The world is using more credit cards than ever before and financial institutions must keep up with marketplace trends. In 2020, Business Insider found that millennial and Generation Z consumers preferred mobile point of sale (POS) choices like contactless payments and digital wallets.
Also, more than half of Gen Z purchasers use their digital wallet at least once per month and 75 percent of these buyers used a digital payment app.
During each card transaction, several players work together to create a seamless purchasing experience. An important player is an acquiring bank that processes credit card payments on behalf of the merchant.
What is the acquiring bank?
An acquiring bank doesn’t cater to consumers. Instead, they serve as the middleman between a cardholder and a merchant.
Every acquiring bank maintains an open credit line for each merchant they represent and this allows banks to accept transaction funds for the merchant. The acquiring bank deposits the appropriate proceeds into the merchant’s bank account.
Acquiring banks need financial resources and infrastructure to represent merchants in credit card transactions and if a dispute occurs, the acquiring bank may incur liability until a resolution is reached.
Every transaction involves multiple steps, and the acquirer performs several functions during this process. Here’s the typical sequence for a transaction.
1. A customer purchases an item from the merchant.
2. The credit card details are entered. This data includes the cardholder’s name, card number, expiration date, and CVV number. This sensitive data goes to the payment gateway.
3. The payment gateway encrypts data and completes anti-fraud scans. Once finished, the payment gateway delivers the payment data to the merchant’s acquiring bank.
4. The acquiring bank passes this information to the correct card association like Mastercard or Visa, which represents multiple card-issuing banks.
5. The card association completes security checks and sends the payment data to the customer’s card issuer.
6. The issuing bank performs more security checks. This verifies the customer’s card information and determines whether they have sufficient credit to complete the purchase. Based on this result, the transaction is approved or denied.
7. This decision travels to all parties involved in the transaction.
8. If the transaction is approved, the acquiring bank obtains the funds from the issuing bank and transfers them into the merchant account.
Do acquiring banks charge fees?
The acquiring bank performs several important services during each transaction. Firstly, they invest in the financial infrastructure needed to execute customer transactions.
During each card processing cycle, the acquiring bank handles (and safeguards) customers’ data while passing it to other transaction partners. After the transaction has been processed, the acquiring bank transfers funds to the merchant account.
For these services, the acquiring bank charges a fee to each merchant they represent. Normally they charge a flat percentage of the transaction.
Example of an acquirer’s fee
In July 2009, Visa initiated an acquirer processing fee (APF) for all United States-acquired authorizations. Credit and debit card transactions carry slightly different fees. Visa’s credit card transaction APF is $0.0195 while the debit card transaction APF is $0.0155.
Why acquiring banks are necessary
During credit card processing transactions, payment processors do the heavy lifting. However, they aren’t considered banks because they only perform specific services.
Therefore, acquiring banks are necessary to provide the financial underpinnings for each transaction. Their financial resources enable the entity to settle credit card transactions. As part of this process, the bank distributes appropriate funds to the merchants’ business bank accounts.
Acquiring bank liabilities
This is a straightforward process with few hiccups. But if the merchant goes bankrupt, the acquiring bank will be forced to cover the business’s refunds and chargebacks.
Because they’re negatively impacted by financially shaky merchants, they’re unlikely to accept high-risk businesses as clients. If the acquiring bank does accept them, it will charge a higher fee and place more restrictions on their operations.
Acquiring bank vs issuing bank
During each credit card transaction, the acquiring bank and issuing bank sit on different sides of the table. The acquiring bank maintains each merchant’s account and enables them to benefit from credit and debit card transactions.
In contrast, the issuing bank represents the card networks (Visa and Mastercard) in issuing credit and debit cards to consumers. During a card transaction, the issuer is the go-between relative to the consumer and card network. The issuing bank enters into a contract with each cardholder, setting up the terms of a transaction’s funds repayment.
Finding the right acquiring bank
Just as you’d perform due diligence in selecting other business partners, look for the acquiring bank that best supports your business goals.
Assess your current business situation
Determine (or estimate) your business stage and monthly business volume, as this number provides a good starting point. Some acquiring banks may better serve newer businesses, while others are more suited for established companies.
Choose your preferred payment cards
Some acquiring banks represent a specific lineup of cards while excluding others. Develop a list of “must-have” cards along with optional add-ons.
