What is an acquiring bank? Companies that want to have their own payment gateways (become payment gateway providers) often do not bother to ask this question as they do not understand the payment acquirer concept and why they need to partner with an acquiring bank to achieve their goals. They witness “success stories” of other gateway providers (including Stripe or PayPal) and think that if they own or license some payment gateway software product (or payment technology) they will be able to process credit and debit cards. However, they do not realize that in order to process payment cards, they need merchant accounts, and some entity has to underwrite them.
In fact, a payment gateway is just a technical solution, allowing the merchant to convey transaction information to the bank in order to authorize payments. However, this is only one aspect of the process.
The purpose of this article is to explain the payment acquirer concept and the role of acquiring banks in the merchant services industry.
The official definition is as follows: a bank or financial institution that processes credit or debit card payments on behalf of a merchant is called an acquirer or an acquiring bank. In essence, an acquiring bank is a bank that underwrites merchant accounts. Merchant accounts are, in their turn, virtual accounts, linked to physical bank accounts. A merchant account is used to process payment cards (both debit and credit cards). Transactions processed through a merchant account are settled into to the physical bank account, associated with the respective merchant account. While a regular bank account can be opened in any bank, a merchant account has to be procured through an acquiring bank.
Risks assumed by an acquiring bank
When an acquiring bank issues a merchant account, it assumes serious risk. In a way, the process is similar to providing a loan to the new merchant or PSP.
The risks are, essentially, related to merchant fraud. A merchant can process transactions using stolen card numbers, get funded, and disappear. When cardholders start issuing chargebacks, some entity will have to assume the financial liability and reimburse respective amounts to cardholders. Acquiring bank is, in fact, the entity, that has to mitigate these risks, associated with credit card chargebacks and processing fraud. So, before an acquiring bank issues a merchant account, it verifies financial solvency and credibility of the applicant, in order to prevent potential merchant fraud and minimize chargeback risks.
Consequently, any business, that wants to own a hosted version of a payment gateway and process transactions for other merchants as a proper payment service provider, has to either partner with an existing acquirer, or become one.
Becoming an acquirer is an extremely costly process. Most likely, people and businesses, that are able to do this, would not need our advice, because their knowledge will have to far exceed the scope of this article.
Find your acquirer first
For those, who need an acquiring partnership, finding an acquiring bank becomes the most challenging task. That is why, if you want to become a payment gateway provider, you have to find the bank, that is willing to issue merchant accounts to you (a PSP) and your sub-merchants.
Keep in mind that every acquiring bank uses some payment platform that you need to connect to, in order to send transactions to this bank. So, after you find the bank, you have to request and analyze the integration specification of the payment processing platform, used by your potential acquiring partner. Only when you have this specification can you start looking for the payment gateway technology that could be used as a foundation for your business as a payment service provider.
While many people start looking for the appropriate gateway technology or payment gateway software (such as UniPay Gateway) before they find an acquiring partner, this is the wrong strategy. These people often end up in disillusionment because there is no acquiring bank that supports the MCC codes they need in the geographic region, where their business is located.
If you want to become a payment gateway provider or a PSP, you have to look for an acquiring partnership before looking for the payment gateway technology to utilize. Your choice of payment gateway technologies will heavily depend on the choice of acquiring banks.
If you want to know more about acquirers and their role in the industry, feel free to contact our experts at UniPay Gateway.