Acquiring Bank & Issuing Bank - Chargebacks Explained
Table of Contents
- Related Terms to Know
- What is an Acquiring Bank?
- What is an Issuing Bank?
- Details About Acquiring Banks
- Details About Issuing Banks
- Conclusion: Arbitration And Beyond
- Frequently Asked Questions
It’s impossible to have a substantive discussion about chargebacks and other dispute and fraud-related topics in the payments industry without referencing the two kinds of banks involved in credit card transaction processing: acquiring banks and issuing banks.
An issuing bank is the cardholder's lender or bank that issues them a credit card and manages their account. These banks interface with credit card networks to offer credit to consumers.
An acquiring bank is the merchant's bank, the bank that accepts payments for the merchant through a payment processor and credit network.
Both types have important roles to play at various stages in the chargeback process in terms of what they do and where information flows to and from. But how do you differentiate between the two?
To better understand the reasoning behind the decisions these banks make your chargebacks, and to communicate with them more effectively, it’s important to have a clear understanding of what these terms mean and how the roles of issuers and acquirers differ.
Related Terms to Know
When talking about these two types of banks, it is important to understand some of the terms and organizations involved:
- The merchant is the party that sold the good or service during a transaction. Merchants are associated with the acquiring bank.
- The cardholder is the individual who holds the card and made the purchase. They are associated with the issuing bank.
- The credit card network is the institution that facilitates transactions between merchants and cardholders. While a card may through a lender or bank, it is the network that supports the infrastructure of payments.
Credit card networks include Visa, Mastercard, American Express, and Discover. This can be confusing, as Discover and American Express are both issuing banks and card networks. That is, they run a network and also issue their own card--thus, why you can get a Discover Card but not a Visa standalone card. Instead, you would get a Visa card managed by another organization.
- Payment processing is when the customer makes a payment and it is processed through a service and technology. So services like PayPal or Square are payment processors that can interface with acquiring banks and credit card networks to accept credit card payments.
What is an Acquiring Bank?
The acquiring bank enters into a contract with the merchant to process their credit and debit card transactions. When a customer makes a payment with the merchant, the payment information is received by the merchant’s acquiring bank, then sent over to the customer’s issuing bank. The issuing bank then sends the funds over to the acquiring bank, completing the transaction.
What is an Issuing Bank?
Issuing banks and acquiring banks are both stakeholders in the chargeback process. As such, it may be up to them to evaluate evidence, make decisions, and handle communications during the various phase of chargeback representment and arbitration.
Details About Acquiring Banks
Acquiring banks provide businesses with the merchant accounts and unique ID numbers that they need to process payments made with cards issued by the major credit card networks, like Visa, Mastercard, American Express, and Discover. Merchants pay fees to their acquiring bank for their services. An acquirer is often a traditional bank that contracts with a payment processing company, but may also be a payment processor that does not offer regular banking services.
Each day, the merchant’s acquiring bank exchanges funds with various issuing banks as customers make purchases, return products for refunds, or request chargebacks. The acquiring bank will then pay the merchant the net balance of their activity for the transaction period—this would be the gross sales amount minus any fees or reversals.
Merchants maintain open lines of credit with their acquiring banks to cover reversals, fees, and other charges that might push their net balance into negative territory. There is some risk to the acquirer that if a merchant becomes insolvent, they won’t be able to recover any fees or other payments from them.
Because of the financial perils posed by merchants on the brink of insolvency, acquiring banks and the card networks they service place great importance on payment security and chargeback management.
This is the reason why chargeback thresholds were established: to mitigate their own risk, the card networks started imposing fees on acquirers who retained merchants with high chargeback rates, and the acquirers pass those fees on to their merchants or simply terminate their accounts if their chargeback rates get too high.
Acquiring banks get notice of chargebacks from the issuing banks they originate with. If the acquirer cannot provide some sort of bank-to-bank resolution for the chargeback, they pass it on to the merchant, who must either accept the chargeback (the default option if no deliberate response is made) or fight it through the chargeback representment process.
Details About Issuing Banks
Issuing banks provide consumers with credit and debit cards affiliated with the major card networks. You could go to Capital One and get either a Visa or a Mastercard, but either way, Capital One would be the issuing bank. Issuers serve an intermediary role between their customers and the card networks, and some card networks—Discover and American Express, for instance—serve as their own issuing banks.
The issuer enters into a contract with their customer and extends them a line of credit, which the customer can then use to make purchases on credit and pay the issuer back with interest. Liability for non-payment is primarily taken on by the issuer, but card networks often have rules that require issuers and acquirers to share liability.
When a customer makes a purchase with their card, their issuing bank communicates with the merchant’s acquiring bank and transfers the funds to them. The acquirer will then place those funds in the merchant’s account, after subtracting any fees or other related charges.
Issuing banks are where chargebacks are born.
When a customer believes that a charge made to their credit card was fraudulent or invalid, they contact their issuer to file a dispute, which kicks off the chargeback process. If the issuer believes the customer has a valid basis for their dispute, they send the chargeback on to the acquirer, who notifies the merchant that they must either accept the chargeback or fight it. If the merchant fights the chargeback, the acquirer will notify the issuer and pass along any evidence or statements supplied to them by the merchant. It is then up to the issuer to make a decision based on that evidence.
Conclusion: Arbitration And Beyond
After the initial chargeback and representment processes have completed, any party involved in the dispute who does not like the final decision can request arbitration. This gives the card network the final say on the outcome of the dispute.
For merchants, their most important relationship is obviously with their acquiring bank, but you have to remember that in a chargeback representment scenario, it’s the issuing bank that holds the most leverage in terms of evaluating the quality of your evidence, making sense of your written statements, and rendering the final decision.
Can the issuing and acquiring bank be the same?
Who are the largest credit networks?
Is Visa an issuer or acquirer?
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