Acquiring Bank

An acquiring bank, frequently referred to as "the acquirer", is the financial institution that provides, maintains and has ultimate responsibility for a business’ merchant account, and processes credit card and/or debit card transactions on behalf of a merchant.
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What is an acquiring bank?

An acquiring bank, frequently referred to as "the acquirer", is the financial institution that provides, maintains and has ultimate responsibility for a business’ merchant account, and processes credit card and/or debit card transactions on behalf of a merchant.

Acquiring Bank Explained

Acquiring banks, or acquirers, are also called sponsor banks. They sponsor credit card processors or ISOs (Independent Sales Organizations) to be part of the card brands’ association. Because acquirers are also members of Visa and Mastercard’s association, they are sometimes called member banks.

Acquiring banks typically process credit/debit transactions through an Independent Sales Organization (ISO), who have varying levels of involvement in the sales, support and risk associated with a merchant account. 

When a business’ customer pays with a credit card or debit card, the payment information is received by the acquiring bank. Simultaneously, the payment information gets sent to the customer’s credit card company (issuing bank.) The transaction is then completed (“settled”) once the customer’s issuing bank sends the funds over to the acquiring bank, where they are added to the business’ merchant account balance.

What entrepreneurs and business owners should know is that acquirers work with credit card processors. Acquirers are ultimately responsible for the financial risks involved in card processing. As a result, they sometimes have strict rules and regulations for the third-party providers they work with.

When you take a credit card payment, the acquirer is responsible for receiving the funds from the cardholder’s bank. They then pass the funds through your processor and on to your account.

If you have a merchant account, you’re probably familiar with your credit card processor or merchant account provider. They’re who you interact with, who signed you up for your account, and who sends your statements. They can approve or deny account applications. However, an acquirer has the final say over financial decisions that the processor makes. And acquirers, in turn, are directly accountable to the card brands, including Visa and Mastercard.

It’s especially important to understand an acquirer’s role if your business might be considered risky. If you have a riskier business model, you need a processor who understands what you do. You also need an acquirer who understands. When it comes to account approvals and other financial actions, the acquirer makes the final decision.

Why are acquirers necessary?

Although payment processors handle much of the transaction process, they can’t do everything. Because they aren’t a bank, processors don’t have the ability to provide timely funding for each payment.

That’s where acquirers come in. They also accept some of the financial risks of processing, such as refunds, chargebacks, and data breaches.

Note that some companies act as both a processor and an acquirer, while others are separate.

Further Explanation

Acquiring banks act as a middleman for payment card transactions. They create contractual agreements with merchants to provide them a specific type of bank account, called a merchant account, and provide the merchant with a line of credit.

Under this contractual agreement, the acquiring bank will exchange funds with an issuing bank on behalf of the merchant. The acquiring bank will pay the merchant daily for its card activity (the net balance: sales minus reversals, interchange fees & acquiring bank fees).

While an issuing bank will work directly with cardholders, acquiring banks will provide financial backing & infrastructure that give merchants the ability to accept credit cards. Acquiring banks will also take on much of the financial risk that is involved with credit card purchases. They will also assume responsibility for securing the "flow of data", and the initial liability in the event of a chargeback or dispute.

Marketing merchant accounts

Acquiring banks rarely market their own merchant accounts to potential businesses. Instead, they rely on third-party, independent sales organizations (“ISOs”) to sell merchant accounts on their behalf.

The independent sales organizations frequently act as the business's main point of contact providing equipment setup, customer support and risk management throughout the duration of a contract.

In most cases, the role of the acquiring bank can be thought of as being more hands-off and strictly financial, though the relationship between each acquiring bank and ISO varies. 

Credit card fees

There are fees associated with accepting credit cards.  Typically 85-95% of those total fees are “interchange fees”, the remainder are markups by the ISO and the acquiring bank associated with them.  It’s important to note that these markups not only serve as profit but also as risk mitigation for the inherent risk in accepting credit cards.

Despite taking on a more “hands-off” role, acquiring banks assume the ultimate risk when providing merchants with a merchant account. The card brand’s rules generally allow customers of a given business to dispute charges for up to 6 months after their purchase.

If a business were to become insolvent, the ISO that provided their merchant account would be responsible for those charges and the associated fees.  If the ISO became insolvent, their acquiring bank would be responsible for all charges and fees.

For this reason, acquiring banks have audits and underwriting controls in place when merchant accounts are being set up.

Flow of credit

Here’s an overview of how the path of credit flows through the acquiring bank after a customer makes a purchase using a credit or debit card:

  1. Customer pays for order by entering their credit card information online or by chip/swiping the card at a physical credit card terminal.
  2. The transaction is authorized by the merchant account provider (ISO) and the payment information is sent to the merchant account provider’s acquiring bank and the customer’s issuing bank.
  3. The customer’s issuing bank transfers the funds needed to cover the purchase to the acquiring bank, then ISO and adds the transaction to the customer’s credit card statement.

Acquiring Bank Examples

First, let’s look at a typical example of a credit card transaction. When you run a customer’s card, your point-of-sale device or software reaches out to your processor. Your processor forwards an authorization request to the customer’s bank. The customer’s bank, known as the issuing bank, responds with an approval or decline.

acquiring bank, which charges the customer’s bank for the transaction amount.

Either your processor or the acquirer will deposit the transaction funds into your account, usually via ACH. Depending on your funding model, you might be paid the day after you run transactions, or within a few days. You’ll also pay processing fees; they can be deducted from each batch or charged on a monthly statement./p>

While this is a simple overview of the process, it should give you an idea of how acquiring banks fit in.

Some large acquiring banks are Wells Fargo, Chase, and Bank of America. Each of these companies acts as an acquirer in addition to other merchant services.

Other examples of acquirers include Elavon, First Data, Global Payments, and Synovus.

Examples of acquiring banks include Harris Bank, Synovus Bank, West America and Esquire. 

There are also companies that serve the role of both the acquiring bank and the ISO such as First Data, Bank of America, Global Payments, Elavon, and Wells Fargo. 

It’s worth noting that retail banks like Wells Fargo and Bank of America provide many services.

Acquiring credit card payments (providing merchant accounts) is just one of the many financial operations that some of these massive banking networks undertake.

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