Acquiring Bank vs. Payment Processor: A Comprehensive Guide

This is the ultimate guide to understanding the differences between an Acquiring Bank and a Payment Processor in 2023.

So, if you want to:

• Grasp the unique roles and responsibilities of acquiring banks and payment processors
• Understand how these entities contribute to the smooth processing of your business transactions
• Decode the complex dynamics of the payment ecosystem
• Discover how to start accepting payments for your business easily

Then, this guide is for you.

It’s not just information – it’s your roadmap to comprehending the key players in the payment processing world and how you can leverage them to scale your business.

Let’s dive right in.

 

Key Takeaways

• Acquiring banks and payment processors play crucial roles in the payment processing ecosystem.
• Acquiring banks hold merchant accounts and manage funds.
•  Payment processors facilitate transaction authorization, settlement, and security.
•  Cooperation between acquiring banks and card issuers is vital for seamless transactions.
• Merchant acquirers generate revenue through transaction fees and value-added services.
• Understanding the roles of these entities helps businesses make informed decisions about payment processing.
• With the right payment processor, like GETTRX, businesses can provide a seamless payment experience for their customers.

 

 

What is an Acquiring Bank?

In finance and electronic transactions, an acquiring bank, also known as a merchant acquirer, plays a vital role that you may need to be made aware of.

As you swipe your card or click ‘pay now’ on your favorite online platform, an acquiring bank works behind the scenes to make this seamless transaction possible.

So, what exactly is an acquiring bank?

An acquiring bank is a licensed member of a card network, such as Mastercard or Visa, responsible for processing credit or debit card transactions on behalf of businesses.

In essence, when you use your card to make a purchase, the acquiring bank is the entity that receives the transaction details from the merchant, ensures the cardholder has enough funds or credit, and then facilitates the transfer of funds from your account to the merchant’s account.

Acquiring banks is indispensable in the payment process, serving as the bridge between merchants and card networks.

They provide merchants with the equipment and software needed to accept card payments, and they also assume the risk of potential card fraud or non-payment.

 

 

 

 

Roles of Acquiring Banks in the Payment Ecosystem

Acquiring banks stand as pillars in the payment ecosystem, orchestrating a network of relationships and transactions that drive the global economy.

Their roles extend far beyond simple transaction facilitation, embedding them deep into the financial infrastructure of businesses.

To fully grasp the importance of these institutions, let’s delve deeper into their extended roles:

 

1. Transaction Facilitation

The primary role of an acquiring bank is to facilitate the transfer of funds from the cardholder’s bank (issuing bank) to the merchant’s bank account when a purchase is made.

They receive transaction details from the merchant, verify the cardholder’s account details, and confirm whether sufficient funds or credit are available for the transaction.

 

2. Merchant Services Provision

Beyond just facilitating transactions, acquiring banks provide a suite of services to merchants.

They equip businesses with the hardware and software to accept card payments, such as point-of-sale (POS) systems, card reader devices, and online payment gateways.

In addition, they offer maintenance and technical support for these systems, ensuring that businesses can accept payments smoothly and efficiently at all times.

 

3. Risk Management and Fraud Prevention

Acquiring banks also shoulder the risk associated with card transactions. This risk can come in various forms – from chargebacks, where customers dispute a transaction, to potential card fraud and non-payment.

These banks employ sophisticated fraud detection systems and adhere to the stringent security standards set by the Payment Card Industry Data Security Standard (PCI DSS) to mitigate these risks and protect sensitive cardholder information.

 

4. Settlement and Reporting

After a transaction gets the green light, the acquiring bank doesn’t simply stop there. It coordinates with the issuing bank to settle the transaction.

This process involves debiting the funds from the cardholder’s account and crediting them to the merchant’s account.

Moreover, acquiring banks provide extensive reporting and analytics about the transactions processed. These insights help businesses track their sales performance, identify purchasing trends, and make data-driven decisions to grow their operations.

 

5. Compliance and Regulation Management

Acquiring banks act as custodians of compliance within the payment process. They ensure that transactions align with the rules and regulations of card networks such as Visa and Mastercard.

By managing these compliance issues, acquiring banks relieves merchants of this burden, allowing them to focus on their core business activities.

