What Is Merchant Acquiring? The Ultimate Guide

Welcome to the exciting world of payments! In this fascinating industry, acquiring is a key aspect. But what exactly is merchant acquiring? And how does it differ from an issuing bank or a payment processor? Read on to learn more about this important part of the payments ecosystem.

A customer's transaction is just a tap away with their card. But what they don't see is the complex web of financial institutions that make it all possible. The merchant acquiring bank is the backbone of it all. Merchant acquiring banks are financial institutions that provide merchants with the ability to accept card payments (credit and debit cards).

Note: An acquiring bank can also be referred to as ‘merchant acquiring bank’ or the ‘merchant acquirer’. They are typically referred to as "acquirers".

The Classical Payment Model: Step By Step

The classical payment model is a process that takes place each time a customer makes a purchase with their debit or credit card. The steps involved in this process are: Authorization, Clearing, and Settlement. Let's take a closer look at each of these steps: 

1. Authorization: When the customer's card is used (either online or physically in the store), the cardholder's bank is contacted to approve the transaction. The cardholder's bank will then either approve or decline it based on a number of fraud rules and a balance check on the cardholder's account to ensure there are sufficient funds.

2. Clearing:  The cardholder’s bank exchanges daily payment information with the merchant's bank via the Card Scheme, resulting in the generation of a settlement file which is used for the following stage.

3. Settlement: The settlement step is when the cardholder's bank pays the merchant's bank for the transaction, who then settles the funds to the merchant beneficiary.

The best way to become familiar with the process and the players involved is to take a look at the detailed explanation below. When you are a merchant, you will often work with a payment service provider (PSP), but the actual funds will come from your acquiring bank.

The standard practice in the card acquiring industry is for the consumer (the cardholder) to authenticate the purchase at checkout by entering their credit or debit card information (card number, cardholder name, expiration date, CVV number). For online sales, payment security can be enhanced with the use of 3DS (Visa Secure, Mastercard SecureCode, Amex SafeKey) which is a form of Strong Customer Authentication (“SCA”). 

The card scheme then routes the payment details to the correct issuing bank for authorization. The process of authorization includes confirming with the issuing bank that the card is valid and there are sufficient funds in the account to complete the transaction. The card issuer (or issuing bank) then verifies the customer's identity and approves or declines the transaction. 

If approved by the issuing bank, the transaction is authorised and will be initially ‘captured’ by the merchant, meaning they submit the payment for processing. Once captured, the payment will be cleared and subsequently settled. Settlement takes place typically 2 - 5 days afterwards where funds are transferred from the issuing bank, via the card network, to the acquiring bank, before being credited to the merchant bank account. 

The time it takes for a merchant to access their funds can vary depending on the merchant acquirer agreements, the currencies being exchanged (payment currency, settlement currency), the countries of the acquiring and issuing banks, delivery times and type of products and service. 

Note: In the classical online payment model, the processor and acquirer are usually two different companies. The processor handles the technical aspects of the payment and then sends the transaction details to the acquirer.

PSP, Acquirer, Issuer, Processor: What’s The Difference? 

Let’s take a look at the terms that have caused many heads to be scratched. Below we explain what a PSP is, and outline the differences between an acquiring bank versus an issuing bank and a merchant acquirer versus a payment processor in the payment cycle. Let us guide you through the jungle of terminology. 

Payment Service Provider (PSP)

A PSP is an entity that provides card services and access to alternative payment methods to businesses by having relationships and contractual agreements with several merchant acquirers and alternative payment method providers. Hence, rather than a merchant needing to seek out multiple partners for different acceptance methods, the PSP does this on their behalf.

The PSP functions as the intermediary, meaning that it manages the connections between merchants and acquirers, but typically is never involved as an actual payments processor. The PSP will provide the technical integration for the merchant, while the acquirer is responsible for processing the payments and managing the associated risks.

One key role of the PSP is to route your payments to different acquirers to optimize for acceptance rates, price, and risk.

Acquiring bank vs. issuing bank

In simple terms, the cardholder’s bank is the issuing bank and the merchant's bank is the acquiring bank.

The issuing bank is the entity responsible for issuing cards to cardholders. They are incentivized to do so by receiving a small percentage (interchange fee) of each transaction. In addition to providing the cards, they authorise transactions after checking for any fraudulent behaviour and whether the balance is sufficient to cover for the purchase.

The acquiring bank is responsible for settling funds to the merchant. They also take on the risk associated with any merchant fraud or failure to deliver on goods or services - hence, should the merchant go bankrupt (or vanish into thin air) and is unable to fulfil any outstanding orders, the acquiring bank is responsible for refunding the cardholders. For this reason, opening a merchant account can sometimes be challenging for new businesses without a trading history. 

