The internet has revolutionised commerce; it’s now possible to find and sell pretty much anything online. Whatever you’re selling, you’ll need certain infrastructure in place that allows you to accept and process card payments. This will involve the use of a merchant account and, in turn, an acquiring bank.
Having a merchant account is vital for any company that wants to trade over the internet. An acquiring bank – or simply ‘acquirer’ – is the financial institution that provides and maintains this account for the seller, giving them the ability to accept debit, credit and prepaid cards as forms of payment for goods or services.
The acquiring bank will be registered as a member of an official card association – like American Express, JCB or Mastercard – and gets its name for the role it assumes in the transaction. Its job is to accept and acquire transactions from the credit card user’s bank, which is also known as the issuing bank.
Running a business will inevitably come with a certain level of risk – when numerous transactions are completed every day and large amounts of other people’s money are involved, there’s an inherent risk.
An acquiring bank accepts the risk that the merchant will remain solvent. This is why a bank is very careful to assess the merchant carefully and determine the level of risk associated with the merchant ahead of time. This affects fees, rolling reserves, caps on volume etc.
A high-risk scenario
A chargeback occurs when a dispute over the validity of a transaction arises and the cardholder requests that their funds are returned through the issuing bank. This could be because the goods were faulty or not received. Or it could be fraudulent and the buyer has no knowledge of the purchase. Card associations will usually view a merchant as a particularly high risk venture if more than one per cent of its payments result in a chargeback.
If the acquiring bank retains a merchant that has a high chargeback frequency, it will be fined by the Card Associations. These fines are usually passed on to the merchant. This in itself provides an incentive for businesses to maintain high delivery and product standards for their customers as well as implement fraud detection services to mitigate fraudulent transactions.
Acquiring banks play a crucial role in the world of e-commerce and it’s important that businesses understand exactly how they work. Only then can they ensure that costs are kept to a minimum and that everything runs smoothly.