 

6. Relationship Management

Acquiring banks serve as intermediaries between merchants, card networks, and issuing banks. They manage these relationships and handle negotiations related to transaction fees and terms.

Furthermore, acquiring banks often represent the merchants in case of disputes or chargebacks, advocating on their behalf and managing the resolution process.

 

7. Merchant Account Services

One of the key services acquiring banks provides is the provision of merchant accounts. These specialized accounts are designed to hold funds from card transactions until they are transferred into the merchant’s regular business account.

Offering a secure space for these funds, the merchant account is critical in ensuring a smooth flow of transactions.

 

8. Customer Support

Acquiring banks provides an essential line of support to merchants. Whether it’s a technical issue with a POS system, a question about transaction fees, or guidance on handling a chargeback, the bank’s customer support team is there to assist.

This high level of service helps merchants navigate any bumps in the road of processing payments.

 

 

How Acquiring Banks Facilitate the Processing of Credit Card Transactions

As we’ve explored the diverse roles that acquiring banks play in the payment ecosystem, it’s clear that they are indispensable in facilitating credit card transactions.

They serve as the central hub in the transaction process, coordinating between various parties to ensure the seamless flow of funds from cardholders to merchants.

Let’s break down this process into detailed steps:

 

Step 1: Initiating the Transaction

The complex journey of a credit card transaction starts with a simple act: you decide to make a purchase using your credit card. This could occur in a physical retail store, where you swipe, dip, or tap your card on a point-of-sale (POS) terminal.

It could also happen online, where you input your card details on a merchant’s secure payment gateway. The information required typically includes the card number, expiry date, CVV security code, and any additional authentication steps your card provider might require.

 

Step 2: Transaction Authorization

Once your card details are entered, the ‘pay’ button clicks, or the card is swiped, the transaction journey kicks into high gear.

The merchant’s POS terminal or online payment gateway captures your card information, encrypts it for security, and sends it to the merchant’s acquiring bank.

The acquiring bank acts as the first major checkpoint in the transaction’s journey. It receives the encrypted data, decrypts it, and forwards the transaction details to your credit card’s issuing bank.

 

Step 3: Transaction Approval or Declination

Upon receiving the transaction details, your issuing bank plays the detective. It verifies your account, checks the requested amount against your available credit limit, and assesses the transaction’s fraud risk based on various factors, including purchasing behavior and location.

After this analysis, your issuing bank approves or declines the transaction. This decision is communicated back through the same path it came—from the issuing bank to the card network, from the card network to the acquiring bank, and finally back to the merchant’s POS terminal or online gateway.

Despite its complexity, this process typically happens within seconds, maintaining a speedy checkout experience for you.

 

Step 4: Transaction Settlement

The transaction process continues even after you leave the store or log off the website.

At the end of the business day, the merchant compiles all approved transactions into a batch. This batch is then sent to their acquiring bank, marking the beginning of the settlement process.

The acquiring bank reviews the batch, organizes the transactions by issuing banks, and sends requests to each issuing bank through the card network, asking for the funds corresponding to their cardholders’ transactions.

 

Step 5: Fund Transfer and Merchant Payment

The issuing banks respond by transferring the requested funds back through the card network to the acquiring bank.

Once the acquiring bank receives these funds, it accumulates the total and prepares to deposit the payment into the merchant’s account.

But before this happens, the acquiring bank deducts any agreed-upon transaction fees—a process known as interchange. These fees serve as compensation for the bank’s role in processing the transactions.

Finally, the acquiring bank transfers the remaining funds to the merchant’s regular bank account. This marks the completion of the transaction journey, as you enjoy your purchased goods or services, and the merchant secures their payment.

 

 

 

Importance of Establishing a Relationship with an Acquiring Bank for Businesses

The importance of an effective, efficient, and secure payment process for businesses cannot be overstated.

An integral part of this is establishing a robust relationship with a reliable acquiring bank.

Such a relationship can offer several advantages, including;

1. Seamless Payment Processing:

As a business, the last thing you want is for customers to abandon their shopping carts due to a complicated or non-functional payment process.

An acquiring bank ensures smooth payment processing, enabling you to accept various forms of card payments, both online and in-store. This convenience enhances your customers’ shopping experience, encouraging repeat business and customer loyalty.

