Acquiring Bank vs. Issuing Bank: What’s the Difference?
Multi-billion credit/debit card transactions happen every year, and acquiring banks and issuing banks are the two driving forces, ensuring money from these transactions gets to the intended destination. Any business that collects payments for services or goods must understand these important systems and how they function in the transaction process. So, what is an acquiring bank? What is an issuing bank? Find answers to these questions and more in this guide.
What Is an Acquiring Bank?
As a business accepting digital payment, before you can accept online payments from your customers, you will have to sign a contract with a reputable financial institution to design and maintain your business merchant’s account. This is crucial because, without signing this contract, you cannot process any credit and debit card transactions or receive payments after they are completed.
To give a simplistic definition, an Acquiring bank is any financial institution in charge of processing debit and credit card payments on behalf of the vendor or merchant. So, each time a cardholder uses their card to complete a purchase, the Acquiring bank handles the authorization or rejection of the transaction; depending on the data collected from the issuing bank together with the card network. If the purchase or payment is successfully approved, the funds go into the merchant’s account, which often happens within standard intervals.
How Does an Acquiring Bank Work?
When the customer gets to the checkout to complete their purchase, the transaction begins with a payment gateway such as Paykassma, which is liable for the acquiring transaction authorization and the data encryption to ensure that the data along with the red are safely transmitted.
Once the payment gateway has initiated the process, the acquiring bank then collects the transaction data from the merchant and transfers it to the appropriate card association. In this case, the card association includes Visa, Mastercard, Discover, and American Express, to name a few. The card association, alongside the issuing bank (the customer’s bank), authenticates this information and confirms the transaction’s authenticity by verifying that the card is still valid and has enough funds to complete the transaction.
Once the transaction is approved, the card brand network and the issuing bank would send their approval to the Acquiring bank to credit the funds to the merchant account. The fund transfer between accounts is often done at a regular rate.
What Are Issuing Banks?
Issuing banks is quite the opposite of acquiring banks as it is working with the cardholder, or one can say it is the customer’s bank. They issue payment cards to various authorized consumers; hence, the name. Like acquiring banks, they are likewise connected with one or many card brands, which are also called card associations.
In this case, we believe that companies such as Visa and Mastercard are issuers. After all, you will find their logos prominently displayed on various payment cards. However, these card brands don’t usually work directly with consumers. They rather let issuing banks handle those relationships for them. So, in any online transaction, the issuing banks play the role of middle-man between the card network and the customer.
Acquirer vs Issuer: Different Banks, Different Roles
As we mentioned earlier, both acquirer and the issuer play an important role in the payment process. However, they are different banks and have different roles.
Acquiring Bank Roles
The role of an acquiring bank is to see to it that businesses get merchant accounts and are authorized to process debit or credit card payments on their behalf. In some cases, acquirers handle the transaction process themselves. They work in tandem with third-party processors more typically and then serve as a middleman between the business, the card network, and the processor. In addition, during a transaction, after the issuing bank release the money from the cardholder’s account, the acquiring bank collects the payment and ensure it gets to the business account.
Issuing Bank Roles
The role of issuing banks is to issue credit to customers. This is because card networks are not heavily involved in individual transactions. All they do is provide the framework for regulated and consistent use plus rules and standards for payments happening on their network. So, the issuer handles the assessment of the cardholder’s account and makes sure the customer has substantial resources to complete the transaction.
Responsibilities of Issuers and Acquirers
The responsibilities of issuers and acquirers vary. Here are a few of them in the list below.
Acquiring Banks Responsibilities
- Sets requirements and rules for merchant accounts
- Provides and handles your merchant account
- Keep records of merchant account activities
- Forwards authentication requests
- Credits merchant accounts when transactions are successfully processed
- It lets you earn money from purchases done with payment cards
- Collects chargeback notifications and debits your account
- Receives reviews and forwards various chargeback responses
Issuing Banks Responsibilities
- Handles credit/debit card applications
- Provides and manages debit/credit accounts
- Issues payment cards to authenticated cardholders
- Declines or approves cardholder transactions
- Send funds to acquiring banks once the transaction is approved
- Let cardholders make purchases using payment cards
- Starts the chargeback process on the customer’s behalf
- Reviews chargeback retorts and assigns liability
Even though they perform different roles and have varying responsibilities, acquiring banks and issuing banks are crucial to digital transactions involving credit and debit cards. So, businesses that accept payment through cards need to have a system in place to ensure that there is an easy handover whenever a customer initiates a transaction at the point of sale. We believe that this guide gives you an insight into what differentiates an acquirer from an issuer.