Acquiring bank

From CEOpedia | Management online

An Acquiring bank is the financial institution in charge of processing credit and debit card payments on behalf of the merchant (Bansal A.2017,p.5). Every time a cardholder uses his card in a purchase, the Acquiring bank is responsible for authorizing or rejecting the transaction based on the data received from the issuing bank and the card network. If the purchase or payment has been approved, the funds will be deposited into the merchant's account (this usually happens within regular intervals).

How does it works?

1) When the customer arrives at checkout to finalize his purchase, the transaction process is first initiated by a payment gateway such as MYMOID which is responsible for acquiring transaction authorization and data encryption to ensure the safe transmission of data along the red.

2) Once the process has been initiated by the gateway, the acquiring bank takes the transaction data from the merchant and passes it on to the card association (VISA, Mastercard, Discover, American Express, etc.).

3) The card association, along with the issuing bank (the bank of the customer), verify this information and establish the authenticity of the transaction by confirming that the card is valid and has sufficient funds.

4) Once the transaction has been approved, the card association and the issuing bank send their approval to the Acquiring bank to credit the funds to the merchant. The settlement of the funds between accounts usually happens at a regular frequency.

Risks

Acquiring banks are exposed to certain risks when it comes to processing transactions on the merchant's website. In the case of a transaction reversal, a refund or a chargeback, they will be the ones responsible for returning the fund to the issuing bank and the cardholder. This means that they will be out of funds until the amount is recovered from the merchant, and this often comes with its additional costs.The reversal of funds can be triggered in 3 different ways(Kjos A.2007,p.10):

  • When the return of funds to the customer is voluntarily initiated by the merchant;
  • When the merchant cancels the transaction after it has been authorized (but not yet settled);
  • In the case of a chargeback where the validity of the transaction is questioned by the customer.

Chargebacks and out-of-fund situations usually translate to additional costs for the acquiring bank. And last but not least, one of the biggest risks for acquirers is fraud. Because they are the ones responsible for sending the transaction to the issuing bank and the card association, the risk is on them to verify with precision that transactions are genuine. For this reason, taking the necessary security measures during all steps of the transaction process is crucial for the reduction and prevention of fraud. This means that both merchants and acquirers need to be in compliance with the official security standard PCI-DSS.

Acquiring bank vs. Issuing bank

Differences beetween acquiring bank and issuing bank :

  • The acquiring bank (also merchant bank or acquirer) is the financial institution that maintains the merchant's bank account. The contract with the acquirer enables merchants to process credit and debit card transactions. The acquiring bank passes the merchant's transactions along to the applicable issuing banks to receive payment.
  • The issuing bank is the financial institution that issues credit cards to consumers on behalf of the card networks (Visa, MasterCard). The issuer acts as the middle-man for the consumer and the card network by contracting with the cardholders for the terms of the repayment of transactions (Marchi A.2011,p.14).

Examples of Acquiring bank

  • Bank of America: Bank of America is one of the leading acquiring banks in the US. It offers a wide range of services, including merchant acquiring, credit card processing, and fraud protection. It also provides merchant services such as electronic payment processing, chargeback management, dispute resolution, and more.
  • Chase Paymentech: Chase Paymentech is a global payment processing service provider. It offers a range of merchant acquiring services including point-of-sale terminals, mobile and online payment processing, and fraud protection. It also provides a range of value-added services such as chargeback management and dispute resolution.
  • Wells Fargo: Wells Fargo is one of the largest banks in the US and provides merchant services such as credit and debit card processing, fraud protection, and dispute resolution services. It is also a major player in the merchant acquiring business, and offers a range of payment solutions for businesses.

Advantages of Acquiring bank

An Acquiring bank offers many advantages to merchants, such as:

  • Increased security and fraud protection: Acquiring banks provide merchants with an extra layer of security by verifying each transaction and protecting against fraudulent activities.
  • Lower processing fees: Acquiring banks often offer lower transaction fees than other payment processing solutions, making them more cost-effective for merchants.
  • Faster payments: Acquiring banks typically deposit payments into merchant accounts faster than other payment processing solutions.
  • More payment options: Acquiring banks can accept a wide variety of payment methods, including credit cards, debit cards, and even digital wallets.
  • Comprehensive customer service: Acquiring banks typically provide comprehensive customer service and support, which is important for merchants.

Limitations of Acquiring bank

  • One of the main limitations of Acquiring banks is the high cost of processing payments. Not only do merchants have to pay a fee for every transaction, but they also have to pay for equipment and services like chargebacks, fraud protection and PCI compliance.
  • Another limitation is that Acquiring banks are subject to the rules and regulations of the card networks. This means that merchants may be restricted from offering certain payment options or may be required to meet certain security standards.
  • Additionally, Acquiring banks may limit the amount of funds that can be processed in a single transaction or impose other restrictions on the merchant, such as requiring additional verification or authentication.
  • Finally, Acquiring banks may have slow processing times and may not be able to provide merchants with real-time updates on the status of their transactions. This can slow down the process of getting payments to the merchant and can lead to delays in customer service.

Other approaches related to Acquiring bank

An Acquiring bank's responsibilities goes beyond just processing payments. There are several other approaches related to their role, such as:

  • Merchant Acquiring: Acquiring banks provide merchant accounts to merchants who wish to accept credit and debit card payments. These accounts are necessary as they provide merchants with a secure way to receive payments and access to the card networks.
  • Risk Management: Acquiring banks must analyze and assess the risk associated with each transaction, to ensure that the transaction is legitimate and to protect the merchant and cardholder from fraudulent activity.
  • Payment Gateways: Acquiring banks provide merchants with a payment gateway, which is necessary to securely process payments and to interact with the card networks.
  • Security: Acquiring banks must provide merchants with secure payment processing solutions, such as encryption and tokenization, to protect customer data and prevent fraud.

In summary, Acquiring banks provide merchants with the ability to accept credit and debit card payments, as well as several other services such as risk management, payment gateways, and security solutions.


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References

Author: Zofia Rey

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