An acquiring bank or merchant bank performs many functions in the world of electronic commerce and internet transactions. A true acquiring bank does not have a building or an office where you can walk in and open an account. They perform vital functions without requiring a visible presence in the world because they tend to deal mostly with other merchant banks and business oriented financial institutions.
More and more goods and services are being paid for electronically with credit cards, ACH transfers or e-checks. Acquiring banks predominantly act as a sort of middleman in these electronic transactions. They are the link between the merchants and the banks that issue the credit cards being used. The acquiring bank is responsible for the efficient flow of data and information that flows between them.
There are several steps in the typical transaction process. A customer finds an item to purchase at a merchant. He swipes his card in the terminal or enters his credit card information onto the checkout page of the website, and after confirming the data he proceeds with the purchase. The information then flows to the acquiring bank for processing. The acquiring bank receives the information that the credit card holder would like to make a purchase and charge the funds to his card. The acquiring bank makes note of the request and sends the information along to the credit card issuing bank for approval.
It is the issuing bank and not the acquiring bank that actually approves or disapproves the transaction. If the transaction is approved, the issuing bank sends an authorization code back to the acquiring bank who in turn notifies the merchant of the issuing banks decision. If the transaction is approved the funds are transferred from the issuing bank through the acquiring bank minus an interchange fee for the transaction. The acquiring bank then takes a discount from the total amount of funds received from the issuing bank and deposits the remainder into the merchant’s checking or other designated business bank account.
Facing ever growing competition from other types of banks and financial institutions due to technological advances, many acquiring banks are examining their business structures to implement changes that would encourage new growth. One of the most significant advances the industry made was changing the policies that had made acquiring a merchant account a difficult process – especially for new and emerging companies and start-up internet businesses.
Extensive background checks and stringent credit requirements made it difficult for start ups to obtain a low cost, efficient merchant account. Weeding out underfunded, higher risk ventures was a good idea in the early explosion of internet websites. Now that things have settled down, acquiring banks have loosened the requirements for new businesses and individuals to acquire merchant accounts, making it easier for more businesses to operate in what was previously restricted territory.
Other changes, such as improved customer service and problem solving (issues that were attributed to the unanticipated growth of the industry in the last decade) have helped the industry establish a sound foundation for the future. Now that growth has levelled off to more predictable numbers, acquiring banks have addressed issues and are eagerly searching for new ways to expand their customer base One of the ways that acquiring banks are hoping to trigger a second round of high percentage growth is to add more features to their service while at the same time reducing the cost to the end users. Acquiring banks are implementing a broader choice of features such as simplified accounting procedures, lower credit qualifications, more accurate routing information and faster deposits of funds.
Essentially, acquiring banks are positioned neatly between merchants and the consumers’ funds, with a steadily growing worldwide customer base steadily increasing the volume of transactions. That unique position at this precise moment in time has made the merchant banking industry one of the most important players in the emerging global economy.