What Is An Acquiring Bank?
Keeping all of the terms straight when it comes to processing payments can be a bit tricky. And there are so many entities involved in payment processing. So we’re going to start with one of the most important terms and players in credit card processing: the acquiring bank. We’ll start with a general definition of an acquiring bank, and then we are going to explore what it means for your business:
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What Is An Acquiring Bank?
The acquiring bank is a financial institution that plays a crucial role for the merchant by creating and managing the bank account. Also referred to as an acquirer or a merchant bank, this financial institution is a licensed member of the card networks, including Visa and Mastercard. When you process a payment with a debit or credit card, the acquiring bank plays a role in approving the sale. The bank makes this determination based on the cardholder’s data (made available at the time of the sale from the issuing bank and the card network). Note that the issuing bank is the bank that provided customer’s credit card.
For instance, let’s say your customer pays you with a Visa card and taps their card to pay. Their card’s issuing bank makes information available about their credit card account to your merchant bank (acquiring bank). If there are enough funds on the card and everything else is copacetic, the acquiring bank approves the purchase and puts the funds in your account.
Now keep in mind that the term “acquiring bank” primarily refers to the specific role it plays in the whole credit card processing interchange. A merchant’s acquiring bank can be an actual bank, or it can be another type of financial organization. A large acquiring bank may also issue credit and debit cards to its customers, thus also acting as an “issuing bank” when a consumer pays with the card (this is the case with Bank of America). An acquiring bank is also sometimes referred to as a payment processor, and it might contract directly with merchants to provide merchants services. That said, not all payment processors are acquiring banks.
There’s a lot to keep straight, but keep reading as we further de-mystify these terms and give you the tools to understand how money moves from your customer to you.
The Acquiring Bank’s Role In Payment Processing
The acquiring bank plays a pivotal role in processing credit card payments for merchants. When a merchant processes a payment, the acquirer’s purpose is to authorize the card transaction and connect with the issuing bank (the consumer’s bank) on behalf of the merchant.
In a nutshell, the acquiring bank acts as a go-between with the customer’s financial organization to ensure funds are transferred. In doing so, the acquiring bank assumes some financial risk (that’s where the acquiring bank fees come in.) We’ll talk more about security, disputes, and more in an upcoming section.
Want to know what happens to your funds in a transaction? Here is an overview to help you wrap your mind around the process itself:
- 1st Step: A cardholder receives a credit card from their issuing bank and visits your shop. When they are ready to buy, they present you with their card to pay for your wares.
- 2nd Step: The transaction information and the card information passes between the payment processor to the card network, and then to the issuing bank.
- 3rd Step: The issuing bank charges your customer for the amount of the purchase.
- 4th Step: The issuing bank transfers the amount to the acquiring bank.
- 5th Step: The acquiring bank deposits the funds into your account.
Keep in mind that your payment processor may not be the acquiring bank. Read on to find out more about the difference in the roles and how you can find the right solution for your business needs.
Payment Processor VS Acquiring Bank: What’s The Difference?
When someone discusses payment transactions, the words payment processor and acquiring bank are sometimes used interchangeably. Some acquirers are themselves also payment processors and you can sign up for a merchant account with them directly. However, not all processors are acquiring banks. In this case, they contract with an acquiring bank to provide services. While they may or may not be two separate entities, the acquirer and payment processor roles are unique.
The payment processor plays more of a direct role with the merchant, as they are obtaining and processing the credit or debit card information during the transaction. Your payment processor handles the lion’s share of the data security as the card information moves from your customer to you. Processors are also the source of the hardware or software you may use. They provide connection to the payment gateway and thus are also integral to the authorization as well.
The acquiring bank is more of a go-between among the card networks, including the issuing bank and the merchant. For example, the acquiring bank essentially mediates any disputed transaction from the issuing bank. When an issuing bank reviews a dispute brought up by a customer, the card network passes the dispute to the acquiring bank, which then conveys the issue to the merchant. The merchant’s response gets passed back to the acquiring bank and so forth. This example is simplified but illustrates where the acquiring bank sits as it relates to you and your customer.
As mentioned earlier, though the role of an acquirer and a payment processor may be unique, sometimes the same organization fulfills both duties. In other cases, payment processors and acquiring banks have contract agreements with one another to perform their separate roles.
Why Does An Acquiring Bank Charge Fees?
As we’ve shown, the acquiring bank is the financial institution that’s involved in each sale and also assumes some financial risk when it comes to funds transfer during credit card processing. The other thing to keep in mind is that just like your payment processor, your acquiring bank is dealing with sensitive customer data and has to follow strict payment security standards. For these reasons, the acquiring bank also charges a fee to cover its own risks and financial investment in the whole process.
For more information on the different types of costs you may incur with processing credit cards, check out What Are Interchange Fees For Credit Card Processing?
How Do Acquiring Banks Affect Merchant Services?
Acquiring banks are essential players in the whole credit card processing landscape. As a merchant, it’s important to at least generally understand who the players are and how they may affect your business. It’s not always obvious who your acquiring bank is, as some processors and acquiring banks are separate entities, while sometimes you’re dealing with the same organization.
On a similar note, smaller processors that contract with acquiring banks often bring better customer service because of their specialization. They also may have different pricing and contract terms, such as month-to-month agreements. Keep the whole picture in mind when you are shopping around for a merchant account so that you can make the best decision for your business.
Wondering what companies are out there and which one is right for your business? You are in the right place here at Merchant Maverick. If you haven’t yet, visit our Merchant Account Comparison page and peruse our small business resources that cover the gamut when it comes to payment processing and you.