An acquiring bank also referred to as an acquirer or merchant bank, is a financial institution that processes card payments on behalf of merchants. However, it is not as simple as swiping a card to make a payment. There is an immense amount of coordination and behind-the-scenes processes at work to provide the user with exceptional services. This article will help you understand an acquirer and its role in processing payments for merchants.
Did you know? The first ever credit card was invented by John Briggs in 1946 and was called “Charge-it” due to it having to be recharged monthly.
What is an Acquirer Bank?
Acquirers also process card payments on behalf of merchants. The acquiring bank pays the merchant the daily card activity’s net amount, i.e., fewer reversals and fees charged for the facilities offered by intermediaries. This is similar to providing a loan until the transaction is settled.
Services Offered by an Acquiring Bank
Acquirer Bank is a bank or a financial institution that signs-up merchants to accept card payments.
Signing Up and Underwriting
Merchant Acquiring is the process of signing-up merchants to adopt a card acceptance by offering a “merchant account”. It also involves underwriting a merchant. In doing so, the acquirer assumes the risk of ensuring that merchants meet the conditions of the card networks, including their solvency.
They also assume responsibility for the transactions of the merchants initiated in the networks.
Signing-up merchants to accept card payments also entails providing them with the infrastructure or equipment, such as card readers, point-of-sale terminals, and software.
After signing up, they deal with transaction processing. It involves two major parts, and they are:
The acquirer authorizes cardholder and transaction information, and by doing so, the acquirer offers merchants payment assurances on their transactions.
2. Clearing and Settlement
Clearing involves transferring transaction information from the merchant to its bank and includes the activities required to settle funds.
3. Statements and Information Services
After transaction processing, the Acquiring bank might also provide other services like account maintenance, providing billing statements, analysis of transaction information, etc.
A single merchant acquirer need not perform everything from signing up to providing after-settlement services. Various parties, such as banks and non-banks, can provide the services they are authorized to provide.
Risks Assumed by an Acquiring Bank
Fund reversal is one of the major risks faced by an acquirer. It can happen due to the following:
- The merchant initiated a refund
- Cancellation of the transaction by the merchant
- Chargeback or request for return of funds by the customer due to various reasons
Fraud is another risk factor faced by merchant acquirers. For example, a thief can either steal existing accounting information or steal the identity of a third party to open a new account. This will enable them to incur debts in the victim's name. Fraud can also be committed by known people who incur payments and then deny them or when merchants place bulk orders but then disappear. Thus, the contingent liability of the merchant acquirer is high due to the existence of fraud risk factors.
Many acquiring banks require PCI DSS compliance from merchants. The Payment Card Industry Data Security Standard (PCI DSS) is an information security standard.
Also Read: All About UPI– United Payments Interface
Fees Charged by the Acquirer
Acquirers charge fees to compensate for risk factors and provide services.
Merchants pay the acquirer through a “merchant discount rate”. It is typically charged as a percentage of the volume of transactions. Still, it can vary depending on many factors, such as the type of business, the size of the transaction, the merchant’s credit standing, etc.
Merchant discount rates include various components. One notable component is the "interchange fee”. The interchange fee is paid by the acquirer to the card issuer or issuing bank to compensate for the costs of attracting and retaining cardholders.
Card associations charge fines from acquiring banks for retaining merchants with high chargeback frequencies, which are generally recovered from merchants.
Process of Credit Card Transaction
We rarely think about what happens behind every card transaction. Unknown to the cardholder, there is an intricate web of activities smoothly coordinated with each other in processing the payments.
The Credit Card Transaction Process Involves the Following
- Payment processor
- Card association
A Credit Card Transaction Process Flows as Given Below
- The customer swipes the card or uploads the card details online for payment for a purchase of goods or services from the merchant.
- This is then communicated with the merchant bank (acquirer) which verifies if it can be approved. It asks the payment processor to communicate with the card issuer.
- The payment processor communicates the card details to the card association and then to the card issuer bank.
- The issuing bank authenticates the details. Based on successful authentication and availability of credit limit, the amount is then authorized. It issues an authorization code or declines the transaction and it is communicated in the same manner as above to the acquirer.
- The merchant bank then approves the payment and the customer will receive a receipt for the same. However, it does not mean that the merchant has been paid yet.
- At the end of the day, the merchant sends all the credit card receipts to the acquiring bank which is then sent to card associations.
- The card association communicates the same to the issuer bank and the issuer bank remits the funds to the merchant bank after retaining a certain percentage as fees.
- The merchant bank then collects its fees before depositing the net amount in the merchant account.
Acquirer Vs Issuer
The acquiring bank is where the merchant has a merchant account, and the issuing bank is where the cardholder or customer has an account.
The issuer and acquirer are different since the payment of the former release for the transaction to the acquiring bank after it has been approved. At the same time, the latter receives the amount from the issuer and deposits it in the merchant account.
An acquirer provides services that let merchants accept credit card payments through merchant accounts while issuing banks issue the cards used by customers to pay for purchases.
Acquiring banks represent the merchants during chargebacks. Unlike acquirers, the issuing bank does not represent customers during chargebacks. Still, it merely decides when to offer chargebacks and when to reverse them by evaluating the evidence presented from both sides.
Merchant Bank Examples
A few top Merchant acquiring banks in India are:
- State bank of India
- HDFC Bank
- Axis Bank
- ICICI Bank
- Bank of Baroda
Need for an Acquirer to Process Payments
The purpose of an acquirer is primarily to facilitate card payments. They secure the payments that are owed to merchants by relentless processing and following up on transactions.
By settling the net daily balance of a merchant's card payments, they provide a credit facility similar to a loan. This helps the merchant meet his financial needs on a timely basis.
When merchants are represented in chargebacks, they are protected from unfair demands for chargebacks.
In this digital era, it has become mandatory for merchants to keep up with the updates in technology, especially in the field of e-payment options. In this way, the acquirer has become an important intermediary in processing the payments of merchants. If a merchant cannot process fund reversals, the acquirer assumes the liabilities and settles the funds required. Since the acquirer is at risk if the merchant cannot cover a chargeback, the credit quality of merchants must be evaluated.
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