PG Glossary: What’s an Acquiring Bank and How Does It Work?

If you are a merchant accepting online payments from your customers, the underlying payment process goes as follows:

The customer likes the product you sell, adds it to the shopping cart, and then proceeds towards checkout. There, he/she enters the card details, authorizes the transaction with an OTP, and it’s done!

On your end, you receive a message or notification saying that you’ve received the ‘XXXX’ amount in your account (either merchant account or linked bank account).

But behind every online payment transaction, there is an intricate relay between multiple players that make the transaction happen with ease. An acquiring bank is one of these players. In simple terms, an acquiring bank processes payments for businesses/merchants.

But that’s not all. To understand the complete picture behind successful online payments, let’s dig deeper into what the term ‘acquiring bank’ means.

What is an acquiring bank?

An acquiring bank, also known as an acquirer or merchant bank, is a financial institution/bank that processes card payments on behalf of merchants. In other words, it acts as a middleman in card transactions and allows merchants to accept card payments from the issuing banks within an association.

Merchant acquiring banks also provide the much-needed infrastructure for merchants to accept card payments.

Renowned card associations – Visa, Discover, MasterCard, American Express, China UnionPay, Indian RuPay, and many others

Where do acquiring banks lie within the bigger payment puzzle?

While an acquiring bank does play a vital role in completing a transaction, it does not work alone. In fact, it is a part of the complex behind-the-scenes process that enables the transactions to pass through. Some of the other key players in that process include:

Card networks/associations/schemes
Issuing banks
Merchants
Payment processor
Payment gateway

How does an acquiring bank work?

A typical transaction goes as follows:

After a customer adds the card details for purchase on a merchant website/app, the information is sent to the underlying acquiring bank.
The acquiring bank then asks the payment processor to contact the issuer.
The processor sends a request to the card network, and then to the issuing bank.
Issuing bank checks whether the card account is active and has the required funds available
Based on whether the transaction is authorized or denied, the decision is then transmitted in a similar manner – from card network to acquirer and then to the merchant.
The merchant sends batches of authorized transactions to the payment processor and eventually gets the funds transferred to the merchant account.

As you can see, the acquiring banks work as a middleman to process all payments related to a merchant. They largely accept or acquire card transactions from issuing banks for merchants, hence the name.

This takes us to the next possible question you might have in mind:

The terms ‘acquirer’ and ‘payment processor’ can be used interchangeably. However, they refer to two different entities performing distinct functions. Here’s the main difference between an acquiring bank and a payment processor:

While a merchant acquiring bank underwrites and processes card transactions, a payment processor facilitates communication between the merchant and issuing bank.

Also Read: What is the Role of a Payment Processor?

Why are acquiring banks necessary?

As you now know, a payment gateway and a payment processor together do most of the transaction processing work. Since these two entities are handling the workload, you might want to ask –

‘What does an acquiring bank bring to the table here?’

The simplest answer – financial backing.

Payment processors are not banks and are limited in the services they offer. Ultimately, you, as a merchant, need someone to extend the credit and receive payments. This is where acquirers come into the picture.

Risk handled by the acquiring banks

In general, acquirers accept the risk that their merchants will remain solvent and are capable of settling fund reversals. Their consumers can trigger the reversal of funds in three different ways:

Card refunds (returning funds to the consumer)
Card reversal (when a merchant cancels a transaction after authorization but before settlement)
Card chargeback (when there is a dispute between the cardholder and the merchant over the validity of a payment transaction)

Acquiring banks provide the funds required to allow timely settlement of payments. This task is similar to extending a loan to the merchant or involved Payment Service Provider until the transaction is settled. While there is a degree of risk involved, these banks take it.

Example – Let’s assume a merchant becomes bankrupt and is unable to process customer refunds or chargebacks. In such situations, the acquiring bank accepts the liabilities and provides funds for account settlement. It also explains risky businesses have the least acquirers available.

Here are a few more facts related to the risk posed to the acquiring banks:

Card associations consider a merchant to be risky if more than 1% of payments result in a chargeback.
These associations levy fines on the acquirers to retain merchants that have a high chargeback frequency.
The acquirers may pass the fines to the merchant to defray the amount payable.
New merchants also pose risk to the acquirers as they may take a large number of orders but disappear without delivering the goods/services after receiving the payments. This is one of the reasons why acquiring banks insist on businesses to become PCI-DSS compliant.

What’s the acquirer’s role in the merchant payment flow?

In layman’s terms, you (merchant) will mostly work with a PSP but will receive money to accept online payments from your acquiring bank. The acquirer is not always a part of the transaction flow technically but it communicates with different financial institutions to retrieve funds so that you can get the total amount from customers’ orders.

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