When you accept credit card payments, it’s important to understand exactly how transactions work and which financial institutions are involved. Both you and the customer have banks that act on your behalf to oversee each transaction.
On the customer’s end, it’s the issuing bank. On your end, it’s the acquiring bank that handles the technical details of the transaction. The issuing bank issues the card to the customer, while the acquiring bank manages your business merchant account.
There’s more to it than that, though, as you’ll find out in this guide. I’ll clear up any confusion you might have about the transaction process including the roles of both banks, what to do in case of chargebacks, and more.
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What Is an Acquiring Bank?
An acquiring bank processes customer payments through your merchant account. It starts the transaction with an authorization request and ensures the money arrives in your account. It’s known as an acquiring bank because it acquires the funds on your behalf.
The acquirer is a financial institution that has been licensed by local financial regulators and approved by card schemes to process transactions. With this status, the bank can charge merchants a fee in exchange for processing payments securely.
The acquiring bank partners with card brand networks, such as American Express and Visa, allowing it to process card payments. The bank gives you access to a line of credit and assumes financial responsibility for approving transactions and depositing funds.
What Is an Issuing Bank?
An issuing bank provides the customer with a credit card they can use to make payments, and handles transactions with the acquirer on their behalf. Known as an issuing bank because it issues cards, this type of bank also partners with card brand networks for payment processing.
The main role of the issuing bank is to authorize transactions a customer makes by making sure they’re legitimate. These can include making sure the customer has sufficient funds in their account, verifying account details, and ruling out fraudulent activity.
While the acquiring bank provides a line of credit to offer security to merchants, the issuing bank assumes liability for the customer’s ability to pay off any outstanding debts. The issuer takes on liability for the customer in exchange for fees.
What Are the Acquiring Bank and Issuing Bank's Roles in Payment Processing?
Both acquiring and issuing banks play key roles in the transaction process. Here’s what that process looks like:
- A customer fills out their card details to make an online purchase or swipes their card at a brick-and-mortar business.
- Your payment service provider forwards the details to your acquiring bank.
- Your acquiring bank requests authorization for the payment.
- The transaction passes through the credit card network for authorization before it’s passed on to the issuing bank.
- The issuing bank approves or denies the authorization request.
- If the request is approved, the acquiring bank then has permission to withdraw the funds from the issuing bank and deposit them into your merchant account. If it’s denied, your acquiring bank will inform you and let you know the reason.
How Transactions and Chargebacks Work
Transactions follow the above steps, starting with the acquiring bank and ending with the issuing bank. Chargebacks can occur after the settlement phase, where the acquiring bank retrieves the funds from the cardholder for the payment.
A customer may issue a chargeback when there’s a problem with the transaction that goes beyond a simple refund request.
Chargebacks are common when:
- The customer doesn’t recognize a payment on their statement
- The transaction didn’t abide by authorization procedures
- The customer received two charges for the same purchase
- The product the customer received was defective
- The customer canceled an order, returned it, but still hasn’t received a refund
The customer can dispute the settlement by contacting their issuing bank and flagging the transaction. Then, the issuing bank communicates with the acquiring bank, and the acquiring bank returns the funds to the cardholder’s account.
This isn’t a one-way process, though, as merchants have a right to respond.
A chargeback response is what happens when the merchant submits a rebuttal to the acquiring bank. The acquiring bank reviews the validity of the rebuttal, and if there’s a strong case, will credit your account and relay the information back to the issuing bank.
If the transaction reaches this stage, the issuing bank will once again review the case and either debit the cardholder account or contest it with the acquiring bank. As you might imagine, the chargeback process can be very time-consuming and become complicated over time.
As a merchant, you’d issue a chargeback response if you can prove that a customer’s claim is false. For example, if you have the information to prove the customer wasn’t charged twice, you could refute the chargeback. Another scenario for chargeback response would be if you have evidence that you issued a refund when a customer denies receiving it.
If you do face multiple chargeback requests from customers, your acquirer can increase its fees since it might perceive that you present more of a risk. That’s why you should take all the necessary precautions and do your best to prevent chargebacks.
By collecting any relevant customer data, you can effectively protect yourself from chargeback requests. That’s all that matters to acquirers and issuers - concrete evidence to prove your case.
In the case of a recurring chargeback, for example, you could produce evidence of the customer signing a cancellation policy. For standard chargebacks, you’ll want to hold onto information such as when refunds are issued, proof that the customer was aware of the refund policy in advance, or evidence of what qualifies for a refund.
The Bottom Line: What Type of Bank Do You Need?
As a merchant, an acquiring bank is essential for securely processing customer card payments. The bank will act behind the scenes on your behalf to take care of authorization requests, chargebacks, and ultimately make sure the money you’re owed ends up in your account.
When you use a payment service provider like Pay.com, you don’t have to open your own merchant account. We let you accept a variety of payment methods and take care of all your transactions for you, from start to finish. Onboarding is quick and setup is easy – all you have to do is sign up for the service and provide some basic information about your business.