What is an Acquiring Bank & How Can it Help Your Business?
Accepting payments on your website is a simple, yet complicated process.
To the naked eye, the consumer enters their personal and card details, the page takes a second or two to load, and the transaction (hopefully) goes through.
What the human can’t see are the intricate simultaneous processes that take place in those few seconds that make online payments possible.
Today we’ll pay attention to a very specific and important cog in that process: the acquiring bank, also known as an acquirer, settlement bank or merchant bank.
What is an Acquiring Bank?
An acquiring bank is a licensed financial institution that’s a member of a credit card association, such as MasterCard or Visa and it allows merchants to open an account in order to accept electronic payments.
Acquiring banks are third-party partners, providing the platform and infrastructure needed in order to make payments possible.
The reason we refer to them as third-party partners is that their responsibilities are contained in authorizing, routing, and processing payments. The merchant account is essentially a line of credit and not a holding account.
Role of the Acquiring Bank in the Payment Process
Now that we’ve explained the basic functionality of a settlement bank, let’s see where it sits in the payment process.
Once a customer enables a transaction, the acquiring bank receives an authorization request which it subsequently forwards to the issuing bank.
The issuing bank is something we’ll explain later on in this article.
If and when the transaction is approved, the amount is deposited in the merchant account. The amount the merchant receives will include the interchange fee plus acquirer fees which we will break down later in the article.
If for any reason the transaction is rejected, the money bounces back into the client’s account.
What’s important to note is that the acquiring bank takes on a certain level of risk when agreeing to work with a new merchant. The risks usually include processing fees such as card chargebacks, reversals, and refunds.
In order to counterbalance their risk exposure, merchant banks do two things.
First and foremost they vet their prospective clients by conducting a thorough KYC investigation in order to ensure the financial viability of the to-be client.
Secondly, they charge the merchant in order to cover their expenses and risk in the case the merchant goes under.
Let’s have a look at the fee structure between the acquirer and the merchant.
The fees an acquirer charges a merchant vary and are usually based on the agreement between the two.
In most cases, acquirers charge a certain fee per transaction. On top of that, they charge a monthly fee, which corresponds to the network processing costs and services, such as fraud protection.
Acquiring Bank vs. Issuing Bank: What’s The Difference?
You can never talk about an acquiring bank without having to distinguish its differences with an issuing bank.
The two often get mixed up simply because they are involved in the electronic payment process.
An issuing bank is a financial institution that issues credit/debit cards for consumers to use in electronic payments.
An easy way to differentiate between the acquiring and issuing bank is to remember that acquiring banks serve businesses (B2B) whereas issuing banks serve customers (B2C).
Conclusion: How Can it Help Your Business?
One might wonder as to why they should care about the intricacies of electronic payments and the granular analysis of institutions like the acquiring bank.
The answer is quite simple. The better your understanding of how things work, the more informed choices you can make about the technology you’ll choose to set up your payment framework.
Electronic payments have become a reference for businesses of any size or industry. Understanding the process, functionality, and legislation around them is where you can set your business apart from competitors.
You can leverage your knowledge in order to build a robust payment system that emits trusts to clients. You’ll know which technology provider fits your business structure and you’ll be able to adjust in the case of a problem/malfunction.
Our team here at BigWPay is always available to give you any information you might need on the electronic payment process, all it entails, and the technology needed to bring it to life.
Do not hesitate to contact us.