An acquirer or acquiring bank has a few meanings. Sometimes, an acquirer is a business or corporation that takes over another’s ownership through a purchase or another type of action. More frequently, acquirers are banks that obtain the rights to a business’ merchant account, so that the financial institution can manage the company’s bank account.
In the payments industry, an acquiring bank, also known as a merchant account bank or settlement bank, often is a licensed member of a credit card association, such as MasterCard, Visa, or American Express. An acquiring bank screens and accepts businesses by approving merchant accounts for them. These accounts allows merchants to safely and effectively process credit and debit card payments.
Overall, an acquirer oversees deposit processing and completes the financial settlement for the merchant. For the most part, an acquiring bank has a back-end role in the transaction process. In the simplest of terms, an acquirer facilitates the exchange of funds between a merchant and the bank that issued that credit card that is used to make a purchase.
As a third party partner in the transaction process, the acquirer must be contacted for processing and settlement, each time a debit or credit card is used to make a purchase. An acquiring bank has the right to determine the types of payments it will accept. Some only accept payments from major card brands, such as Visa or MasterCard, while others may work with a single-branded card, further limiting the types of payments they can accept.
After an agreement is signed, the acquirer exchanges funds with card-issuing banks on behalf of the merchant. The acquirer pays the merchant the daily net balance of its credit card transactions. The amount the merchant receives is minus the interchange fees, acquirer fees, and any payment reversals. Any fees, which vary, that a merchant will pay will be outlined in the agreement with the acquirer. Most acquirers charge a per transaction fee plus a monthly fee, which cover the costs associated with network processing and any other services, such as fraud protection.
When a merchant enters into an agreement with an acquiring bank, the acquirer takes on most of the risk because the merchant account is a line of credit not a holding account, such as a checking or savings account. So, if a merchant shuts down operations and fails to pay any outstanding fraud or chargebacks, the acquiring bank is left on the hook for those charges.
To protect themselves, acquirers often conduct thorough credit check prior to approving merchant accounts. This is important because many credit card brands consider a merchant to be “high risk” if more than 1% of their payments result in a chargeback. When percentages consistently climb above that amount, a merchant account can be terminated, resulting in business to have to refrain from taking credit and debit cards payments. Some credit card schemes charge exorbitant fines against acquiring banks that maintain merchant accounts that have excessive chargebacks, which are when credit card companies demand a charge be repaid for a disputed or fraudulent transaction. To limit fraud, merchants must ensure they are taking security steps to protect electronic payments. In most cases, acquirers will pass those fees on to merchants. However, these fines can be too much for merchants to handle. If they default on payments and chargeback costs, merchants could end up shutting down their businesses. This, again, is where acquiring banks take on most of the risk. If a merchant goes out of business and can’t pay the fees and such, the acquirer gets stuck with the bill.