What Role Do Acquiring Banks Play?

What Role Do Acquiring Banks Play?

An acquiring bank (merchant bank) performs a variety of functions concerning online credit card processing and electronic commerce. A real acquiring bank doesn’t have an actual brick and mortar building or office where you can just walk in and open a checking account. They carry out critical functions without the need for a physical presence since they primarily deal with other providers of merchant accounts and business-based financial institutions overall.

Today, more products and services are bought online through credit card processing transactions, e-checks, and ACH transfers more than ever. Acquiring banks mostly serve as a kind of middleman for these electronic transactions. Overall, they’re the connection between merchant accounts and the banks that issued the credit cards. The acquiring bank is liable for the proficient flow of information and data that inevitably transfers between the two.

There are a number of steps that take place in the average electronic transaction process. First, a client decides to buy a particular item at a store. She swipes her credit card in the terminal or sometimes enters her credit card info onto a website’s checkout page. Upon verifying the data, she proceeds making the purchase. The data then transfers to the acquiring bank in order to be processed. The acquiring bank is informed that the holder of the credit card wishes to buy the item and then charges the funds to her card. The acquiring bank notes the request and subsequently transmits the information along to the appropriate credit card issuing bank in order to be approved.

It’s the issuing bank rather than the acquiring bank that literally approves or declines the transaction. If it’s approved, the issuing bank transmits an authorization code directly back to the acquiring bank who then notifies the store of the decision. If the transaction is approved, the funds are then transmitted from the issuing bank via the acquiring bank minus the interchange fee for the client’s transaction. Next, the acquiring bank will then take a cut from the entire amount of funds received from the issuing bank and will proceed to deposit the remainder into the checking account of the merchant or other chosen business bank account.

Due to the ever-evolving competition from other kinds of financial institutions and banks who continue to progress in technological advances, several acquiring banks are looking at their overall business structures in order to incorporate key changes that would eventually support new growth.

What Does an Acquiring Bank Do?

An acquiring bank is essentially the medium through which all credit card processing occurs. These banks and institutions acquire and verify payments made through credit associations such as Visa, MasterCard, and others, which are then paid to the merchant account, held by a business. Credit and debit card transactions aren’t simple two party exchanges between seller and customer, there is always an acquiring bank in between.

The Role of Acquirers

As the key middle piece of credit transactions, the primary purpose of acquiring banks is to maintain transaction security. On a merchant’s behalf, they handle credit card processing, and avoid risk as best they can by staying with the constantly evolving security standards in the modern world. They process all kinds of transactions, not limited to the usual buyer and seller situation, but also refunds, reversals, and chargebacks. Acquiring banks exist so that credit associations and businesses don’t have to work directly with each other, but they aren’t entirely unincorporated with the associations. Rather, they are comparable to an extension of the agency, created to make the transaction process simple.

In regard to refunds, reversals, and chargebacks, acquiring banks bear the biggest burden of risk, as these types of transactions come with larger fees and in the case of chargebacks, heavy fines from credit associations. While these are normally passed on to the merchant, if a merchant can’t maintain solvency, the acquiring bank, being in the middle, stands to lose the most.

Merchant Accounts

A merchant account is essentially a businesses’ bank account with an acquiring bank. With one, a business is able to accept and settle credit card transactions. Like any ordinary bank account, they come with their own set of rules and processing fees. In order to open one, the merchant is required to sign a contract agreeing to abide with the regulations and policies of a credit card association. While enabling, it is important that merchants keep in line with their contracts in order to avoid culpability in the event they are victims of credit card fraud. Should all regulations be followed, an acquiring bank is able to fulfill its purpose, processing and protecting credit card transactions, with ease.

What is an Acquiring Bank?

Merchant accounts, which let businesses accept payments via credit card processing, are a necessity for any business today. To accomplish this, a business needs the assistance of an Acquiring Bank. Sometimes known simply as an Acquirer, this bank is the one responsible for supplying the actual merchant account to let the business accept credit card payments.

These banks generally operate far behind the scenes, and usually don’t directly serve the merchant. Most acquiring banks only act as facilitators, helping with exchanging of funds between merchant and the card-issuing bank. These banks rely on third-party organizations to sell the accounts and provide customer service to the merchants. On very rare occasions, Acquiring banks not only process the payments but also market, sell and service their merchant accounts directly.

As for the actual overall cost of the credit card processing fees, Acquiring banks surprisingly play a very small role in the transaction. They collect a small set fee for each credit card transaction, and are only a bit player in this event. Most of the costs associated with credit card transactions with businesses come from interchange fees and the markup fees tied to the processors and providers.

When it comes to the risks involved with credit card processing transactions, Acquiring banks assume the majority of the risk because merchant accounts are considered lines of credit rather than holding accounts like traditional savings or checking accounts. Once the dust settles, the Acquiring bank is hoping the merchant does very well with its business. In the event a business goes belly-up, the Acquiring bank loses money involved with fraud or chargebacks. Because of this, most Acquiring banks require any person or business entity wishing to establish an account with them to accept credit cards to be subject to a credit check and supply certain financial data before acceptance.

While Acquiring banks operate in the backdrop of most transactions, their role in working with businesses is extremely important. By being able to subject a business or individual to credit checks and financial evaluation prior to acceptance, they essentially hold the fate of a business in their hands. A business today that does not accept credit card payments is almost doomed from the start, so these banks play a pivotal role in shaping the business landscape of today. As paying with credit continues to boom, these banks will continue to play a role of great importance.

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