What is an Acquirer or Merchant Bank?

An Acquiring Bank, or acquirer, is a bank or financial institution that processes credit or debit card payments on behalf of a merchant. Usually these banks play a back-end role and only facilitate the exchange of funds between card-issuing banks and merchants. The term acquirer indicates that the bank accepts or acquires credit card payments from the card-issuing banks within an association. Some of the better-known credit card associations are Visa, MasterCard, Discover, and American Express.

An Acquiring Bank enters into a contract with a merchant and offers it a merchant account with a line of credit. Under the agreement, the acquiring bank exchanges funds with issuing banks on behalf of the merchant, and pays the merchant for its daily payment-card activity’s net balance--that is, gross sales minus reversals, interchange fees, and acquirer fees. Interchange fees are fixed rates set by the card association, and vary depending on the merchant’s industry. Acquirer fees are an additional markup added to association interchange fees by the acquiring bank, varying at the acquirer’s discretion.

Acquiring Banks also assume much of the risk in the credit card processing network because merchant accounts are a line of credit and not a holding account like a checking or savings account. If a merchant becomes insolvent, and suffers fraud or chargebacks, the acquiring bank suffers the loss if the funds are not recovered either from the merchant or the customer. Most Acquiring Banks, therefore, conduct thorough credit checks on anyone seeking a Merchant Account. Card associations consider a participating merchant to be a risk if more than 1% of payments received result in a chargeback. For instance, Visa and MasterCard levy fines against Acquiring Banks that retain merchants with high chargeback frequency. To defray such costs, the Acquiring Banks often pass these fines on to the merchant. Due to the high amount of risk Acquiring Banks are subject to, as well as their key position in the payment chain, the security of electronic payments is a great concern for these institutions. For this reason they have been involved in the development of electronic point-of-sale security standards.