2. Access to Advanced Payment Technologies:

Acquiring banks can provide access to state-of-the-art payment technologies, such as contactless payments, mobile payments, and secure online payment gateways.

As you keep pace with the latest payments industry developments, you can meet your customers’ evolving expectations and stay competitive.

3. Comprehensive Risk Management:

Acquiring banks play a critical role in managing risks associated with card transactions, including fraud and chargebacks.

With their advanced security measures and fraud detection systems, acquiring banks can help mitigate these risks, protecting your business and customers.

4. Regulatory Compliance:

A complex set of regulations governs the payment industry to protect consumers’ data and prevent financial crimes.

Acquiring banks ensures that all transactions comply with these regulations, including local and international banking rules, card network standards, and data security standards.

5. Reliable Financial Partner:

An acquiring bank acts as a reliable financial partner, providing essential services such as merchant accounts, settlement of transactions, and detailed transaction reporting.

They also offer business advice based on their broad experience with various types of businesses and industry trends.

 

 

What is a Payment Processor?

A payment processor is the critical link between your business, the acquiring bank, and the issuing bank.

The entity handles the actual transaction process, transmitting information between your customer’s bank (the issuing bank) and your bank (the acquiring bank).

Essentially, a payment processor is the engine that drives the payment transaction vehicle.

The payment processor jumps into action when your customer swipes their card or hits ‘pay’ on your website.

It encrypts the customer’s card data, ensures it safely reaches the acquiring bank, communicates with the issuing bank to approve or deny the transaction, and then relays the message back to your business.

Roles of Payment Processors in the Payment Ecosystem

Just as an acquiring bank plays multiple roles in the payment ecosystem, so does a payment processor.

As the middleman between your business, the acquiring bank, and the issuing bank, a payment processor has several crucial responsibilities.

Let’s delve into the key roles that a payment processor like GETTRX performs:

1. Transaction Processing

The primary role of a payment processor is to handle the actual processing of transactions.

This includes encrypting the transaction data, transmitting it securely from your business to the acquiring bank, communicating with the issuing bank to get transaction approval, and sending the response back to your business.

2. Fraud Prevention and Risk Management

Payment processors employ advanced technologies and strategies to detect fraudulent transactions, prevent chargebacks, and minimize the risk associated with payment processing.

This ensures that you and your customers are protected from potential financial losses.

3. Compliance and Security

Payment processors must adhere to various rules and regulations, including Payment Card Industry Data Security Standard (PCI DSS) compliance, which sets the rules for handling cardholder data.

They ensure all transactions are processed securely, protecting sensitive customer data from potential breaches.

4. Integration and Support

Payment processors are responsible for providing and integrating your business’s payment gateway or POS system to accept card payments. This includes setting up the system, maintaining it, and providing technical support when needed.

They ensure your payment systems run smoothly, providing a seamless checkout experience for your customers.

5. Reporting and Analytics

Many payment processors offer comprehensive reporting and analytics tools. These tools can provide invaluable insights into your sales trends, customer behavior, and more. Leveraging this data can inform your business strategies and help drive growth.

 

 

How Payment Processors Handle Transaction Authorization, Settlement, and Security

As a central figure in the payment ecosystem, a payment processor is responsible for critical stages of the transaction process: Authorization, Settlement, and Security.

Here, we’ll explore each stage in depth to better understand the processor’s intricate operations.

 

Transaction Authorization

The authorization process begins when a customer makes a purchase and provides their card details by swiping, inserting, tapping, or entering their details online. The payment processor then steps in to facilitate the following steps:

1. The payment processor sends the transaction details, including the card information and the transaction amount, to the acquiring bank.
2. The acquiring bank forwards these details to the card network (like Visa, MasterCard, etc.), which sends them to the customer’s issuing bank.
3. The issuing bank checks the customer’s account for sufficient funds or credit and approves or declines the transaction based on this check and various other parameters, like fraud detection algorithms.
4. The decision (approval or denial) is sent back through the same path: from the issuing bank to the card network, from the card network to the acquiring bank, and finally from the acquiring bank to the payment processor, which communicates the outcome to the merchant and the customer.