Merchant acquirer vs. payment processor

Payment processors are important for facilitating the transaction on behalf of the acquirers and issuers. They act as the communication layer between the banks and the card schemes, sending and receiving the necessary information to authorise, clear and settle a transaction. Note: the payment processor has a strictly technical function, meaning they are not involved in the money flow. However, people often use the term “payment processor” to refer to counterparties involved in the settlement of funds to the merchant, helping to add to the confusion.

Payment processors are typically integrated directly with acquirers to accept transactions, who in turn provide the financial institution and card scheme licensing to process the transaction.

Acquirers play an important role in the payment process by receiving funds from the card networks and ensuring that merchants receive the amounts due for their customer purchases. Acquirers are often, but not always, part of the technical transaction flow, and regardless of their participation in the technical aspect they play a vital role in making sure that payments are processed smoothly and efficiently. 

Now that we have a better understanding of what merchant acquiring banks are, let's take a closer look at how they serve their merchants.

The Role of Merchant Acquirers: More Than Just Credit and Debit Card Processing

The role of the merchant acquirer is not limited to accepting and processing credit and debit card payments. They also provide a number of value-added services that can help merchants run their businesses more efficiently. Understanding the role of acquirers can help you make educated decisions about your payment processing options.

Some of the critical roles fulfilled by merchant acquiring banks are as follows:

1. Opening merchant accounts: Ensures the merchant's identity is verified and confirmed that they are indeed selling what they claim to be selling.
   
   
2. Settlement. Works with the card issuing bank to make sure that the merchant gets paid for the transaction.
   
   
3. Chargebacks. In the event that a customer disputes a charge, the acquirer will work with both the merchant and card issuer to try to resolve the issue.  
   
   
4. Fraud prevention. Using transaction monitoring tools to identify and prevent fraudulent activity. Acquirers take on the risk of fraud and chargebacks, so they have a vested interest in preventing it. 
   
   
5. Analytics. Provides real-time insights into your sales and customer health metrics, so you always stay on top of your game and remain competitive. This allows you to make informed decisions about your business in order to keep it running smoothly.
   
   
6. Customer support. Provides customer support for both merchants and cardholders in case there are issues with any card transactions.  

Now that you understand that the role of the merchant acquirer is not limited to accepting and processing credit and debit card payments, it is beneficial to have a detailed understanding of the associated costs and fees.

Merchant acquiring: deciphering cost and fees

Pricing models can be very confusing, especially when it comes to card processing. There are two main pricing concepts: blended and Interchange Plus (‘Intercharge+’).

Blended pricing is more common for small merchants and is an ‘all-in’ rate. With blended pricing, the merchant does not see the granularity of each transaction and hence the merchant profit can increase materially depending on the type and location of the customer's card.

For larger or more established merchants, Interchange+ pricing is more widely used as it is more transparent and allows for more granularity around processing fees. Interchange+ pricing is one model often used by merchant acquirers to help determine the cost per transaction for merchants. This fee consists of two components: the interchange fee set by the card network, and the markup set by the card processor itself.

An example of how this works is as follows: Visa* interchange fees are 1.51% + $0.10 for standard payments. Let’s say a merchant acquirer charges a flat markup of 0.25% on top of these interchange fees. If a merchant were to process a transaction for $100 using Visa, they would be charged 1.51% + $0.10 + 0.25% = $2.01 in fees.

* This is only an example, and actual pricing will vary depending on the card type, transaction amount, MCC market, and merchant acquirer. 

When it comes to Interchange Plus Plus (Interchange++) pricing, there is not a world of difference between the two. The key distinction lies in the fact that with Interchange++, the acquirer also passes on the scheme fees from the card networks. This means that there are three components to this type of pricing: the interchange, the first plus (the acquirer's fee), and the second plus (the card scheme fee).

Now that you know about the two main pricing models, let's take a look at the other fees that can vary depending on the acquirer. Some of the fees that you may see on your statement can include:

Some of these fees can be negotiable. Merchants who take the time to review and understand their monthly statements might be able to effectively negotiate different pricing with their acquirers.

What About Security?

With the recent increase in data breaches, it's important that all parties involved in the credit and debit card payment process follow security standards for fraud prevention. 

The Payment Card Industry Security Standard (PCI DSS) has guidelines to keep your customers’ information safe. If a company processes credit or debit cards, it should be fully compliant with the PCI standard. This ensures that your customer's information is secure when they make a purchase from your online store. 

Fraud is a real threat to businesses, but it doesn't have to be. Choosing the right type of PSP and acquirer can help you to significantly fend off fraudsters. We recommend using PSPs that offer anti-fraud solutions and fraud prevention tools to help prevent cyberattacks and fraudulent activity.

Key takeaways

There you have it — everything you need to know about merchant acquiring. We hope this guide has given you a better understanding of what acquiring is, how it works, and what to look for when choosing a merchant acquirer for your business. Don't forget to check out this list of the top merchant acquirers to help you find the best fit for your business needs.