Estimate your average card transaction numbers
If you have a newer business, you may initially experience low transaction volumes. If so, project your average monthly transactions for the future to avoid getting locked into a monthly fee arrangement.
Project your average transaction amount
This number will help you determine the amount that acquiring bank candidates will assess for each transaction. This space has lots of competition, so shop around for the best rates.
Five questions to ask acquiring bank candidates
Once you’ve identified several acquirer candidates, ask them the following questions.
1. What cards and payment methods do you offer?
The acquirer should support all frequently-used cards. Besides chip card processing and other payment processing methods, the acquirer should also support mobile payment methods.
2. What fees do you assess to merchants?
Be prepared for a laundry list of fees, as that’s the payment industry standard. Pay special attention to the acquirer’s transparency (or lack thereof) regarding the fees.
3. What kind of fraud protection do you offer?
Acquiring and issuing banks, along with merchants and payment processors, are required to comply with PCI (or payment card industry) standards regarding the security of customers’ sensitive personal and financial data. The acquirer should also have internal fraud protection measures.
4. When will the transaction funds reach my bank account?
Some settlement periods are as short as one day, while some might take weeks. If your business relies on fast income, then this is an important point to consider.
5. What level of customer support is available from these financial institutions?
Your acquirer should offer you 24/7 support and agents should be available via email, text, and online chat. Tech support personnel must also be easily accessible.
After you’ve analyzed acquiring banks’ sales materials, view the pros and cons of each acquirer, and choose the acquiring bank that aligns with your company’s business goals.
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Quick FAQs about Acquiring Banks
Q: What is an acquiring bank?
An acquiring bank, also referred to as an acquirer, is a financial institution that processes credit and debit card payments on behalf of a merchant. They act as a middleman between the merchant and the cardholder’s issuing bank, ensuring that transactions are securely processed and funds are appropriately transferred to the merchant’s account.
Q: How does an acquiring bank differ from an issuing bank?
An acquiring bank works with merchants to process card transactions, while an issuing bank provides credit or debit cards to consumers. The acquiring bank handles the merchant’s transactions, whereas the issuing bank is responsible for approving or denying transactions based on the cardholder’s account status.
Q: What role does an acquiring bank play in a card transaction?
During a card transaction, the acquiring bank receives the payment details from the payment gateway, forwards the information to the relevant card networks (like Visa or Mastercard), and ultimately ensures that funds are transferred from the issuing bank to the merchant’s account after approval.
Q: What fees do acquiring banks charge?
Acquiring banks typically charge a fee for their services, often a flat percentage of each transaction. Additionally, there may be other fees such as the acquirer processing fee (APF) introduced by Visa, which varies slightly between credit and debit transactions.
Q: How can I choose the best acquiring bank for my business?
To select the best acquiring bank, consider factors like your business stage, monthly transaction volume, supported payment methods, fee transparency, and customer support. Compile a list of essential card networks and payment methods your business needs to accept, and compare the fees and services of various acquiring banks.
Q: Why might an acquiring bank reject a high-risk business?
Acquiring banks may reject high-risk businesses due to the potential financial liability involved, such as covering refunds and chargebacks if the business goes bankrupt. If they do accept high-risk clients, they often charge higher fees and impose stricter operational restrictions.
Q: What are the security measures employed by acquiring banks?
Acquiring banks must comply with PCI (Payment Card Industry) standards to protect sensitive personal and financial data. They also implement internal fraud protection measures and conduct anti-fraud scans during the transaction process to ensure data security.
Q: How quickly do acquiring banks settle transactions?
Settlement periods can vary from one day to several weeks depending on the acquiring bank. Businesses that rely on quick access to funds should consider the settlement time when choosing an acquiring bank.
Q: What should I ask potential acquiring banks before making a decision?
Ask about supported payment methods, fee structures, PCI compliance, fraud protection measures, settlement times, and the availability of customer support. It’s crucial to understand all potential costs and ensure the acquiring bank can meet your business’s needs.
Q: What happens if a merchant goes bankrupt?
If a merchant goes bankrupt, the acquiring bank is responsible for covering any refunds and chargebacks. This financial liability is why acquiring banks carefully evaluate the risk associated with their merchant clients and may reject or impose higher fees on high-risk businesses.
