There are three major actors in a payments process: the payment processor, the acquiring banks, and the issuing banks. These three actors play distinct but important roles. Payment processors, known as payment gateways in the online world, allow business to accept different types of payments through one terminal. Merchant banks provide business bank accounts into which credit and debit payments can be deposited. Finally, issuing banks give customers debit and credit cards, allowing them to pay for goods and services in different ways.
What is an acquiring bank and what is an issuing bank?
An acquiring bank is a bank that provides business bank accounts to its customers. For example, if you’re selling books online and you accept debit and credit card payments, you’ll need an acquiring bank that:
- Checks whether that customer has the funds
- Deposits those funds into your bank account
Let’s say you’re the owner of a fictional yoga studio – Stretches and Smiles – and you have a business bank account with Bank of America. You require your clients to pay for class packages online. When your client, Mark T., pays online, Bank of America sends a message through the payments system to make sure the client has the money in their account (if they’re paying with debit) or enough credit left over (if they’re paying with credit). If they have the money, the payment is authorized and after some time, the money is deposited into your Bank of America account.
An issuing bank, on the other hand, is a bank that provides consumer bank accounts. If you buy things using a debit or credit card, you’ll need an issuing bank to give you an account. Your issuing bank:
- Verifies whether you’re eligible for a bank account (e.g., have the appropriate government ID) or eligible for a credit account (e.g., credit check, income verification)
- Manages all the responsibilities of your credit account, such as preparing monthly statements or undergoing collections activities if you miss payments
Let’s say our yoga enthusiast Mark has a Mastercard that has been issued by Wells Fargo. When he makes a payment, Bank of America will send a message through the payment network to Wells Fargo, which manages his credit account. Wells Fargo will let Bank of America know that Mark has enough credit left over in his account.
What role does the acquiring bank play?
The acquiring bank is one player in a 4-player payment system. A 4-player system consists of:
- The acquiring bank
- The issuing bank
- The card network
- The merchant
What are an acquiring bank’s responsibilities during the payment process?
The acquiring bank opens business bank accounts for its clients and sometimes, they also give them the equipment they need (such as a point of sale device) so they can accept card payments from their customers.
The acquiring bank is responsible for:
- Authorizing payments: This means making sure that the correct person has allowed the use of funds for the card. Most authorization methods today are enabled by PIN or a signature.
- Processing payments: They make sure that customers’ payments go through the necessary steps to make it into the business’ bank account.
- Settling payments: The acquiring bank is then responsible for making sure all parties in the payment process have fulfilled their obligations before the funds can officially be deposited into the bank account.
- Managing disputes: If a customer claims that they did not authorize a payment or there was fraudulent activity, the acquiring bank is responsible for investigating and resolving the issue.
What is the acquiring bank’s relationship with the merchant?
The acquiring bank offers a business bank account to the merchant. They may also provide payment processing equipment (such as a POS device) or a gateway (for online businesses). They offer businesses entry into the world of card payments and card networks. Their relationship with the merchant is mostly transactional. They charge the merchant a fee that’s typically divided up into a fixed rate fee and a per transaction fee. If the acquirer receives a huge number of chargebacks and disputes about a specific merchant, they may suspend that merchant’s privilege of accessing the card networks.
What are some examples of acquiring banks?
Some examples of acquiring banks include:
- JPMorgan Chase
- Bank of America
- Citigroup
- Wells Fargo
- Fiserv (First Data)
- Worldpay (FIS)
What role does the issuing bank play?
The issuing bank is another important player in the 4-player payment processing system.
What are the issuing bank’s responsibilities during the payment process?
During the payment process, the issuing bank’s responsibility is to check whether the customer has enough funds in their account to process the payment. They also transfer funds from the issuing bank to the acquiring bank.
When it comes to cardholders, issuing banks issue debit and credit cards. These cards are tied to one of the credit card networks, such as Visa or Mastercard, allowing customers to access even more merchants in person and online.
Examples of issuing banks in the United States are:
- Bank of America
- Capital One
- Wells Fargo
- Chase Bank
Credit unions, such as Navy Federal Credit Union and States Employees’ Credit Union, can also issue cards.
What role do payment processors play?
Payment processors help with the electronic transfer of funds from the acquiring bank/merchant bank to the issuing bank/customer bank. They help keep transactions secure. They also help vendors accept a wider variety of payment methods through one system. Examples of payment processors include:
- Stripe
- Square
- Shopify Payments
- Apply Pay
- Google Pay
Where does PCI DSS come into all of this?
PCI DSS is the Payment Card Industry Data Security Standard. It’s a set of standards that participants in the payment network use to keep transactions secure. Many of the card networks had their own security standards before consolidating them into PCI DSS.
Acquiring banks are responsible for developing PCI DSS compliance programs for their merchants.
It’s easier to navigate the payments process when you understand the key players
When you’re a business owner, it’s easier to understand the intricacies of the payments process once you understand the key players. Acquiring banks and issuing banks play an especially important role in the payments process, especially when it comes to disputes. Understanding how they work can help you ensure you have all the documentation you need to accurately and successfully process payments.
You can book a call with a member of the ChargebackStop team here to learn more.
