Acquiring banks, also known as merchant banks or acquirers, accept, manage, and process transactions on behalf of merchants. They provide merchants with the infrastructure and support needed to accept credit and debit card payments from customers. They act as intermediaries between the merchant and the issuing banks to facilitate the acceptance of card payments. They ensure funds from card transactions are securely and efficiently transferred to the merchant’s account, enabling smooth transaction processing and settlement.

What are acquiring banks?

What is an acquiring bank?

Acquiring banks enable merchants to receive payments by providing merchant accounts, which are necessary for accepting card payments. They handle the processing of card transactions, including authorization, clearing, and settlement. Acquiring banks offer tools and services to detect and prevent fraudulent transactions, safeguarding merchants against potential losses.They also provide ongoing support to merchants, assisting with transaction inquiries, technical issues, and chargeback management.

Role of acquiring banks in payment processing

When a customer makes a purchase initiating a card transaction, the payment gateway encrypts the payment details and forwards them to the payment processor. The processor decrypts the information and forwards it to the acquiring bank. The acquiring bank processes the payment by initiating the payment request through the card network (for example, Visa, MasterCard) with the issuing bank. During authorization, the acquiring bank checks with the issuing bank to confirm that the cardholder has sufficient funds or credit to complete the transaction and verifies the transaction details. The transaction details are sent to the card network for processing. The funds are then transferred from the issuing bank to the acquiring bank through the card networks and the payment service provider, and then deposited into the merchant's account.

Regulation and compliance

Across the world, acquiring banks are governed by several regulatory bodies complying with the legal regulations associated with each country, including the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB). They must also be compliant with the Payment Card Industry Security Standard (PCI DSS). Acquiring banks in India are regulated by the Reserve Bank of India (RBI).

Merchant onboarding

Acquiring banks follow strict rules and regulations when setting up merchant accounts. The onboarding process for merchants involves several steps.

• Application: Merchants submit an application to the acquiring bank, providing business details and financial information.

• Verification: The acquiring bank conducts due diligence, verifying the merchant’s credentials and assessing the risk level. This involves conducting thorough background checks and risk assessments on merchants to prevent fraud and money laundering, and ensuring merchants comply with industry standards, such as PCI DSS, to maintain cardholder data security.

• Approval: Upon successful verification, the acquiring bank approves the application and sets up a merchant account.

• Integration: The merchant integrates with the acquiring bank’s payment processing system, often through a payment gateway or processor.

Acquiring banks and payment service providers

Acquiring banks interact with various other components in the payment ecosystem to process payment transactions. This includes payment gateways, payment processors, payment facilitators, and payment aggregators. In India, payment aggregators have similar functions to payment facilitators.

• Payment gateways: These act as the interface between the merchant’s website and the payment processor, securely encrypting and transmitting transaction data to the processor.

• Payment processors: These entities handle the technical aspects of transaction processing. They decrypt transaction data from the gateways and securely send it to the acquiring banks.

• Payment aggregators: These service providers allow multiple merchants to be onboarded under a single master merchant account handled by the aggregator, facilitating easier and faster onboarding for small businesses.

Fees and pricing

Acquiring banks charge various fees for their services. These include transaction fees, monthly fees, set up fees, and chargeback fees.

• Transaction fees: A percentage of each transaction, typically ranging from 1% to 3%.

• Monthly fees: Regular monthly charges for maintaining the merchant account.

• Setup fees: One-time fees for setting up the merchant account.

• Chargeback fees: Fees charged when a transaction is disputed and reversed.

Role in chargebacks, refunds, and disputes

Acquiring banks also play a crucial role in managing chargebacks, refunds, and disputes. Acquiring banks handle chargeback requests, working with merchants to provide evidence and resolve disputes. In dispute management, acquiring banks assist in resolving transaction disputes between merchants and customers.They also facilitate the process of returning funds to the cardholder’s account when a refund is issued.

Conclusion

Acquiring banks are vital components of the payment processing ecosystem, enabling merchants to accept card payments securely and efficiently. They offer comprehensive support to merchants, including fraud prevention tools, transaction management, and technical assistance. Governed by strict regulatory standards, acquiring banks follow a detailed onboarding process to ensure compliance and security. Their interaction with payment gateways, processors, and aggregators further streamlines the payment process. By understanding the functions and benefits of acquiring banks, merchants can optimize their payment operations, enhance customer satisfaction, and safeguard their financial transactions.