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What is an acquiring bank and why is it so important?
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When a customer makes a payment, it only takes a tap or a swipe of their card. However, every transaction — whether it's a tap, swipe, or click — initiates an intricate relay between financial institutions, a process made possible through your acquiring bank.
What is an acquiring bank?
An acquiring bank* is a financial institution that provides merchant services to businesses, allowing them to accept credit card, debit card and other forms of payment from their customers.
The acquiring bank makes it possible for merchants to process payments by creating a merchant account and providing the necessary equipment, software and services required for processing card transactions.
It is important for merchants to understand how an acquiring bank operates when setting up their merchant account as well as be aware of any associated costs associated with accepting payments via credit cards.
*An acquiring bank may also be referred to as a "merchant acquiring bank" or "merchant acquirer". They are often referred to as "acquirers".
Role of an acquiring bank in credit card transactions
The role of an acquiring bank in credit card transactions is to facilitate the payment process by verifying the validity of the cardholder, authenticating the transaction flow and collecting interchange fees.
Acquiring banks work with card brands such as Visa, Mastercard, Discover and American Express to verify the identity of the cardholder and authorise funds for payment before sending confirmation back to the merchant. This process allows merchants to accept payments from customers without having to maintain their own bank accounts.
They also provide merchants with the necessary equipment and software for processing credit card transactions, as well as various merchant services such as online payments and point-of-sale terminals. Additionally, they must adhere to industry security standards such as PCI DSS in order to protect both themselves and their customers when processing payments.
The process involved in a credit card transaction
Credit card transactions are a widely used form of payment and require a streamlined process to ensure the security of both the cardholder and merchant:
1. The process starts with the cardholder initiating a purchase from a merchant, either in person or online. The merchant then forwards the transaction information to their acquiring bank for authorisation.
2. The acquiring bank will verify that the cardholder is genuine before forwarding it onto the issuing bank.
3. The issuing bank will then check to see if there are sufficient funds available in the account, and if so, they will authorise the transaction and send confirmation back to both the merchant and acquiring bank.
4. Once this is complete, funds will be deposited into the merchant’s account within a few days or weeks, depending on their agreement with their service provider.
Overall, credit card transactions are a safe and secure way to make payments as long as all parties involved follow industry standards such as PCI DSS to protect themselves from potential fraud or chargeback issues.
1. Authorisation request
During authorisation, a merchant’s payment processor contacts the cardholder’s issuing bank and verifies that the customer has sufficient funds to cover the purchase. It also requests that the card issuer places a temporary hold on those funds until they are released by the merchant at a later date.
- Authorisation requests occur in both online and point-of-sale transactions and are typically completed within seconds of an order being placed.
- They can be initiated by either the cardholder’s issuing bank or a third-party service provider such as Visa, Mastercard, Discover, or American Express.
- Once approved, merchants receive an authorisation code which serves as proof that the transaction was authorised and accepted by the cardholder’s issuer.
This code is then used to complete the transaction and settle funds into the merchant's bank account through interchange fees paid by either party involved in the transaction process.
2. Authorisation response
An authorisation response results from an authorisation request, which is a critical part of payment processing.
When an authorisation request is sent by the cardholder’s issuing bank or a third-party service provider such as Visa or Mastercard, the merchant’s payment processor will receive either an authorisation code or a decline notice.
An authorisation code is proof that the transaction was accepted and authorised by the cardholder’s issuer, allowing it to be completed and funds to be settled into the merchant's bank account.
If a decline notice is issued, then additional steps should be taken to ensure that no fraudulent activity has taken place and that proper authentication has occurred for the transaction to go through.
3. Capture request
A capture request is a critical part of the payment processing journey. This request is sent by the merchant’s acquiring bank or payment processor to the cardholder’s issuing bank in order to secure funds from a transaction that has been authorised.
The capture request verifies that all of the information used for authorisation was correct, and if approved, will transfer funds from the cardholder's account into the merchant's bank account.
This process typically occurs after a transaction has been completed, with merchants sending out a capture request in order to finalise the purchase goods or services.
The issuing bank will then verify that all information used for authorisation was accurate before sending an approval code and transferring funds. If any discrepancies are found during this process, then the transaction will be rejected and funds returned back to the cardholder’s account.
4. Settlement requests and settlement response
A settlement request is sent by a merchant’s acquiring bank or payment processor to the cardholder’s issuing bank.
This request is used to obtain funds from a transaction that has already been authorised and verifies that all information used for authorisation was correct.
If approved, the issuing bank will transfer funds from the cardholder's account into the merchant's bank account.
The subsequent settlement response from the issuer confirms whether or not the capture request was successful and allows merchants to finalise goods or services purchased by their customers.
The response will include information such as when funds are expected to be received in the merchant’s account, along with any fees associated with the transaction. If any discrepancies are found during this process, then it may result in a failed transaction and funds being returned back to the cardholder’s account.
