they will be issuing cards to customers and processing the transaction.
Next, we are taking a look at how a standard transaction works. This includes everything from the payment service used by the merchant to the actual process of the transaction. If the same bank is playing both roles, it will independently perform the roles of the acquirer and the issuer.
The process of credit card transactions
Let’s take a look at the transaction process. Remember that the process is largely the same for debit card transactions as well.
1. Transaction request
The process begins when a customer with a card initiates a purchase. This is after they have selected the items they want to purchase and are ready to pay.
It doesn’t matter where the transaction is made. It could be an online payment at an eCommerce store or through swiping the card at a physical checkout location. The backend process will still be the same.
Once the transaction begins, the first thing that happens is that the acquiring bank submits an authorisation request. This request basically asks the issuing bank whether the transaction can be completed or not.
2. Transaction response
Now, it is the card issuer’s job to make sure that the transaction can be approved. There are a lot of checks that need to be made by the issuing bank. The most obvious one is the available credit. If the cardholder has not exceeded their line of credit, the issuing bank will approve the transaction. For a debit card, this would mean having enough funds in the account to cover the purchase.
Main reasons why an issuer declines a transaction
Remember that there are several reasons why the transaction may not be approved. Here are the most common ones:
- The cardholder may not have entered the information correctly. For online payments, this could mean that the card number, expiry date, or security code(CVV) is incorrect. For physical payments, the card PIN number would be incorrect.
- There could also be a problem with the payment network. This could happen due to an internet issue or because one of the entities responsible has an error.
- The transaction amount may exceed the funds or credit that the cardholder has.
- There is evidence or suspicion of fraudulent activity. A customer may report the card stolen and have it frozen. On the other hand, the card issuer may detect fraudulent activity due to location changes or erratic behaviour.
3. Settlement
If everything is in order, the transaction can proceed. Settlement is the process of transferring the currency from the cardholder’s account to the merchant’s.
This is done through one of the card networks. However, it is important to remember that the actual settlement doesn’t take place immediately.
While the funds are sometimes available for use immediately, most settlements occur at the end of business days. This is mostly done for efficiency, as batch settlements are much easier to process.
In some cases, the merchant may decide to delay settlement of their own accord. For example, an educational institution may delay the settlement of fee payments in case they need to add additional fines.
4. Chargebacks
Usually, the transaction is considered to be complete at this point. However, the purchaser may request a chargeback. A chargeback is a refund that occurs because the cardholder has disputed the payment. In some cases, a chargeback occurs even after the merchant has provided the services.
If the cardholder is dissatisfied with a transaction, they can contact the issuing bank and file a dispute. Then, they have to present a case for why the transaction should be declared invalid. After this, the issuing bank will refund the transaction amount and notify the acquirer.
At this point, the acquirer deducts the funds from the merchant account and notifies the merchant of the chargeback.
Reasons why chargebacks occur
The cardholder may decide to dispute the transaction for a number of reasons. Some of the most common ones include:
- The products or services purchased were not received or were defective.
- The products or services purchased were not as advertised.
- Cardholder did not provide the authorisation for the transaction to take place.
- The amount that the merchant charged was not correct.
- Payment for services rendered was charged twice.
- For subscriptions, the cardholder may have cancelled, but their card still gets charged.
- A problem on the side of the card-issuing entity.
- Fraudulent transactions such as purchase/sale of illegal items.
5. Invalid chargebacks and merchant response
A fair number of chargeback claims are correct. However, this does not apply to all of them. In many cases, the chargeback might not be justified. The cardholder may be incorrect about their claim or even trying to defraud the merchant outright.
Here, the merchant can respond to the chargeback and dispute it. Chargebacks can be disputed on a number of grounds. For one, credit card payments have deadlines for submitting chargeback requests. If the request was beyond the deadline, it is invalid.
Conclusion
Understanding the distinctions between both banks is essential for merchants to optimize their transaction flow and cost savings. While the acquiring bank acquires funds from the cardholder's bank and charges a fee for its services, the issuing bank issues cards, approves transactions, manages cardholder accounts, and handles chargebacks.
It's important to note that some banks perform both roles, offering comprehensive services.
FAQs
Visa and Mastercard are card networks. They do not issue their own cards and they do not deal with merchants directly. As such, they are not considered issuers or acquirers. However, certain card networks such as American Express and Discover do act as issuers as well.
Normally, the merchant will not be in contact with the issuing bank. In most cases, the merchant only needs to deal with the issuing bank in case of a chargeback. Here, the merchant should come up with a strong rebuttal that clearly states their case for why the chargeback is invalid.
Merchants with larger businesses can also hire professional chargeback management companies that have prior relationships with issuers. These companies can help dispute chargeback claims for a fee.
Absolutely. A card payment cannot go through without both an issuer and an acquirer. Even for alternative methods where a card isn’t used, an issuer and acquirer are usually working in the background.
Yes. Services like PayPal and Stripe can be an all-in-one solution for merchants. However, it is important to remember that these services usually have limits. For one, it is not possible to customise them. As such, they tend to work well for smaller merchants but larger stores usually go for acquirers that grant them flexibility.
Here are some of the things merchants should be aware of when picking an acquiring bank:
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They accept card networks that your customers have.
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The fee structure is something that you are comfortable with. Sometimes, banks have hidden fees so taking a look at the fine print is important.
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They accept currencies that are used by your customers. Some banks have restrictions due to regulatory concerns.
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They do not place limits on the account that may restrict operations (e.g., transaction volume).
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They have a capable and responsive support team. The best way to find out if this is the case is to head online and read reviews of the bank.
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