 

Transaction Settlement

After successful authorization, the transaction moves into the settlement phase. Here’s how the payment processor handles this:

1. The merchant batches all the approved transactions at the end of the day and sends them to the payment processor.
2. The payment processor forwards this batch to the acquiring bank, which sends each transaction to the corresponding issuing bank, requesting the transaction amounts.
3. The issuing banks transfer the funds for their respective transactions to the acquiring bank, which then sends them to the merchant’s bank account.
4. The payment processor ensures the correct transfer and receipt of funds, handling any discrepancies or issues arising during this process.

 

Transaction Security

The payment processor plays a critical role in ensuring transaction security:

1. It uses advanced encryption technologies to protect sensitive card data during transactions.
2. It complies with the Payment Card Industry Data Security Standard (PCI DSS), which sets stringent rules for handling cardholder data.
3. It employs fraud detection and prevention technologies to identify and block fraudulent transactions, protecting the merchant and the customer from potential financial losses.

 

Advantages of Using a Payment Processor for Businesses

Here’s how employing a competent payment processor can unlock a host of advantages for your business:

 

1. Improved Cash Flow Management:

A payment processor accelerates the pace at which you receive payments, hence improving your cash flow.

Instant authorizations and rapid settlements mean that the money gets into your business account faster, providing you with the liquidity you need to run your operations smoothly.

2. Enhanced Customer Experience:

In an era where customers demand smooth, seamless shopping experiences, a payment processor ensures that transactions go through quickly and without hiccups.

Plus, the ability to accept multiple payment methods opens up more choices for your customers, enhancing their overall experience.

3. Access to Data and Insights:

Modern payment processors provide comprehensive reporting and analytics tools that can offer invaluable insights into your sales, customer behavior, and business trends.

These insights can inform your business strategies, helping you understand what works for your customers and where there is room for improvement.

 

4. Simplified Compliance:

Navigating the intricate landscape of payment regulations can be daunting.

Payment processors handle this compliance on your behalf, ensuring that all transactions align with local and international banking rules, card network standards, and data security standards.

 

5. 24/7 Support:

Lastly, a good payment processor provides round-the-clock support to address any issues that may arise, ensuring your payment system runs smoothly.

This can be particularly crucial for businesses that operate across multiple time zones or have a significant online presence.

 

Acquiring Bank vs. Payment Processor

Understanding the difference between an acquiring bank and a payment processor provides valuable insight into how your transactions are processed.

Here’s a more detailed comparison to highlight the unique roles and responsibilities of these two entities:

 

Acquiring Bank	Payment Processor
Financial institution	Technology service provider
Holds the merchant’s account where funds are initially deposited	Does not hold merchant accounts but communicates transaction details to the acquiring bank
Receives transaction details from the payment processor	Encrypts and sends transaction details to the acquiring bank
Interacts directly with the card networks (Visa, MasterCard, etc.) to forward transaction details	Does not interact directly with card networks
Handles risk assessment and underwriting for the merchant	Provides fraud detection and prevention mechanisms
Provides the Merchant ID (MID) which identifies each merchant for transactions	Provides the payment Gateway for the merchant to receive online card payments
Receives transaction details from the payment processor	Encrypts and sends transaction details to the acquiring bank
Works primarily behind the scenes and has no direct interaction with the customer	May interact with customers during the transaction process (e.g., entering card details, handling error messages, etc.)
Compliance with banking regulations and card network rules	Ensures transactions comply with PCI DSS standards for data security

 

While the acquiring bank and the payment processor play significant roles in facilitating card transactions, their duties and areas of expertise are distinct.

The acquiring bank operates mainly in the financial and regulatory domain, while the payment processor handles the technological and customer-facing aspects of the transaction process.

 

 

Acquiring Banks as Financial Institutions that Hold Merchant Accounts and Manage Funds

Acquiring banks are licensed financial institutions. They provide a merchant account, a special type of bank account required for businesses to accept card payments.

These banks manage the funds from card transactions and take on significant risks in the process, including the risk of chargebacks and fraudulent transactions.

They also liaise with card networks like Visa and MasterCard, facilitating funds transfer between issuing banks and merchant accounts.

 

 

Payment Processors as Technology Providers that Facilitate Payment Transactions

Unlike acquiring banks, payment processors don’t hold or manage funds. Instead, they focus on the technological aspects of the transaction process.

