What is a merchant acquirer?

Tilly Michell5 minutes
What is a merchant acquirer?
In this article

Merchant acquirers, sometimes known as acquiring banks or simply as acquirers, are one of several key players that enable merchants to collect card payments from customers. In this article, we'll explain the role that acquirers take in facilitating card payments and demonstrate how acquirers work in tandem with other parties, such as payment processors, card networks and issuing banks.

By understanding the systems that underpin payment processing, merchants can improve payment acceptance rates, minimise chargebacks, protect against card fraud, and streamline operations. 

What do merchant acquirers do?

A merchant acquirer is a financial institution or payment service provider that is licensed by card schemes (such as Visa and Mastercard) to authorise credit and debit card transactions for merchants. The acquirer establishes and maintains the merchant’s account where funds are settled, and takes on the risks of card fraud, disputes and chargebacks. This contributes to a seamless and reliable payment experience for both merchants and customers.

Merchant acquirer vs payment processor

The terms “merchant acquirer” and “payment processor” can easily be confused, as they work in tandem and some companies combine both services in one package. However, they are actually different entities within the payment processing ecosystem.

A merchant acquirer facilitates the authorisation of card payments and the transfer of funds from the card issuing bank (that’s the customer’s bank) to the merchant’s account. Payment processors handle the authorisation and transfer of transaction data, ensuring that payment information is securely transmitted and verified.

In some cases, financial service providers, such as Airwallex, can be both an acquirer and a payment processor, which means that merchants don’t need to set up a separate merchant account and payment gateway. This streamlines and simplifies the process for merchants.

What is the role of acquirers in card transactions?

To answer that question, let’s look at the steps that take place when a card payment happens.

  1. The first step happens when a customer makes a purchase using a credit or debit card at either a physical point of sale (POS) terminal or an online checkout. The payment gateway or POS terminal captures the transaction details and sends them to the payment processor. 

  2. The payment processor transmits the transaction details to the acquirer.

  3. The acquirer sends the transaction data to the card network.

  4. The card network relays the transaction information to the issuing bank (this is the bank or financial institution that issued the customer with their credit or debit card).

  5. The issuing bank verifies the card details and checks whether the customer has funds available in their account. Based on this information, the issuing bank will either approve or decline the transaction. 

  6. This response is then sent from the issuing bank back through the card network to the acquirer and payment processor. 

  7. If the transaction is approved, the issuing bank transfers the funds to the acquirer.

  8. The acquirer deposits the funds into the merchant’s account.

  9. The payment processor ensures that all transaction data is recorded and shared with all parties. 

Throughout the process, various security measures are in place to protect sensitive information and prevent unauthorised transactions. These include encryption, tokenization, and fraud detection mechanisms.

How merchant acquirers handle chargebacks and refunds

Chargebacks are disputes initiated by customers. They occur for various reasons: for example, customers are dissatisfied with the product, the product never arrived, their card was stolen and used without authorisation or they are simply trying to scam the company.

Chargebacks protect consumers from fraud, error and dissatisfactory services. They allow the customer’s issuing bank to reverse a transaction and recover funds after a purchase has been made with a credit or debit card.

During a chargeback dispute, a merchant acquirer acts as a mediator between the merchant and the payment network, facilitating communication and representing the merchant's interests. In the case of refunds, the acquirer helps process and document the refund. Managing this effectively ensures that good relationships are maintained with customers, and that potential penalties or financial losses are kept to a minimum.

If the merchant has become insolvent in between the customer buying the item and requesting a chargeback, the acquirer is responsible for covering the cost. That is why acquiring banks need a lot of information before taking on a merchant customer. They need to make a well-informed decision about offering their services to the company.

How merchants can reduce chargebacks and protect against card fraud 

Pre-chargeback programs

Unfortunately, chargebacks are expensive for merchants. Even if a merchant wins a payment dispute (which is rare) they will incur a fee. Pre-chargeback programs are designed to help merchants resolve disputes and fraudulent payments before they become chargebacks, typically by automatically refunding disputed transactions at a much lower cost than a traditional chargeback. Pre-chargeback programs include Visa Rapid Dispute Resolution (RDR) and Mastercard Collaboration.

3D Secure

3D Secure (3DS) requires customers to complete an additional verification step when paying online with their card. This will usually mean redirecting customers to an authentication page on their bank’s website. International regulations, including the revised Payment Services Directive (PSD2) in Europe and similar laws in the UK, Australia and India, may require merchants to trigger 3DS for card payments. 3DS is an effective way of minimising card fraud. 

Network tokenization

Network tokenization is where payment networks, such as Visa and Mastercard, replace customers’ primary account number (PAN) with a unique EMV® payment token. Network tokenization helps merchants eliminate the risks associated with handling sensitive cardholder data and can improve card authorisation rates by up to 5% according to Visa.

How to choose the right merchant acquirer

There are many merchant acquirers that offer the same core services, however businesses that are looking to grow beyond their domestic market should prioritise one thing: global coverage. 

Your merchant acquirer must have the necessary licences and infrastructure to support your business’ growth in multiple regions, facilitating pay-ins and payouts in each market you wish to expand to. It should also help you intelligently manage foreign-exchange risk whilst eliminating the manual processes that inhibit your ability to scale.

Airwallex provides a powerful global solution

Airwallex is an ideal choice for merchants that sell globally. Our combined package of merchant acquiring, payment processing, foreign exchange (FX), and transfer services enables merchants to manage end-to-end money movement on a global scale.  

  • Airwallex holds 60+ financial licences around the world, enabling global payment acceptance.

  • Customer payments can be settled by merchants in multiple currencies, meaning merchants can avoid costly currency conversions and save as much as 2.5% per sale.

  • Airwallex offers interbank currency exchange rates and a range of FX solutions that can help merchants hedge against foreign exchage risk. 

  • Airwallex supports payouts to over 150 countries and regions through high-speed local payment networks. 

  • Airwallex helps businesses minimise fraud and chargebacks with 3D Secure and pre-chargeback programs including Visa Rapid Dispute Resolution (RDR) and Mastercard Collaboration.

To find out more sign up to Airwallex today. 

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Tilly Michell
Content Marketing Manager

Tilly manages the content strategy for Airwallex. She specialises in content that supports businesses in their growth trajectory.

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