In the complex world of credit card transactions, issuers represent the customer’s side, and acquirers represent the merchant’s side.
This sounds antagonistic, but there’s much more to it. It’s actually a partnership trio with the card networks.
And there’s risk involved on all sides.
How does this trio work together?
Each has a crucial role in completing payment card transactions. They also take sides in disputes.
Let’s examine how this all works safely and securely in hundreds of millions of daily transactions.
What is an Issuer?
An issuer is more formally known as an issuing bank or financial institution. That’s where the money is.
When you think of an issuing bank, think of the bank as issuing the credit cards that customers use to purchase goods or services.
A credit card represents a line of credit provided to an individual by the issuer.
We’ve all been there. Before establishing a credit account, a customer is vetted for creditworthiness. Banks are thorough in checking your credit and financial history.
In today’s automated world, this vetting can take place almost instantly. You can be granted or denied a credit card in a heartbeat.
Once a customer becomes a cardholder with a line of credit, they can purchase the goods and services they want (up to their credit limit).
The issuer takes risks.
- The cardholder may fail to pay their credit card bills, including principal and interest.
- The card may suffer unauthorised use through theft, data breaches, or fraud.
- The bank may experience loss from its own internal mistakes or operational failures.
- Interest rates can (and do) change, increasing the cost of capital and lowering the profitability of credit card loans.
- If the bank fails to comply with laws and regulations, it faces legal challenges which are costly and damaging to its reputation with cardholders.
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What is a Card Network?
It’s important to note that the card issuer is not the same as the card network, which serves as the payment processor for all these transactions.
Card networks, such as Visa, Mastercard, AMEX, and Discover, are intermediaries between the issuer and the acquirer. They facilitate the processing of transactions between cardholders and merchants.
They set the standards and enforce regulations that the issuing and acquiring banks must legally and procedurally obey.
They define credit cards, but they do not issue them.
Issuing banks issue credit cards.
Acquirers accept credit cards as payment.
Because the card network is between the issuer and acquirer, they are typically not the ones the customer or merchant deals with regularly.
The cardholder communicates through the issuing bank, and the merchant communicates through the acquiring bank. The card network processes the transactions between them.
What is an Acquirer?
An acquiring bank or institution represents the merchant in this transaction trio.
- The acquirer provides the merchant with the tools and infrastructure to collect credit card payments reliably and securely and deposit them into the proper merchant bank account.
- The acquiring bank issues a unique merchant ID to identify the correct merchant in transactions going through the card networks or other payment processors.
- Security measures are implemented by the acquiring bank as dictated by law. PCI DSS (Payment Card Industry Data Security Standard) compliance is mandatory.
- The acquirer acts as an intermediary that facilitates the authorisation, settlement, and funding of credit card transactions on behalf of the merchant.
Acquirer risks include the merchant’s failure to provide refunds or pay for chargebacks, failure of the merchant’s business, fraudulent transactions made through the merchant’s account, and failure to comply with anti-money laundering and counter-terrorist financing regulations.
How the Trio Works Together
Now, let’s view the transaction process as a whole to get the proper context.
- A customer acquires a card from an issuer and becomes a cardholder. A merchant sets up an account with an acquirer to accept credit card payments.
- The merchant sets up the ability to pay for goods with a credit card, either through a point-of-service terminal in a physical store or an online form, like an electronic shopping cart.
- The customer provides a credit card or card number to pay for the merchant’s products or services. The merchant captures the card and cardholder’s information.
- The automated merchant system sends the transaction details to the acquiring bank, which in turn forwards them to the card network. The card network ensures regulation compliance and then forwards the information to the issuing bank for authorisation.
- The issuing bank verifies the cardholder’s account status and either approves or declines the transaction. This decision is sent back to the merchant through the card network.
- If the transaction is approved, the merchant is paid. If declined, the transaction is halted.
What is a Chargeback?
Not all transactions go smoothly.
If a customer (cardholder) thinks something is wrong—goods not received, not making the purchase, or for other reasons—they can dispute the completed transaction with their issuing bank.
The issuing bank looks at the evidence provided by the cardholder and determines if there is a valid reason to reverse the payment on the transaction. This reversal is called a chargeback.
A chargeback entails reversing the completed transaction, crediting the cardholder’s account, and beginning a further investigation.
The acquiring bank is notified of the chargeback through the card network (they’re always in the middle). The merchant’s account is debited for the transaction amount plus any additional chargeback fees. The acquiring bank holds this money until the dispute is resolved.
The merchant now has a chance to dispute the dispute. This process is called representment. A rebuttal letter containing arguments and evidence about the transaction’s validity is written. The merchant sends this rebuttal package to the acquiring bank.
If a rebuttal package is sent through the card network to the issuing bank, the bank makes the final decision based on the evidence from both sides—the cardholder and the merchant.
If the merchant is vindicated, the transaction amount is debited from the cardholder’s account, and the dispute is terminated.
Note that the merchant must still pay any chargeback fees.
Looking Forward
The issuer, network, and acquirer trio makes the communication between customer and merchant fair and secure. If everybody plays by the rules, the system works for all. Of course, criminal and friendly fraud is always a problem. That’s a story for another time.
If you have any questions, please contact us online.
Visit ChargebackStop.com for a free demo or more information.
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FAQ: Issuer vs Acquirer
How do issuers and acquirers interact in a credit card transaction?
In a credit card transaction, the acquirer processes the merchant's transaction request and forwards it to the card network. The card network routes it to the issuer for authorisation. If approved, the issuer sends the authorisation back through the network to the acquirer, which then approves the transaction on the merchant's end.
Who pays the interchange fees, and who receives them?
Each credit or debit card transaction involves the merchant’s acquiring bank paying interchange fees to the cardholder’s issuing bank. These fees compensate the issuer for the cost of processing the transaction and the risk of fraud and non-payment.
What is the difference between a credit card transaction and a debit card transaction from the perspective of an issuer and an acquirer?
From the perspective of issuers and acquirers, the main difference is the source of funds. In a credit card transaction, the issuer extends credit to the cardholder. In a debit card transaction, the funds are drawn directly from the cardholder's bank account (where the issuer is also the depositor's bank). The acquirer processes both types of transactions through the payment network, but the funding source affects the transaction's risk profile and processing fees.
Can a financial institution be both an issuer and an acquirer?
Yes, some financial institutions serve both roles, issuing cards to consumers and providing merchant services to businesses. However, the functions and risks associated with each role are distinct, and institutions often have separate departments managing these activities.
How do disputes and chargebacks work in the context of issuers and acquirers?
When a cardholder disputes a transaction, the issuing bank initiates a chargeback, reversing the transaction. The acquirer is notified and debits the merchant's account for the disputed amount. The merchant can then respond with evidence to dispute the chargeback.