They encrypt and transmit transaction data, request authorization from the issuing bank, communicate the approval or denial back to the merchant, and manage the settlement process.

They also provide the hardware and software needed for businesses to accept card payments, in-store or online, and offer technical support to ensure these systems run smoothly.

However, the process continues. Integrating a payment processor adds another layer of efficiency and transparency, making the payment experience even smoother.

 

 

Acquiring Bank vs. Card Issuers

While the payment processing landscape involves several key players, each performing their unique roles, card issuers are one of the integral components.

Although acquiring banks and card issuers work, their roles, responsibilities, and functions vary substantially.

To fully appreciate their distinct parts, let’s delve deeper into differentiating these two entities and exploring their interplay within the payment process.

 

 

Difference between Acquiring Banks from Card Issuers

Acquiring banks and card issuers sit on opposite sides of the payment ecosystem, each providing crucial services.

Their functions can be likened to two sides of a coin—different yet part of the same whole.

 

 

Acquiring Banks	Card Issuers
Provide merchant accounts to businesses.	Issue credit and debit cards to consumers.
Liaise with card networks to facilitate fund transfers.	Approve or decline transactions based on the customer’s account status.
Manage the transfer of funds from card transactions.	Carry the risk of non-payment by cardholders.
Responsible for chargebacks and dispute management.	Maintains the cardholder’s account, including statement generation and customer service.
Establish a risk profile for merchants to mitigate fraud.	Set the terms and conditions of the cardholder agreement, including interest rates and fees.
Provide transaction reports to merchants.	Grants credit and set credit limits for cardholders

How Acquiring Banks and Card Issuers Work Together in the Payment Process

The steps below illustrate how these two entities work together to facilitate successful card transactions.

Step 1: Transaction Initiation

When you, the customer, swipe your card at a merchant’s terminal or input your card details for an online purchase, the transaction process is initiated. The payment processor captures the transaction details, including the card number, expiration date, and the transaction amount.

Step 2: Transaction Authorization

The payment processor sends the transaction details to the acquiring bank associated with the merchant.

The acquiring bank, in turn, forwards these details to the appropriate card network (Visa, Mastercard, etc.). The card network then routes the transaction details to the card issuer—typically, your bank or the institution that provided your credit card.

Step 3: Transaction Approval or Decline

The card issuer checks the validity of the card and the availability of funds or credit for the transaction. Based on this, it either approves or declines the transaction.

This decision is then communicated through the same chain: from the card issuer to the card network, from the card network to the acquiring bank, and finally, from the acquiring bank back to the merchant via the payment processor.

Step 4: Transaction Settlement

If the transaction is approved, the card issuer subtracts the transaction amount from the customer’s account. The issuer then sends the funds via the card network to the acquiring bank, which deposits the funds into the merchant’s account.

Step 5: Transaction Completion

The merchant receives a confirmation of the successful transaction, and the customer gets a notification (typically, a receipt) for the completed purchase. In case of a declined transaction, the merchant receives a decline message, and the customer is notified accordingly.

This illustrates the vital roles both acquiring banks and card issuers play in the payment process.

Despite occupying different positions in the transaction flow, their collaboration ensures smooth and secure payment transactions.

 

Importance of Cooperation Between Acquiring Banks and Issuers for Successful Transactions

The cooperation between acquiring banks and card issuers is instrumental in ensuring successful transactions in the payment ecosystem.

This collaboration facilitates a seamless flow of information and funds, fostering an efficient and secure transaction process. Here are some reasons why their cooperation is important:

 

1. Swift Transaction Processing: Acquiring banks and card issuers work hand in hand to expedite transaction approval and settlement. When they cooperate efficiently, transactions are processed faster, enhancing customer experience and boosting the merchant’s cash flow.
2. Secure Transactions: Both entities are crucial in maintaining transaction security. The acquiring bank ensures secure transmission of transaction data to the card issuer, while the card issuer employs robust security measures to prevent fraudulent activities.
3. Accurate Transaction Information: The acquiring bank and the card issuer must share accurate transaction data. Any error can lead to transaction failure or dispute, affecting the customer and the merchant. Efficient cooperation ensures accuracy in data exchange.
4. Effective Dispute Resolution: Acquiring banks and card issuers collaborate to resolve chargebacks and disputes. Their cooperation ensures an impartial evaluation of disputes, leading to fair outcomes.
5. Compliance with Regulations: Both entities must adhere to various financial and card network regulations. Their cooperation helps ensure all transactions are compliant, mitigating legal and financial risks.

