Acquiring Vs. Issuing Banks: What Are the Differences?

Acquiring vs. Issuing Banks: What are the differences? What is each one's role  when processing a payment? How does the entire online transaction process work? These are the questions that will be answered in this article.

Acquiring Bank and Issuing Bank overview

How does your hard-earned money get to you? On the surface, the entire online payment process seems pretty straight forward: your customer falls in love with one of your products, places it in the shopping cart, proceeds to checkout, pays with a credit card and boom! The money is available in your account right away.

Behind every online payment, however, there are a few key players that work hard to make the transaction happen. Most notably, the acquiring bank and the issuing bank are key actors in online payment processing.

All about Acquiring Bank

What is an Acquiring Bank?

As e-commerce , before you start accepting online payments on your website, you must sign an agreement with your acquirer. Without this document, you will not be able to receive money after a transaction is completed.

There are three parties involved in every credit or debit card transaction: the seller, the customer and, sitting in between them,  the acquiring bank. An acquiring bank (sometimes referred to as “acquirer” or “credit card bank”) is an institution that has the Cards Schemes authorization to process a transaction so by signing a contract with the acquirer, a merchant can process credit and debit card transactions.

Acquirer’s role in payment processing

You can think of an Acquirer as a go-between for all debit and credit card transactions. Acquirers manage communication between credit associations and businesses.

As a key player in the payment process, an acquiring bank also ensures transaction security. On your behalf, it will handle the transaction process using the most up-to-date security systems and constantly evolving technology.

Because all online transactions come with a risk of fraud and sensitive information breach, every acquiring bank follows very strict guidelines laid out by the Payment Card Industry Data Security Standard (PCI DSS).

In the unlikely event of fraud or data breach, the acquiring bank will take responsibility for the compromised transactions.

All about Issuing Bank

What is an issuing bank?

An issuing bank (also known as issuer) is another key player in the payment process.

In the simplest terms, an issuing bank is a financial institution that provides credit and debit cards to customers on behalf of big card networks like Visa, MasterCard, Discover, and American Express. Worldwide, there are more than 100,000 issuers who provide credit and debit cards to their customers.

When you make a payment with a card, the funds are transferred from the issuer bank to the acquirer.

What’s the role of an issuing bank?

In any given online transaction, the issuing bank plays the role of a middle-man between the consumer and the card network.

Despite a common misconception that card networks like Visa and Mastercard issue debit and credit cards, it’s the banks and credit unions who actually issue the card on behalf of the credit card networks.

Because of the risk associated with issuing cards, the issuing bank (not the card networks) accept the liabilities and guarantee payment in case of loss or damage.

If a cardholder is not able to pay off his or her debts, then it will be written off by the issuing bank. The issuing banks become responsible for recouping the costs.

In the transaction process, the issuer is responsible for customer authentication and for making sure that the cardholder has enough funds to cover the transaction.

The issuing bank is also in charge of approving and denying credit card applications, collecting payments from the cardholders and providing customer support.

How does the transaction process work?

Depending on the country where the transaction will be made the payment flow may be a little different, but will always have the participation of an Acquirer and Issuer bank. In Latin America, for example, is no different, each country has its own specificity.

Here is how the entire transaction process happens in Brazil and Mexico from the perspective of the Acquiring and Issuing Bank.

Transaction flow in Brazil

First, an acquirer receives the payment request from the merchant
Step 1

First, an acquirer receives the payment request from the merchant.

The acquirer sends the payment request to the card brand, who will in turn forward it to the issuing bank for approval
Step 2

The acquirer sends the payment request to the card brand, who will in turn forward it to the issuing bank for approval.

The issuing bank makes a risk analysis, checks if the customer has enough funds to pay for the transaction and if there are any temporary holds that will be released any time soon
Step 3

The issuing bank makes a risk analysis, checks if the customer has enough funds to pay for the transaction and if there are any temporary holds that will be released any time soon.

If everything is OK on the issuing bank’s side, it sends an approval code back through the payment chain
Step 4

If everything is OK on the issuing bank’s side, it sends an approval code back through the payment chain.

If the transaction is approved, the money will be deposited into the merchant's account
Step 5

If the transaction is approved, the money will be deposited into the merchant's account.

If the customer needs to dispute a charge or report a fraud, it is the issuer who decides whether to proceed with a refund or not
Step 6

If the customer needs to dispute a charge or report a fraud, it is the issuer who decides whether to proceed with a refund or not.

Transaction flow in Mexico

To process any credit card transaction, the system needs to send an approval request from the merchant’s terminal through the card network. This approval request travels first to the acquirer
Step 1

To process any credit card transaction, the system needs to send an approval request from the merchant’s terminal through the card network. This approval request travels first to the acquirer.

After being approved by the acquirer the approval request passes through a Switch. The Switch is responsible to send the approval request directly to the issuing bank
Step 2

After being approved by the acquirer the approval request passes through a Switch. The Switch is responsible to send the approval request directly to the issuing bank.

If everything is OK on the issuing bank’s side, the bank then sends an approval code back to the Switch
Step 3

If everything is OK on the issuing bank’s side, the bank then sends an approval code back to the Switch.

The Switch then passes this approval code to the acquirer, that passes the approval code on to the merchant
Step 4

The Switch then passes this approval code to the acquirer, that passes the approval code on to the merchant.

If the customer needs to dispute a charge or report a fraud, the customer reports the case to the issuer and it starts a process with the acquirer and the merchant, after a review the case is solved according to local payments regulation
Step 5

If the customer needs to dispute a charge or report a fraud, the customer reports the case to the issuer and it starts a process with the acquirer and the merchant, after a review the case is solved according to local payments regulation.

The main points of interaction

If you’re in a business that involves card transactions, educating yourself the entire payment process is very important. There are different players involved in a credit card transaction process and without them, the process can't be conducted. 

 

  • The Card Holder - your customer
    The Card Holder

    Your customer

  • The Merchant - you
    The Merchant

    You

  • The Issuer - financial institution that issued a credit or debit card on the Credit Card Network's behalf
    The Issuer

    Financial institution that issued a credit or debit card on the Credit Card Network's behalf

  • The Acquirer - an institution that has the Cards Schemes authorization to process a transaction
    The Acquirer

    An institution that has the Cards Schemes authorization to process a transaction

To facilitate the transaction process it is possible to involve another player, the Payment Processor that already has connections with acquiring and issuing banks besides of knowing the market regulatory environment, this way you can make card transactions without worries.