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what is a merchant acquirer

Saturday, December 05, 2015

Removing some of the confusion for your business

As a small business, it can be confusing to have to learn all of the vocabulary associated with running your business. This vocabulary often includes payment processing jargon. In the course of doing business, you may come across the term “merchant acquirer.” In this article, we’ll focus on what a merchant acquirer is, how it factors into the payments ecosystem, and the difference between an acquirer and a payment processor. To start, let’s define a merchant acquirer.

What is a merchant acquirer?

A merchant acquirer, also known as an acquiring bank, is a financial institution or a bank that processes credit and debit card payments for businesses of all sizes – including small businesses like yours. A merchant acquirer is the entity that holds your company’s merchant account. These acquirers have a relationship with the credit card schemes or card networks like Visa, Mastercard, Discover and American Express. When they receive payments, they aggregate and send them to the card issuers or issuing bank through the interchange process. Then, the issuing bank credits the acquiring bank to fund a company’s merchant account. Think of an acquiring bank as a mediator or middle man who works to sort funds between the card networks, the issuing bank and the merchant. All of that work results in a completed transaction and money in the merchant’s bank account. In addition, a merchant acquirer can also step in as needed to help fight any chargebacks or refunds merchants may incur.

Let’s see how the process works with a sample credit card transaction:

  1. A cardholder makes a purchase at your business with a credit card.
  2. The card information is passed from the credit card terminal through the payment processor infrastructure to the merchant acquiring bank.
  3. The acquirer contacts the correct card association who then contacts the card issuing bank.
  4. The issuing bank authenticates the transaction by ensuring fund availability and security checks.
  5. The approval then gets sent back through the credit card network to the acquiring bank.
  6. The acquiring bank then authorizes the transaction and settles funds in the merchant account.

Because the acquirer takes responsibility for all of the transaction details, they are also financially responsible for that activity. And, because they access the interchange network, they also have to follow any relevant laws, regulations, and card brand rules. In addition, they perform underwriting and ongoing due diligence to help ensure their merchants are following all of the same guidelines. Often, it can be confusing to know the difference between a merchant acquirer and a payment processor (or payment service provider). Let’s talk about payment processors before contrasting the two in a later section.

What is a payment processor?

As the name suggests, a payment processor is an entity that processes transactions and has direct access to the electronic payment systems. These companies have the capability to authorize and carry out transactions on behalf of the merchant acquirer. When a merchant hires a payment processor, the payment processor helps the merchant accept credit card payments and debit card transactions. While payment processors obtain and process these credit card or debit card transactions, they do not have the same risk as an acquiring bank. That’s because a payment processor does not take on the financial responsibility for these transactions, the acquiring bank does.

Think of it like this: payment processors handle all of the technical aspects of merchant services. From connecting the payment terminals for in-person transactions to setting up payment gateways that process online payments from ecommerce websites, payment processors have the infrastructure to help your business accept payments. They are also responsible for ensuring that your company is compliant with the Payment Card Industry Data Security Standard (PCI DSS). This is a set of rules and regulations from the card associations to help ensure secure transactions.

Depending on the payment processor, they may have their own merchant account at an acquiring bank, meaning your business will have access to their merchant account. When your business uses their services, your funds make up a small part of the payment processor’s merchant account. Put a different way, your business is a submerchant of the larger merchant entity – your payment processor. Now, let’s look at the difference between the two entities.

What’s the difference between a merchant acquirer and a payment processor?

Is your head spinning yet? The difference between these two entities can be confusing, but hopefully you’re gaining a better grasp of how each works. Let’s further break down the subtleties between the two.

First, acquiring banks are banks. They hold money in various accounts, including merchant accounts. Merchant accounts can be in the name of one company, or in the name of a third-party payment processor who aggregates many sub-accounts into one merchant account.

In contrast, payment processors are technology companies. They have the infrastructure and technical expertise to authorize transactions and move them throughout the payment process on behalf of the acquirer.

Here’s where things can get a little muddy. Sometimes, acquirers also offer payment processing services to their clients. So instead of utilizing a payment processor, some businesses would work directly with the acquiring banks. These acquirers will sometimes have the capability to process payments for those businesses who have merchant accounts with the said acquirer.

As you can see, the payments industry can be complex. And in this article, we’ve outlined the merchant acquirer role in the payments process as well as how it differs from a payment processor’s role. After reading this article, you should have a better understanding of how these two entities work together in the payment processing cycle.

Ready to work with a payment processor who can help you keep your business moving forward?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.