Credit Card Processing

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

Read Time: 5 min

graphic of a traditional bank that is an acquiring bank

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 do acquiring banks do?

When a customer makes a purchase with a credit or debit card, the acquiring bank initiates a request to authorize the payment from the cardholder’s bank. This request is communicated via a credit card network. The most popular credit card networks are Visa, Mastercard, American Express, and Discover.

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.

What do issuing banks do?

The issuing bank verifies that the cardholder has the funds to cover a transaction. If funds are available, the issuing bank approves the transaction and communicates the authorization to the acquiring bank, which completes the purchase.

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.

Acquirer

  • Represents merchants by accepting deposits to complete transactions and authorizing withdrawals to complete refunds
  • Issues a merchant account and/or business bank account

Issuer

  • Represents cardholders by authorizing withdraws to complete transactions and accepting deposits to complete refunds
  • Issues consumer credit and debit cards
  • Accepts the liability of insufficient funds

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.

a man receiving funds in the form of a bag of money from their issuing bank

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.

Acquiring Banks and Issuing Banks: FAQs

If I have questions about my merchant account, can I contact my acquirer?

You can contact your acquirer for answers to a wide range of questions about your merchant account. You can also find most of the answers you may need by logging into your online or in-app merchant account portal.

Can an issuing bank and an acquiring bank be the same bank?

Yes. The acquiring bank and issuing bank can be the same bank.

Are Mastercard and Visa issuers or acquirers?

Mastercard and Visa are neither issuers nor acquirers. They are credit card networks.

Do I have to have an acquirer?

Acquiring banks process card payments for merchants. If your business processes credit or debit card transactions, you likely need an acquirer.

How do I find the right acquirer?

The right acquirer for your business’s needs depends on a number of factors, such as:

  • How often do you process payments?
  • What types of cards do your customers most frequently use?
  • How much is your business’s average transaction amount?
  • Is your business an eCommerce operation?

You should also compare processing fees and additional charges. No acquirer perfectly fits all businesses, so take your time to find the one that works for you.

What’s the difference between a merchant acquirer and a payment processor?

A merchant acquirer is your banking partner that accepts and forwards transaction information to credit card companies for authorization, clearing, and settlement.

Meanwhile, your payment processor works behind the scenes to move money from your customer’s account to your merchant account.

Can my acquirer be a payment service provider like PayPal, Square, or Stripe?

Not really. The simplest explanation is that payment service providers, such as PayPal, Square, and Stripe, are online payment processing platforms. These platforms funnel each user’s payments through an aggregate merchant account. When you partner with a payment service provider, you do not have your own merchant account, thus you do not have an acquirer.



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