 

How Do Merchant Acquirers Make Money?

Primarily, merchant acquirers make money through a fee-based model, charging fees for each transaction processed. These fees are typically a blend of fixed and variable charges and are collectively known as the Merchant Discount Rate (MDR).

The MDR is often expressed as a percentage of the transaction value plus a fixed fee. The actual rates can vary based on factors like industry, transaction volume, and transaction risk.

 

Common Pricing Structures

There are several components to the fees that merchant acquirers charge:

 

1. Transaction Fees: One of the primary revenue sources for acquirers is the transaction fee, charged on every card payment processed for the merchant. These fees usually have fixed and variable components based on the transaction value.
2. Interchange Fees: Acquiring banks receive a portion of the interchange fees the merchant pays for each transaction. The card issuer sets these fees, and they are shared among the card network, the issuer, and the acquiring bank.
3. Additional Value-Added Services: Beyond processing transactions, many acquirers offer additional services that generate revenue. These could include payment gateway services, fraud prevention systems, analytics and reporting services, and more.

 

Some merchant acquirers may adopt a simple flat-rate pricing model, charging a fixed percentage plus a flat fee per transaction, irrespective of the card type or transaction size. Others may use a tiered pricing model, where rates differ based on transaction qualifications.

 

 

What Is the Easiest Way to Start Accepting Payments for Your Business?

Starting to accept payments for your business is a vital step in facilitating smooth transactions and promoting customer convenience. Here’s the easiest way to get started:

1. Understand Your Business Needs

Before choosing a payment solution, understand the nature of your business.

Do you operate online, offline, or both? What’s the average transaction value? What’s your expected volume of sales?

Having clear answers to these questions will help identify the best payment solutions for your business.

2. Choose a Payment Processor

Your payment processor will link your business, the acquiring bank, and the customer’s bank.

Choose a payment processor with competitive pricing, reliable service, and strong security measures. They should also comply with the Payment Card Industry Data Security Standard (PCI DSS).

3. Decide on Payment Methods

Decide on the payment methods you want to accept – credit cards, debit cards, mobile wallets, or online payment platforms like PayPal or Stripe.

The more options you offer, the easier it will be for customers to purchase. However, consider the fees associated with each method.

4. Set Up Your Payment System

This means getting a point-of-sale (POS) system or credit card reader for physical stores. You’ll need a payment gateway that can securely accept and process online transactions for online stores.

Some payment processors offer all-in-one solutions, including a payment gateway and a merchant account, simplifying the setup process.

5. Test Your System

Before going live, test your system to ensure it’s working correctly and can handle transactions smoothly. Check for any glitches or security issues.

6. Train Your Staff

Ensure that your staff is familiar with the new payment system. They should know how to process transactions, handle errors, and assist customers if needed.

7. Go Live

You can start accepting payments once everything is in place and working correctly. Monitor the system regularly for any issues and address them promptly.

8. Regular Review

Regularly review your payment processing performance. Look for ways to improve transaction speeds, reduce errors, and lower costs.

Remember, accepting payments for your business is not just about facilitating transactions; it’s also about enhancing the customer experience.

Choose a solution that is efficient, secure, convenient, and easy for your customers to use.

Also Read: 18 Terms to Know Before Choosing a PayFac

 

Starting to accept payments for your business can be simple.

With careful consideration and a strategic partnership with a reliable payment processor like GETTRX, you can streamline your payment processes, enhance customer satisfaction, and drive business growth.

No more surprise fees, just smooth transactions and happy customers. Click here to get started.

 

 

The Bottom Line

What are your thoughts on the roles and differences between acquiring banks and payment processors?

Your understanding, opinions, and experiences are vital for us to continue this enlightening conversation.

Have you noticed any impacts on your business due to the functions of these key players in the payment ecosystem? Do you have any stories or insights regarding starting to accept payments for your business?

Feel free to share your thoughts with us here. We’re excited to continue this journey of understanding the payment ecosystem together with you. Let’s continue the conversation.