Trying to understand the payments process can feel like entering a hall of mirrors.
Things are not always what they seem. Everywhere you turn, there are similar terms, confusing entities, and overlapping functions.
Understanding what a merchant acquirer and a payment processor is, and the differences between them, can help clarify things. Let's take a closer look.
What is a merchant acquirer?
A merchant acquirer (also known as an acquiring bank or acquirer) is a financial institution that processes transactions for merchants.
It enables merchants to accept credit and debit card payments and online payments by interacting with other payment parties, such as cardholders and issuing banks.
And it also manages merchants' chargebacks, disputes and cardholders' requests for information.
Usually, merchant acquirers are also merchant account providers. A merchant must have a merchant account in order to access merchant acquiring services. It is a separate account from their business banking account.
Examples of merchant acquirers
Examples of merchant acquirers include: Barclaycard Business, Lloyds Bank Cardnet, and Nuvei.
What is a payment processor?
A payment processor is a financial entity that authorizes and settles transactions between cardholders and merchants.
They act as a third-party intermediary service provider via card networks to carry out their tasks.
There are two types of payment processor.
Issuer processors
An issuer processor is a financial institution that authorizes (or declines) and manages transactions between issuing banks and card networks.
It also performs a number of other tasks as part of the payments process. These include issuing cards, maintaining a system of record for cardholder data, and communicating with clearing and settlement entities.
Acquiring processors
An acquiring processor (also known as a merchant processor) is a financial institution appointed by merchants to handle transactions for them.
This involves a number of tasks, including authorizing and settling transactions, settling daily 'batches' (a collection of transactions), handling chargebacks, and more.
Examples of payments processors
Some well-known payment processors include: WorldPay, Mastercard, Visa and Nuvei.
What are the similarities between merchant acquirers and payment processors?
1. Certification
Both merchant acquirers and payment processors must be certified by a major card network, such as Visa, Mastercard or UnionPay (in China). Without this, they cannot be a payment service provider.
2. Overlapping functions
Merchant acquirers and payment processors' roles can sometimes overlap. Some companies even function as both a merchant acquirer and a payment processor.
What are the differences between merchant acquirers and payment processors?
1. Relationship with merchant
Each merchant has a direct relationship with its merchant acquirer. The latter acts on behalf of the former for all card transactions, enabling it to accept card payments and linking it to card schemes.
Payment processors, on the other hand, only have indirect relationships each merchant. They are like middlemen acting on behalf of the transaction process itself.
Each transaction a cardholder makes at different stores will involve payment processors. The issuing processor will be the same for the cardholder, but the merchant acquirer and acquirer processor might be different.
And for merchants, the merchant acquirer will be the same for each payment, but the issuer processor might change.
What is a card scheme?
Card schemes are payment networks that enable debit or credit card transactions to happen. They transfer card transaction data between merchants and consumers.
Visa, Mastercard and American Express are three major card schemes.
2. Liability for transactions
As the merchant's bank, merchant acquirers take on liability for merchant's payments. Payment processors do not take on financial liability.
3. Role in payment process
A merchant acquirer's role in the payments process largely takes place early on in the transaction workflow. They approve transactions and maintain the merchant's account on the merchant's behalf.
By contrast, payment processors deal with 'later' stages of a transaction and actually process the payments. They don't deal directly with or on behalf of the merchant, but they do transmit payment data, authorize transactions, and charge the cardholder's account.
4. Connection to payment gateway
Payment processors connect directly to payment gateways. This gives them access to the infrastructure so they can accept payments online.
Although merchant acquirers also rely on payment gateways, their connection is not direct. The only exception to this is when the merchant acquirer is also the acquiring processor for a a transaction.
What is a payment gateway?
A payment gateway is a technology for cardholder to merchant transactions (both in-store and online). It connects the main parties involved in the payments process to each other.
It works by first sending encrypted cardholder data and transaction information to the acquirer processor.
Next, it receives authorization information back from the acquirer processor (which received it from the issuer processor) and relays it back to the merchant and cardholder.
Example of merchant acquirers and payment processors in action
At the point of sale (POS), a cardholder taps their card on the merchant's terminal to purchase their goods.
1. First payment processor: Data encrypting and initiating authorization
The acquiring processor receives the card transaction details and cardholder's information from a merchant's terminal via a payment gateway.
It then passes this information through to the issuer processor (via a payment card scheme).
2. Second payment processor: Authorizing transaction
The issuer processor receives the transaction information and checks it with the cardholder's bank or financial institution.
If the information is correct, the issuer processor sends the information back to the acquirer processor via the same card scheme.
3. First payment processor: Confirmation with cardholder and merchant
The acquiring processor sends back the confirmation of authorization to the merchant's terminal via the payment gateway. Now the cardholder and merchant know the transaction has been cleared.
4. Merchant acquirer: Accepting payment
The cardholder's bank authorizes the transaction. This information is passed back through to the merchant acquirer via the card scheme and then back to the merchant and cardholder at the POS.
A hold is placed on the cardholder's account. This is settled when the merchant acquirer requests it along with a batch of payments.
Nuvei's acquiring and processing services
Nuvei's offers an efficient and reliable payment platform with direct connectivity to major payment card schemes.
It allows seamless online, in-store, and mobile payments. And it supports over 700 alternative payment methods, including nearly 150 regular currencies and cryptocurrencies, too.
Its features include:
- Conversion-boosting checkout
- Easy shopping cart integration
- Built-in fraud protection
With direct connectivity to major payment card schemes, it allows for online, in-store, and mobile payments.
Using Nuvei, businesses can expand globally, offering a variety of local and alternative payment options, without compliance concerns.
Conclusion
Merchant acquirers (also known as an acquiring banks or acquirers) are financial institutions that allow merchants to accept payments and manage chargebacks, disputes, and cardholders' requests for information.
Payment processors are financial entities that authorize and settle transactions between cardholders and merchants and through card networks (which transfer transaction data between merchants and consumers).
There are two types of payment processors: issuer processors and acquiring processors. The former authorize and manage transactions between issuing banks and card networks. The latter are responsible for managing the process of settling the funds. They are like two sides of the same coin.
These two types of processors have some similarities. However, they differ in their relationships with merchants, liability for transactions, roles in the payment process, and connection to payment gateways.
Card schemes, like Visa, Mastercard, and American Express, are payment networks for card transactions. They transfer transaction data between merchants and consumers.
In a payment process, the acquiring processor encrypts and initiates authorization, while the issuer processor authorizes the transaction and checks with the cardholder's bank.
The acquiring processor confirms authorization, and the merchant acquirer accepts payment, settling it with a batch of payments.
Hopefully this will have clarified the roles and the terminology in the word of payment processors and digital payments, so it is less like a hall of mirrors from now on.
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