Credit Card Acquirer and Issuer: Differences and Roles of the two

Two significant entities make it possible for money to move from a buyer to a seller.

These are the acquiring bank and the issuing bank.

Understanding the roles and differences between these two players will help you grasp how payments work. And as an eCommerce merchant, that knowledge is vital for opening an online business.

What are Acquiring Banks?

Acquiring banks, also known as merchant banks or acquirers, are financial institutions that provide merchant account services to vendors. These services allow businesses to accept electronic payments, such as credit card and debit card transactions.

When a customer uses a credit or debit card for a purchase, acquiring banks process the transaction, verifying that the card is valid and that the customer has sufficient funds or credit available to complete the transaction. If they approve the transaction, the acquiring bank will credit the business's account for the purchase amount and debits the customer's account.

Acquiring banks typically charge a fee for their merchant services, ideally a percentage of the transaction amount and a fixed charge per transaction. In addition to processing transactions, acquiring banks may also provide other services to businesses, such as fraud protection and payment gateway services.

What are Issuing Banks?

Issuing banks, also known as card-issuing banks or issuers, are financial institutions that provide credit and debit cards to consumers.

These cards allow consumers to make electronic payments for purchases and other transactions. When a consumer uses a credit or debit card to make a purchase, the card issuer processes the transaction – verifying that the card is valid and that the consumer has sufficient credit or funds available to complete the transaction.

In addition to issuing and managing credit and debit cards, issuing banks provide other financial services to consumers, such as checking and savings accounts, loans, and investment products. They may also offer customer support, including dispute resolution and fraud protection.

Before we proceed to the next thought, a backdrop worth noting is that while acquirers represent merchants and issuers represent customers, one bank can also play both roles.

What Roles Do Acquirers and Issuers Play in a Transaction Flow?

Acquiring banks process electronic payments made by customers using credit and debit cards. And they typically charge a fee for their services. And issuing banks are responsible for managing and providing customer support related to their use of the cards.

The specific roles of these entities or entities that play both roles are as follows:

Acquiring Banks:

• Provides merchant account and maintenance services;
• Responsible for credit and debit card payments processing;
• Offers needed credit line for addressing unforeseen payment processing issues, like chargebacks;
• Facilitates transaction flow, ensuring seamless payment processes;
• Makes it possible for sellers to receive payments from card purchases;
• Responsible for receiving chargeback notices and debiting your account.

Issuing Banks:

• Offers credit card and maintenance services;
• In charge of approving or denying credit card requests;
• Approves or declines a buyer’s transaction payment;
• Transmits the transaction value to the acquiring bank after approval;
• Makes it possible for buyers to make payments for card purchases;
• Initiates chargebacks on cardholder’ behalf.

Having said all that, let’s look at these roles in more detail. You will learn how to  ensure the payment process runs seamlessly between these two entities.

Issuer vs Acquirer: Crucial Roles in a Transaction Flow

The main difference between an issuer and an acquirer is their role in a financial transaction. An issuer is an organization that creates and distributes financial instruments such as stocks, bonds, and credit cards. They are responsible for the terms and conditions of these instruments and manage their distribution to investors or cardholders. On the other hand, an acquirer is an organization that accepts and processes payment transactions on behalf of merchants.

Every credit card transaction involves several parties, including:

• the issuing bank, which manages the accounts of cardholders and verifies the validity of credit and debit cards;
• the acquiring bank, which provides merchant services to businesses and processes electronic payments made by customers;
• the payment network, which facilitates the exchange of information and funds between the various parties;
• and the card association, which sets the rules and standards for the use of credit and debit cards.

But throughout the cycle, there are two gatekeepers that ensure a seamless transaction flow: the acquirers, who are merchant-facing, and issuers, who are buyer-focused.

In the following passage, we dig deeper into their various roles and in the transaction process.  

1. Authorization

When a consumer uses a credit or debit card to make a purchase, the issuing bank receives a request to authorize the transaction. The issuer verifies that the card is valid and that the consumer has sufficient credit or funds to complete the transaction. If they approve the transaction, the issuing bank sends an authorization message to the acquirer, indicating that the consumer has sufficient credit or funds to complete the purchase.

The acquiring bank receives payment approval from the issuer. And credits the business's account for the purchase amount and debits the customer's account.

2. Clearing and Settlement

Clearing and settlement refer to transferring funds from the customer's account to the business's account after a transaction has been approved.

The acquiring bank facilitates funds transfer from the customer's account to the business's account.

After the acquirer has remitted the funds to the business's account, the issuing bank reconciles the transaction and updates the customer's account to reflect the purchase.

The issuing bank may also be responsible for communicating with the customer about the transaction and providing any necessary customer support. It's important to note that the payment clearing and settlement process may involve additional steps and parties, such as the payment network and the card association.

3. Chargeback Mediation

A chargeback is when a consumer disputes a transaction and requests a refund from the business. The issuing bank reverses the transaction and credits the consumer's account for the purchase amount, while the acquiring bank debits the business's account for the same amount.

The practical steps start with the consumer initiating a chargeback. The issuing bank receives a request to reverse the transaction and credit the consumer's account for the purchase amount. They then review the chargeback request to determine whether the transaction was authorized by the consumer. If the issuing bank determines that the transaction was unauthorized, they will credit the consumer's account with the transaction bill.

The acquiring bank on their side receives a request to debit the business's account for the purchase amount.

The acquiring bank is responsible for reviewing the chargeback request and determining whether the merchant processed the transaction appropriately.

If the acquiring bank determines that the transaction was processed correctly, it may challenge the chargeback and attempt to recover the funds from the issuing bank.

In other instances, the acquiring bank will debit your merchant account for the same amount and send you the notice.

If you determine chargeback representment, requiring you to send a chargeback response. In that case, you’d need to construct a chargeback rebuttal letter and send it to your acquirer for review, who will, in turn, transmit the same to the issuing bank.

The issuer then evaluates your response, decides the case's outcome, and awards the transaction bill to the respective party. While that seems like a straightforward process on paper, what you should know about chargeback mediation is that it’s a long winding road with minimal chance of success for merchants. That is if you don’t have added benefits of automation and order insight, such as Chargeflow provides.

4. Fraud Protection

Fraud protection refers to the measures financial institutions and businesses take to prevent, detect, and mitigate fraudulent activity related to credit and debit card transactions.

Acquiring banks are responsible for providing merchant services to businesses, which includes protecting them from fraudulent activity. They may also offer fraud protection services, such as monitoring for suspicious activity on the business's account and alerting the company if any unauthorized transactions are detected.

The acquiring bank often works with the business to develop and implement measures to prevent fraud, such as requiring additional authentication for certain transactions. Hence, you must figure out what fraud protection services your acquirer provides.

Issuing banks, on their side, are responsible for managing cardholders' accounts and protecting them from fraudulent activity.

The issuing bank may offer fraud protection services, such as monitoring for suspicious activity on the cardholder's account and alerting the cardholder if any unauthorized transactions are detected. They may also work with the cardholder to develop and implement measures to prevent fraud, such as requiring additional authentication for specific transactions.

In a nutshell, issuing and acquiring banks offer fraud protection services against unauthorized transactions.