Acquirer vs. Issuer: Understanding Payment Processing Basics

September 23, 2016/ David Lampe /

What are Acquiring and Issuing Banks? How Do They Impact Payment Processing?

All eCommerce transactions involve two different banks—one representing the cardholder, known as the issuing bank, and one representing the merchant, called the acquiring bank. What roles and responsibilities to these two entities play over the course of a transaction?

Processing Payments: From Cardholder to Acquirer

There are a number of different parties involved in a basic eCommerce transaction. The process is surprisingly complex, despite the fact that it takes only 2-3 seconds on average:

1. Cardholder: Makes a request for a purchase from the merchant, enters and authorizes cardholder information to initiate the transaction
2. Payment Gateway: Forwards transaction information directly from cardholder’s web browser to payment processor
3. Processor: Serves as a facilitator on behalf of the acquirer, forwards transaction information from the payment gateway to the card network
4. Card Network: Routes the transaction information to the correct issuing bank in order to receive the bank’s authorization
5. Issuer: Receives and verifies the transaction information; if the credit or debit is available, the issuer sends an authorization code for the transaction back to the card network
6. Card Network: Receives the authorization approval from the issuing bank, then forwards the authorization to the processor
7. Processor: Receives the issuer’s authorization approval from the card network, then forwards that information to the payment gateway
8. Payment Gateway: Receives the issuer’s authorization approval from the processor, forwards it to the merchant to complete the transaction
9. Merchant: Receives the authorization, fulfills the order, and batches the transaction information along with the rest of the day’s sales
10. Acquirer: Receives the batched transactions at the end of the day, then deposits an amount into the merchant’s account equal to the total of the batch, minus applicable fees

The Detailed Roles of Acquirers and Issuers

This is a rudimentary overview of the two different entities, and what function each of them serve in the course of a transaction:

Acquiring Bank

The primary purpose of an acquiring bank (also known as a merchant acquirer, or simply as an acquirer) is to facilitate payment card transactions on behalf of merchants.

In order to accept credit and debit card transactions, a merchant will need to contract with an acquirer to receive funds from the cardholder’s issuing bank.

The only alternate option would be to process payments through a wallet, like PayPal, Apple Pay, or Android Pay.

As part of the payment processing agreement, the acquirer essentially extends a line of credit to the merchant until the chargeback time limit has expired. As such, the merchant bears certain responsibilities.

The acquirer will typically hold a portion of the merchant’s funds in a merchant account reserve—a separate account held by the acquirer as a kind of security deposit. This way, acquirers insulate themselves against loss in the event that a merchant experiences excessive chargebacks.

Issuing Bank

The primary role of an issuing bank (also known simply as an issuer) is to provide payment cards to consumers on behalf of the card networks. This financial institution acts as a liaison and facilitates the repayment of transactions to merchants.

Most issuers supply cards branded by Visa or MasterCard. However, American Express and Discover are both card network and issuer, meaning they supply their own branded cards directly to consumers.

Some financial institutions, such as Bank of America, represent both merchants and cardholders, and can therefore serve as both an issuer and an acquirer at the same time.

Each Bank Plays a Role in the Case of Chargebacks

When a cardholder requests a chargeback, the issuing bank will forcibly reverse the transaction in question, withdrawing the money from the acquirer and returning it to the cardholder.

The merchant can choose to dispute the chargeback through a process known as representment. In this case, the acquirer will gather compelling evidence on the merchant’s behalf to prove the validity of the original transaction.

The issuer will then examine the evidence and provide an outcome, siding on behalf of either the merchant or the cardholder.

Want to Know More?

Payment processing nomenclature is often difficult for merchants to understand. If you’d like additional information about processing payments in the online environment, contact the Payment Dispute Standards & Compliance Council. We provide expert training materials, specifically designed to help eCommerce merchants optimize success.

Last Update: September 26, 2016