Acquiring bank

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

Merchant accounts

An acquiring bank enters into a contract with a merchant and offers it a merchant account. The arrangement provides the merchant with a line of credit. Under the agreement, the acquiring bank exchanges funds with issuing banks on behalf of the merchant, and pays the merchant for its daily payment-card activity's net balance—that is, 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. 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. The main source of risk to the acquiring bank is fund reversals. Consumers can 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 occurs.
• A card chargeback occurs in a dispute between the merchant and the card-holder over the validity of the transaction. The card-holder may request the return of funds through the issuing bank for various reasons, including that the goods were not received or were faulty, or that the card-holder lacks knowledge of the transaction.

Card associations consider a participating merchant to be a risk if more than 1% of payments received result in a chargeback. 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.