Recently we have been receiving questions like: “Who runs the risk of underwriting: the gateway, the payment processor, or the acquirer?” or “Why do some gateways ask you about existing acquiring partner or merchant bank relationships and others do not?” In order to find answers to such questions, we should clearly understand, “who is who” in payment processing industry, how one type of entities differs from another, and what types of relationships they have with each other. So we have decided to write an article, in which we can clearly outline the role of each entity and explain, how acquiring banks, payment processors, and payment gateway providers are “related to each other”.
Acquirer and payment processor
In some cases, relations between acquirers and processors are “one-to-one” (as in the case of Vantiv, for example). Although, Vantiv’s acquirer is Fifth Third Bank, most people consider Vantiv as both processor and acquirer (things will change now with Vantiv’s acquisition by WorldPay). Other processors, such as First Data and TSYS, have established partnerships with multiple acquiring banks.
A processor is, in a way, a technical arm of an acquirer. A processor provides a technology, allowing to authorize transactions and, potentially, receive transaction settlement information. In other words, processors handle the technical side of the merchant services (including movement of funds). However, processors do not assume financial liability for the process. This liability and risks lie on acquiring banks (as we mentioned in the article on the importance of acquiring bank partnerships). Risk departments of acquiring banks decide, whether merchant applicants should be underwritten or not (whether merchant accounts should be issued or not). Beside that, acquirers handle physical remittance of funds to merchants (through bank accounts associated with these merchants). I.e., acquiring banks are the point-of-entry into the banking system for the processors. That is why it is the acquirers that assume financial liability.
For example, if a merchant authorizes a transaction through a processor, the funds for this transaction need to be remitted back to the merchant. In order to be able to fund the merchant the respective amount (into the merchant’s bank account), the processor has to be part of a banking system. Technically, it is the acquirer that is the part of the banking system. Consequently, there is always an acquiring bank behind a processor.
Payment gateway, payment facilitator, and acquiring bank
Payment gateways, in their turn, are platforms that unify access of merchants (and payment facilitators) to several different processors (simplifying access from technical viewpoint). Some people might think that underwriting is performed by gateways and it is the gateways (such as PayPal or Stripe) that assume the liability and risk.
In fact, some companies realize that it is beneficial for them to “hide” providers of both acquiring and processing services behind their own brands. As a result, thanks to modern onboarding mechanisms and processing technologies, it may, indeed, seem that onboarding and underwriting are done by the payment gateway provider, and it is the gateway provider that assumes the risks. True, technically a large gateway company can become an acquirer and processor “all-in-one” if it integrates directly with Visa and/or MC. However, in general, some entity behind the gateway has to provide acquiring services.
Actual partnership terms between the gateway and the acquirer often depend on a specific business arrangement. Some acquirers offer their services to gateway providers and payment facilitators at lower prices, and in exchange, gateways and PayFacs assume greater risk for their sub-merchants.
For example, if a gateway gets permitted to issue merchant accounts to applicants at low prices and, therefore, receive greater share of residual revenue, it may be required to assume 100% liability for credit card chargebacks.
Usually, chargeback-related risk is assumed by acquiring banks, and that is another reason why it is acquirers’ risk departments that make decisions concerning merchant underwriting. However, at the modern market we are witnessing the emergence of multiple payment facilitators. Beside payment facilitation, many of them also provide gateway services. So, in some particular cases the underwriting risk may be assumed by a PayFac, as a result of its particular arrangement with an acquirer. A lot of information on payment facilitators’ role in merchant services can be found in our respective article.
Conclusions
Every processor has an established acquiring partnership. An acquiring bank assumes underwriting-related risks and liabilities. Acquirers’ main functions are as follows.
- Acquirer’s risk department decides whether to underwrite a prospective merchant or not.
- Acquirers fund merchants (as well as payment facilitators) from their portfolios through their respective bank accounts.
In some cases certain risks can be assumed by a gateway provider or a PayFac in exchange for better acquiring terms (larger residual revenue shares).
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