An acquiring bank is a bank that provides a merchant account to businesses that accept credit cards, and provide the money when a customer uses their credit card for goods or services. Before your small business can begin accepting payments from customers, you ultimately have to work with a an acquiring bank.
It’s also known as an “acquirer” or “settlement bank.” It can be a bank or a financial institution processing card payments on behalf of merchants and it enables acceptance of these payments from card associations like Visa or MasterCard. It is usually a registered member of these associations.
How Card Payments Work
- The cardholder presents the card at checkout or provides information in CNP (card not present) transactions.
- The transaction is encrypted and transmitted.
- The acquiring bank receives data from the merchant, and that data is passed to the appropriate card association (MasterCard, Visa, American Express, etc.).
- The card association passes the data to the issuing bank–the bank that issued the credit card to the cardholder.
- They confirm the validity of the card and ensure that there are sufficient funds available to the cardholder to meet the request.
- Upon approval, this information is passed back to acquiring bank.
- The acquiring bank informs the merchant and transaction is complete.
- The settlement of funds between the merchant and the acquiring bank happens according to a predetermined schedule.
Functions of an Acquiring Bank
This institution is not necessarily a conventional brick and mortar building where a client can walk in to cash a check or open an account. They may function without the help of a physical presence and mainly deal with other merchant account providers and financial institutions.
- Acquiring banks play a middleman role in electronic transactions
- They connect merchant accounts to the card issuing banks.
- This enables easy two-way flow of data and information between the merchant account and issuing bank.
- Authorization codes, card decline information, or approval information is sent by the issuing bank to the acquiring bank and then to the merchant.
- Some acquiring banks take on the role of payment processing services and offer payment processing solutions
- They can also partner with third party payment processing services
- They take on the risk of processing transactions and charge fees for transactions, refunds, and chargebacks
- Fees can vary according to each acquiring bank’s policies
Acquiring banks face certain risks and challenges. Since all transactions, whether online or in person, carry an inherent risk of breach of sensitive data, all the parties involved must have robust security systems in place.
Other risks include fund reversals or chargebacks from consumers. If more than 1% of transactions result in chargeback disputes, the merchant may be considered to be a high-risk one. Because of the risk of data breach, many acquiring banks are actively involved in creating and developing electronic POS security standards.
For more information about what an acquiring bank is, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.