Merchant Acquirer (Acquiring Bank) Explained
What is a merchant acquirer?
A merchant acquirer (or acquiring bank) gives your business the ability to accept credit card or debit card transactions and handles the communication between your business and the issuing bank.
Odds are, if you are already in business then you have some sort of deal with an acquiring bank or with a merchant services provider working in tandem with an acquiring bank. They are where you hold your merchant account and are the bank that deposits funds into your chosen business account after receiving your batched transactions.
So in a similar way to how issuing banks are the customer’s gateway into the payment ecosystem, acquiring banks and their partner merchant service providers are the merchant’s gateway.
Seems simple enough, right? Well, sort of.
When you start to think a bit harder about acquiring banks and issuing banks, you may start wondering what all parties are involved in a single eCommerce transaction. And for a process that happens in a matter of seconds, the answer may surprise you.
Here’s a great list that includes credit card acquirers from the Payment Dispute Standards & Compliance Council that sums it up, and the image below is also a nice summary, although there are more streamlined processes available today.
We’ve added some extra language on the typical players in the payment processing landscape, too.
The players involved in an eCommerce transaction
Cardholder (a.k.a. the consumer)
This is the individual or company that makes a request for purchase from the merchant and provides the necessary information to initiate a transaction.
This is the secure, online software that takes that sensitive information about the transaction and delivers it to the payment processor.
The payment processor serves as a facilitator on behalf of the acquirers, forwarding the transaction information from the payment gateway to the card network.
The card network routes the transaction information to the correct issuing bank in order to receive the bank’s authorization.
The issuing bank makes sure no fraudulent signs are detected and verifies the transaction information. If funds (either credit or debit) are available, the issuer sends an authorization code for the transaction back to the card network.
Card network (redux)
The card network is pinged again but this time with a success or denial authorization notification from the issuing bank and forwards that answer back to the processor.
Receives the issuer’s authorization approval or denial from the card network and then forwards that information to the payment gateway.
Receives the issuer’s authorization approval from the processor and forwards it to the merchant to complete the transaction
Merchant account / merchant
The merchant receives the authorization, fulfills the order, and batches the transaction information along with the rest of the day’s sales.
The credit card acquirer receives the batched transactions at the end of the day and deposits that amount into the merchant’s account equal to the total of the batch minus applicable fees.
How acquiring banks make their money
The acquiring bank typically charges the Merchant Services Provider a small licensing fee that is passed through to the merchant (you), and that’s usually blended in with the merchant pricing.
All merchant service providers have a partnership with an acquiring bank, so avoiding this cost isn’t really possible. Some acquiring banks also function as merchant service providers, but this isn’t always the case.
So what does the relationship between an MSP and Acquiring bank look like in practice?
Let’s use us as an example:
Tidal Commerce is a registered ISO/MSP with the Card Brands through Westamerica Bank (the acquiring bank), and WAB’s role is to provide us with the registration and to oversee our compliance with regulations/requirements.
Again, your merchant services provider usually has a preferred acquiring bank that they’ve developed a close relationship with (in our case Westamerica), so reach out to them for any specifics on your acquiring bank.
How merchant accounts relate to acquiring banks
Remembering acquiring banks’ function is easy because they acquire the funds on behalf of merchant accounts.
You can think of merchant accounts like a liaison or intermediary between your business account and the consumer’s bank account (usually an issuing bank). So your acquiring bank pings the issuing bank who delivers the funds to your acquiring bank after an authorization request is verified, and then your acquiring bank sends those funds to your business account of choice.
As mentioned, these services are not without fees, but they’re usually passed along to your MSP who bundles it into your payment processing pricing. That’s because acquiring banks take on risk when acting as this intermediary. If your business dissolves and you can’t pay a consumer back for services, that liability falls on the acquiring bank.
Difference between acquiring banks and issuing banks
Whereas acquiring banks are for the people selling, issuing banks are banks that give cards to consumers. These issuing banks facilitate the relationships and contracts between the card networks (VISA, MasterCard, etc.) and the consumers themselves. Examples of issuing banks include Chase and Barclays.
Merchant acquirer vs. payment processors
Keep in mind that merchant acquirers and payment processors are not the same things. While credit card acquirers handle communications between banks and hold funds at various points, payment processors are simply the mechanism in which payments are processed. Think of them like the crank that drops the cash into a hypothetical bucket (or account in our case).
There are a lot of moving parts in the payments ecosystem, and it’s no wonder fees can be so high in payment processing.
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