Acquiring banks explained
Getting a base-level understanding of a few key terms and players in the payments is key to understanding credit card transactions and your options when looking for payment processing.
Whether you are looking for in-person payments or a way to take credit card payments for online sales, although behind the scenes, a merchant acquirer is a crucial step in the process of credit and debit card payments.
When you process a customer's credit card payment, the transaction moves through multiple financial institutions and systems before the payment ends up in your business bank account. It's a complex chain of which one key component is the merchant acquirers.
What is an Acquiring Bank?
A merchant acquirer, sometimes referred to as credit card acquirer or acquiring bank, sets merchants up with merchant accounts, which is the processing arrangement between the business and their credit card processor. This agreement with the acquiring bank (or in many cases, the payment processor acting on behalf of the acquiring bank) allows for the exchange of funds with the card-issuing banks and your business.
Simply put, the "acquirer" is the financial institution that works with merchants, while the issuer is the financial institution that works with customers. Acquirers are the banks that allow merchants to accept credit card payments. Either the acquiring bank or the payment processor then facilitates the transfer of those payments from the merchant account to the merchant's business bank account (which is usually at an issuing bank).
The acquirer's role in credit card processing
Here's how an acquiring bank fits into the payment cycle:
When you process a transaction for a customer who has come into your store location or submitted an order through your online store or payment gateway, the transaction is processed through an acquiring bank. (Note: if you are using a payment processor, the transaction will be communicated through them first.) Acquiring banks allows merchants to accept credit card payments from cardholders and their issuing banks.
When a cardholder makes a purchase, the merchant acquirer bank works on behalf of the merchant to confirm with the cardholder's issuing bank that they are authorized to process the payment and that the cardholder has the funds available for the transaction. By settling funds at the end of the day, the funds that were previously authorized during the transaction can be pulled and paid from the cardholder's account to the acquiring bank or payment processor. The payment processor or bank will likely deposit the money into the merchant's bank account unless they see any red flags, in which case they might freeze the funds for the sake of avoiding chargebacks and fraud prevention.
Merchant acquirers may be less visible to merchants and cardholders compared to issuing banks because they often work behind the scenes, while their partners (payment processors like Helcim) are the ones who work directly with merchants during the signup process or when questions arise about the merchant's account.
Acquiring Bank vs. Payment Processor
Instead of signing up with an acquiring bank directly, you can instead choose to sign up with a payment processor. If you sign up with a payment processor, they will communicate with the issuing banks through their acquiring bank partner and act as a mediator between your business and the cardholder issuing banks.
Acquiring Bank vs. Issuers
Now that you have an understanding of a merchant acquirer or acquiring bank let's clarify the difference between them and the issuing banks. The issuing bank is the bank associated with your customer's card. Your customer will have to go through a bank to open an account and be approved for a credit or debit card. Every time they use these cards to make a purchase, the terminal reads their card details and communicates with the card networks and acquiring banks who act as a mediator to the customer's card-issuing banks to pull the funds out of the customer's account or credit.
How merchant acquirers make their bottom line
Just like every player in the credit and debit card payment process, acquiring banks have to make a bottom line too. The way they do this is by getting together with the card network brands to determine a reasonable fee to charge payment processors to cover their own costs. This fee is called the interchange fee, and it is a cost that affects both the merchant and payment processors.
Payment service providers then need to make their own margin which they charge merchants, or in the case that you process directly through an acquiring bank, they will tack on a small margin as well. This is where your pricing model comes into play- but remember that no matter which processor you choose, they all pay the same cost, or interchange fees, to the acquiring banks and card networks.
For example, Interchange Plus pricing passes on the wholesale interchange fee with a small, consistent margin for various transaction types. Flat rate pricing, on the other hand, charges one fat margin, which accommodates their own cost for fluctuating interchange fees for low and high-cost transactions but doesn't pass on the savings.
The easiest way to start accepting payments
If you're looking to get started accepting credit and debit card transactions, a payment service provider or merchant service provider may be an easier all-in-one solution for payment processing (rather than trying to go directly through a merchant acquirer bank). First of all, they tend to be faster and more sophisticated when it comes to hardware and software options, but also when it comes to integrations and built-in tools. With a merchant account, your payment provider can also help get you up to speed to become and remain PCI compliant and relieve you from doing all the yearly work necessary to stay compliant and keep you and your customer's sensitive credit card data secure with tools like card vaults and tokenization.
Understanding who merchant acquirers are and what they do is a great foundation for understanding how a credit card transaction works and the costs and hands that the payment process passes through, which ultimately contribute to the pricing model and fees you pay to accept payments. Both issuing and acquiring banks play an important role in credit card processing. If you'd like to learn more about how credit card processing works, checkout this article.