Features of an acquiring bank
Accept electronic payments from customers, such as credit and debit card transactions. They provide the necessary infrastructure and technology to securely process these payments.
Merchant account setup
Helps businesses to set up merchant accounts, which are specific types of bank accounts designed to receive funds from electronic transactions. These accounts allow businesses to receive payments from customers and have the funds deposited into their bank accounts.
Payment gateway integration
Integrates with payment gateways, which are software platforms that securely transmit payment information between the merchant, customer, and issuing banks. This integration ensures smooth and secure transmission of transaction data during the payment process.
Assess and manage the risk associated with payment transactions. They employ various security measures, fraud detection systems, and compliance procedures to protect merchants and customers from fraudulent activities and ensure regulatory compliance.
Settlement and funds disbursement
They handle the settlement process, which involves transferring funds from the customer's issuing bank to the merchant's bank account. They typically settle funds on a predefined schedule, usually within a few business days, and provide detailed transaction reports to merchants.
Assisting customers with any payment-related issues, inquiries, or disputes. This can include troubleshooting technical problems, resolving chargebacks, and providing assistance with account management.
Advanced reporting and analytics, recurring billing solutions, multi-currency support, and integration with other business systems like PMS, OMS, or e-commerce platforms.
Security, fraud prevention and compliance services
Security, fraud prevention and compliance services are essential components of any payment card transaction.
Acquiring banks provide merchants with these services to help ensure the safety and security of their customers' information. They implement advanced fraud detection systems to screen for suspicious activity and protect against potential data breaches or fraudulent transactions.
They also ensure that merchants meet the strict PCI DSS standards set by the major card associations in order to guarantee the secure transmission of payment information.
Finally, they provide customers with dispute resolution services if a problem arises during a transaction process.
Payment processing support and services
Payment processing support and services are an essential component of any merchant's operations.
Acquiring banks provide merchants with a range of services that help ensure the secure processing of their customers' payments. These services include verifying cardholder information, authenticating payment information, verifying transaction data, providing customer dispute resolution services and helping to comply with PCI DSS standards.
All of these services allow merchants to process payments safely and confidently while providing customers with peace of mind when making purchases.
Returned funds management
When customers make purchases online or in a store with their credit, debit, or prepaid card, the issuing bank transfers funds to the merchant’s account. If a customer later requests a refund or if there is an issue with the transaction, the issuing bank may return these funds to the cardholder's account.
Merchants need to have effective processes in place for managing returned funds as this ensures that transactions are tracked and accounted for properly.
Acquiring banks can provide assistance by offering merchant services such as reconciliation, dispute resolution services and fraud detection systems that help merchants track returned payments accurately.
Access to merchant banking facilities
Access to merchant banking facilities is an invaluable asset for businesses, allowing them to process payments quickly, securely and efficiently.
Merchant banks provide merchants with a range of services such as merchant accounts, payment processing, merchant services and card transactions.
With merchant banking facilities in place, merchants can process payments from any customer on any device or platform such as point-of-sale systems or online stores.
These banks also provide additional security measures such as PCI DSS which helps protect the cardholder's data from theft and misuse.
Merchant banks provide merchants with an array of options to process payments, from point-of-sale systems to online stores. This allows businesses to optimise their payment processing costs and increase their bottom line.
Financial institutions offer advanced security measures such as PCI DSS which helps protect customer data from theft and misuse.
Through merchant banking services, businesses can save time, money and resources while ensuring their customers have a secure payment experience.
Easy integration with existing systems
Easy integration with existing systems is one of the most significant benefits of merchant banking services.
This allows businesses to quickly and easily integrate their payment processing system with their current technology stack. Merchant banks provide merchants with reliable payment gateways that are compatible with various types of software, such as e-commerce platforms, point-of-sale systems and online stores.
Merchant banks provide developers and service providers with access to APIs which allow them to develop secure applications for businesses to use for payment processing.
Moreover, merchant banks offer authentication methods such as 3D secure which verifies the identity of cardholders when they make payments online.
Faster payment processing
Faster payment processing is increasingly more in demand by businesses and customers around the world; it enables businesses to receive funds in a matter of minutes rather than days or weeks, which can significantly improve cash flow. It also also provides customers with the convenience of paying their bills quickly and securely with just a few clicks.
This type of payment is typically free or low cost, making it a cost-effective option for both businesses and consumers.
Finally, payments are usually backed by card networks such as Visa, Mastercard, Discover or American Express, providing customers with additional security when making purchases online.
Reporting provides detailed information about a company's financial transactions, including sales and expenses, customer purchases, supplier costs and more. Comprehensive reporting helps businesses keep tabs on their income and outgoings, as well as identify potential areas of improvement.
It also offers valuable insights into customer behaviour, which can be used to improve services or products.
An acquiring bank plays a vital role in the payment processing ecosystem, serving as the intermediary between the merchant and the customer's issuing bank. Choosing the right one is an important decision for any business looking to process payments, as it can impact the speed and cost of transactions, as well as the overall security of the payment processing system.