Acquiring bank

An acquiring bank (or acquirer) is the bank or financial institution that processes credit and or debit card payments for products or services for a merchant. The term acquirer indicates that the bank accepts or acquires credit card payment from the card-issuing banks within an association. The best-known (credit) card associations are Visa, MasterCard, American Express, Diners Club, Japan Credit Bureau, Attijariwafa Bank, and China UnionPay.

Merchant accounts

The acquiring bank contract with the merchant is a merchant account. The arrangement is actually a line of credit and not a bank account. Under the agreement, the acquiring bank exchanges funds with issuing banks on behalf of the merchant, and pays the merchant for the net balance of their daily payment card activity: gross sales minus reversals, interchange fees, and acquirer fees.

Interchange fees are fixed rates set by the card association, varying by the merchant's industry, as reflected in their SIC codes. Acquirer fees are an additional markup added to association Interchange fees by the acquiring bank, varying at the acquirer's discretion.

Acquirer risk

The acquiring bank accepts the risk that the merchant will remain solvent over time, and thus has an incentive to take a keen interest in the merchant's products and business practices. Crucial to maintaining an ongoing positive balance is the limiting of reversals of funds. Consumers may trigger the reversal of funds in three ways:

• A card refund is the return of funds to the consumer, voluntarily initiated by the merchant.
• A card reversal is where the merchant cancels a transaction after it has been authorized, but before settlement (as if the transaction has never taken place).
• A card charge back is a dispute between the merchant and the card holder over the validity of the transaction. The card holder requests the return of funds to the consumer through the issuing bank for a number of reasons including: goods not received, goods not as advertised or faulty or when the card holder denies all knowledge of the transaction.

Card associations consider a participating merchant to be a risk if more than 1% of payments received result in a charge back. Visa and MasterCard levy fines against acquiring banks that retain merchants with high chargeback frequency. To defray the cost of any fines received, the acquiring banks are inclined (but not required) to pass such fines on to the merchant. Costly fees are generally at the cost of the merchant.

Due to the high amount of risk acquiring banks are subject to, as well as their key position in the payment chain, the security of electronic payments is a great concern for these institutions. For this reason they have been involved in the development of electronic point-of-sale security standards, such as PCI-DSS and the emerging SPVA standards.