Issuing Bank vs. Acquiring Bank: What’s the Difference?

Issuing banks and acquiring banks both play an important role when your customer uses a credit card to make a purchase at your business. While the same bank can technically perform both roles, there’s a difference in the actions they execute during payment processing. If your business accepts credit card payments, it’s especially important that you understand the purpose of these specific banking roles in order to troubleshoot problems associated with payment processing. Below, we examine acquiring banks vs issuing banks—what they are, why they’re important, and how they differ.

What Is an Acquiring Bank?

The acquiring bank, also known simply as an acquirer, is the bank associated with the merchant. Responsible for hosting a merchant account and/or business bank account, the acquiring bank processes payments on behalf of merchants.

What Is an Issuing Bank?

The issuing bank is the bank associated with the customer. On behalf of the customer, the issuing bank, also known as the issuer, authorizes the acquiring bank’s request to withdraw the funds from a transaction.

Acquirer vs. Issuer: What’s the Difference?

The acquiring bank and issuing bank depend on each other in order to process credit or debit card payments online. One can’t exist without the other, but they perform very different functions. Below outlines the fundamental differences between the two.

The Role of Acquiring & Issuing Banks in the Transaction Process

The differences between an acquiring bank and an issuing bank are most evident in the transaction process. The key players in each transaction are the:

• Merchant: That’s you
• Cardholder: Your customer
• Acquiring Bank: Bank acting on behalf of the merchant
• Issuing Bank: Bank acting on behalf of the customer
• Credit Card Network: Visa, Mastercard, etc.

Below outlines the transaction process in order to highlight each of these parties’ specific roles:

Step 1: Request for authorization

The cardholder initiates the transaction process by using a credit or debit card to make a purchase. The merchant’s point-of-sale system or payment gateway reads the card, encrypts the information associated with the transaction, and transmits this encrypted data to the acquiring bank through the credit card network.

Step 2: Authorization response

The acquiring bank transmits the transaction data to the issuing bank for approval, again through the credit card network. Upon receiving the transaction details, the issuing bank either approves or denies the transaction on behalf of the customer.

Approved/Declined authorization response

The issuing bank may deny a transaction if the cardholder does not have sufficient funds to cover the transaction or if suspicious activity is detected. Upon transaction authorization or decline, the appropriate response code appears in the merchant’s payment software.

Step 3: Settlement

At this point, the merchant has already thanked the cardholder for their business and sent them on their way, but the transaction process isn’t complete.

For settlement, the issuing bank sends the appropriate funds to the acquiring bank through the credit card network. When the issuing bank pays the acquiring bank for the purchase, the transaction is settled.

Step 4: Chargebacks

In the event of a chargeback, the cardholder contacts the issuing bank and challenges the transaction. The issuing bank issues a conditional refund to the cardholder and accompanying reason code, which is usually numeric, for the chargeback. If applicable, the merchant may compile the required documents to challenge the chargeback.

It’s important to note that in the event of a chargeback, the issuing bank receives funds and acquiring bank remits funds, a reversal from their roles in the traditional transaction process.

International Transaction Flow for Issuing and Acquiring Banks

The flow for international transactions is the same as the process described above. However, international transactions are prone to snags due to restrictions. One such restriction is that credit card networks do not service every country, thus some may find that their cards are not widely accepted while traveling abroad. Regarding your business operations, you should confirm your payment gateway is equipped to accept international payments, especially if you plan to sell your goods online to consumers living outside the United States.

Acquirer vs. Issuer: Final Thoughts

When processing credit cards, it’s important to understand that the acquiring bank acts on behalf of the merchant and the issuing bank acts on behalf of the customer during the payment process. In doing so, these banks ensure the correct funds move to the correct accounts, protect against fraud, and mitigate the likelihood of chargebacks.