Trying to remember the difference between acquiring banks and issuing banks can be a bit like trying to tell apart twins.
If you are regularly coming into contact with them, it helps a lot to be able to tell the difference.
Below is our guide to understanding and appreciating the difference between an acquiring bank vs issuing bank.
What is an acquiring bank?
Acquiring banks (otherwise called acquirers and merchant banks) are financial institutions involved in managing merchant transactions made via card networks.
Acquirers also equip businesses with merchant accounts, which are essential for receiving funds from credit and debit payment card transactions.
When acquiring banks accept payments, they ensure that the funds are safely and efficiently transferred to the merchant.
Sometimes acquiring banks can process transactions themselves using in-house payment processing, but usually they work alongside a third-party payment processor.
Examples of acquiring banks
Examples of acquiring banks include Bank of America, HSBC, Barclays, and JPMorgan Chase.
What is an issuing bank?
Issuing banks (otherwise called issuers and consumer banks) are financial institutions involved in issuing credit and debit cards to customers.
Issuers offer a number of services, including hosting various types of consumer account (checking, saving, etc.) and issuing credit cards.
Their role in payment processing is to authenticate transactions. They can also choose whether to accept, restrict, or deny a customer's credit card application.
After approving a customer, the issuing bank must assess the cardholder's account. They check that it has enough funds available to complete a transaction.
Example of an issuing banks
Examples of issuing banks include Chase Bank, Wells Fargo, Bank of America (some banks are both acquiring banks and issuing banks).
Acquiring bank vs issuing bank: what do they do?
What do acquiring banks do?
An acquiring bank plays several important roles in payment processing. Here are their three main functions.
1. Provides merchant accounts
Acquiring banks provide merchant accounts, which enable businesses to receive payments from customers.
When a merchant opens an account, they submit an application to the acquiring bank. The acquiring bank will then decide whether the merchant account should be categorized as low-risk or high-risk. This will determine the account's monthly interest fees, reserve funds, and holds.
High-risk accounts will see higher associated costs. This is so the acquiring bank can protect themselves in the event the account is not managed responsibly by the merchant.
2. Processes and monitor chargebacks
A chargeback is a reversal of a transaction that has been disputed. They occur for a variety of reasons, included unauthorized card use, fraud, product problems, or delivery issues.
The acquiring bank processes both chargeback requests and the chargebacks themselves. So, they have a vested interest in reducing chargebacks through chargeback management.
They aim to reduce the number of chargebacks by placing limits on a merchant's chargeback ratio. The chargeback ratio is devised by looking at a merchant's total sales versus the number of chargebacks they receive in a given period.
If these limits are exceeded, fines or account termination may occur. The latter involves adding the merchant to a MATCH list (a blacklist used by banks, payment processors, and other financial institutions to avoid high-risk merchants).
3. Settles with a merchant account
Once the acquirer has received payment for a transaction from the issuing bank, the acquiring bank securely transfers the funds to the merchant's account. The payment transaction flow is now complete.
What do issuing banks do?
1. Authentication
During a card or online transaction, the issuing bank serves as the 'middle-man' between cardholders and card networks.
The issuer is responsible for customer authentication and checking that there are sufficient funds available in the cardholder's bank account for transaction completion.
2. Approving and denying transactions
The issuing bank is also responsible for approving and denying credit card applications, collecting payments from cardholders, and providing customer services.
Due to the many associated risks with issuing cards, the issuing bank is liable for guaranteeing payments in the case of any loss or damage.
3. Recovering costs
If an account has insufficient funds to cover their credit card transactions, they may face penalties and increased interest rates.
Their debt may even be pursued by the issuing bank, which will typically take measures to recoup costs associated with unpaid credit card debts.
4. Settling with acquiring banks
Once a transaction is authorized, the issuing bank transfers the transaction value to the acquiring bank.
Each transaction is usually sent by the issuing bank in a batch to a payment network (like Visa or Mastercard), which then directs them to the appropriate recipients.
What are the differences between acquiring banks and issuing banks?
Let's outline some key differences between acquirers and issuers.
1. Representation
An acquiring bank provides the merchant account. It retrieves customers' money from issuing banks on behalf of merchants.
An issuing bank, on the other hand, is the customer's bank. They provide the customer with the credit or debit card they use to make a card or online payment.
2. Roles
The acquiring bank facilitates payment processing and merchant services for merchants, while the issuing bank provides credit and debit cards to consumers and is responsible for authorizing and settling the cardholder's transactions. They operate on 'different sides' of the payment process.
3. Risks
An acquiring bank takes on some financial risk when providing credit to customers.
If a data breach occurs during the transaction flow, the acquiring bank is liable for the compromised transaction. This is why acquiring banks must stick to strict PCI-DSS protocol. This protocol must be met to ensure the safety of the customer, merchant, and the bank itself.
They may also be liable for reimbursing any outstanding refunds or chargebacks if a business fails to meet customer expectation.
Issuing banks also take on risks. This is because in the case of credit cards, they essentially provide unsecured, short-term loans to cardholders. (This is not the same in the case of prepaid and debit card transactions).
In return, they collect monthly interest fees if this loan remains unpaid. However, if the cardholder defaults, the bank then becomes liable for making back the debts.
The issuing bank mitigates this risk in evaluating whether to accept, restrict, or deny credit card applications based on the customer's credit score and worthiness.
Conclusion
Acquiring banks and issuing banks are two key financial institutions in payments processing.
The former provides bank accounts to merchants, manages associated transactions on card networks, processes and monitors chargebacks, and settles transactions.
The latter issues credit or debit cards and accounts to customers, monitors and authenticates transactions, and settles money with the acquiring bank.
The two interact: issuer banks release funds from cardholder's accounts, which the acquiring bank transfers to the merchant's account.
The main difference between the two kinds of banks is that acquiring banks represent merchants, whereas issuing banks represent customers.
This means that they assume different roles and risks in their part of the payment authorization and settlement process.
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