What is an acquiring bank?

An acquiring bank is a financial institution that maintains a merchant account and processes card payments on behalf of the merchant. An acquiring bank is named as such since it "acquires" transactions from the merchant and forwards these transactions to the card associations (like Visa, MasterCard etc.) and the card issuing bank for further processing.

An acquiring bank or acquirer thus acts as an interface between the merchant and the consumer. The acquirer represents the merchant and provides the required information about the merchant and the transaction to the card association and the issuing bank. The acquirer thus plays a key role in payment processing and ensuring that the merchant gets paid timely and securely.

How does it all work?

A card transaction may be simplistically represented by the following chart.

The acquiring bank takes the transaction information from the merchant and passes it along with the card association. The card association then verifies the information about the card/ client along with the issuing bank. The customer may be asked for some additional information via 3D Secure, etc., to verify the transaction. Once the authenticity of the transaction is established, the card association and the issuing bank give the go-ahead to the acquirer to credit the funds to the merchant. All participating banks settle their accounts with each other at a set frequency.

Choosing an acquirer

Acquiring banks may charge various fees to the merchant for services rendered. Normally, most merchants choose their existing bank to serve as their acquirer for ease of use and due to an existing relationship. While choosing an acquiring bank, it is important to look at the free structure and compare the services on offer by various acquirers. Another important aspect is the acquirer's ability to perform cross-border acquiring. This means that you can use the same account with the same acquiring bank to receive payments from clients across the world.

Risks for acquiring banks

Acquiring banks undertake some risk by way of their potential exposure on the merchant. In case of a transaction reversal, refund or chargeback, the acquiring bank has to return the fund to the issuing bank and the cardholder. This leaves the acquirer out-of-funds until they are able to recover this reversed amount from the merchant.

Incidents of chargeback and being out-of-funds mean additional costs for the acquiring bank. In addition, card associations also impose fines for merchants who have a lot of chargeback requests issued against them. Therefore, it is always a good idea for merchants to take steps to minimize such incidents.

Finally, the biggest risk for acquiring banks is a fraud. Since the acquirers are the ones who send the transactions to the card association and the issuing bank, the onus is on them to verify that the transactions are genuine. They have to do this at a physical point-of-sale or in a digital environment, depending on where a transaction is initiated.