My day-to-day job involves helping merchants with technical problems related to processing payments.
Beyond configuration investigations, I also engage with acquiring banks and issuing banks to understand their setups and requirements.
In this article, let’s explore how money moves from customers to businesses while looking at the roles of Acquiring and Issuing Banks, and Payment Processors in the payment process.
At its core, the payment processing ecosystem is about smoothly moving money from a customer’s bank account to a business’s bank account. It involves various ways to pay, like ACH (Automated Clearing House), credit cards, debit cards, and even new things like cryptocurrencies.
When a customer initiates a payment, the journey begins at various touchpoints such as point of sale terminals, virtual terminals, or e-commerce platforms, where cardholder information is securely collected and stored. After that, your payment info travels through networks like Visa or MasterCard to your bank, where they check if you have enough money. Here, the issuing bank meticulously evaluates the customer’s account to determine whether sufficient funds are available (authorization). If the transaction is approved, an authorization code is promptly sent to the place you’re paying, leading to the creation of a batch of approved transactions.
However, it’s important to note that the issuing bank does not transfer the entire transaction amount to the acquiring bank (acquirer). Instead, it withholds a portion of the funds, commonly known as the interchange fee. The interchange fee is a dynamic factor, influenced by variables such as the type of card used and the transaction method, whether it’s a card-present or card-not-present transaction.
Throughout this payment journey, several key entities play critical roles, including payment processors, payment aggregators, and payment gateways, which work in tandem with acquiring and issuing banks to ensure the smooth transfer of money from the customer to the business. This whole process continues to evolve and expand as payment methods and technologies advance, shaping the future of financial transactions.
Q. What is the Difference between Acquiring and Issuing Bank?
Acquiring bank is a financial institution closely associated with a business’s merchant account. It acts as the bridge between the business and the payment processor, making it possible for the business to accept payments from customers. The primary job of an acquiring bank is to facilitate transactions by connecting with card brand networks and ensuring that the payments from customers reach the business.
Issuing bank is the financial institution linked to the customers. It issues credit or debit cards to customers and makes sure these customers have enough money in their accounts to complete transactions. The issuing bank is responsible for enabling the transaction on the customer’s side by providing the payment method (credit or debit card) and verifying that there are sufficient funds available.
In a financial transaction, these two banks are like “bookends.” The acquiring bank represents the business side, while the issuing bank represents the customer’s side of the transaction.
When a customer makes a purchase, the request travels through the payment processor to the acquiring bank. The acquiring bank then contacts the issuing bank to get the necessary funds. Once the issuing bank approves the transaction, the acquiring bank ensures that the money is transferred to the business’s account, completing the transaction. These two banks work together to make sure that funds flow successfully from the customer to the business.
Q. What are Payment Aggregator, Payment Gateway, and Payment Processor?
Payment aggregators, also known as merchant aggregators, are external third-party payment providers aiming to streamline the onboarding of multiple merchants under their exclusive merchant identification number (MID). They simplify the setup of payment methods, allowing businesses to conveniently accept payments through a single master account. Payment aggregators handle tasks such as connecting with banks, selecting payment gateway providers, configuring merchant accounts, and negotiating with financial institutions and payment gateway providers. By offering a user-friendly “plug-and-play” solution, they reduce the complexity and time required for businesses to establish online payment methods, ensuring a seamless payment experience for both businesses and customers.
Payment gateway holds the crucial responsibility of safeguarding customers’ credit card information throughout online transactions, serving as a protective guardian by implementing encryption techniques to shield sensitive cardholder data from potential security threats. This guardian role extends to facilitating the secure flow of payment data from the merchant’s website to the payment processor and back, guaranteeing the safety and integrity of customer payment information. In the realm of e-commerce transactions, payment gateways play an indispensable role, especially for online businesses seeking secure payment processes, as they uphold the confidentiality and integrity of customer data during the entirety of payment processing.
Payment processors function as intermediaries connecting the merchant, the issuing bank (the customer’s bank), and the acquiring bank (the merchant’s bank) within the realm of credit and debit card transactions. Their pivotal role encompasses the entire process of transaction execution, covering authorization, settlement, and the transfer of funds. Payment processors are further categorized into front-end processors, responsible for managing merchant accounts and streamlining transaction procedures, and back-end processors, primarily focusing on the settlement aspect of fund movement. Whether businesses aim to accept credit and debit card payments through online platforms, phone transactions, or physical point-of-sale systems, collaboration with a payment processor is indispensable for successful card-based transactions.
Did you find payment processing happening behind the scenes more or less complicated than you imagined?
The next time you buy something, whether in a store or online, let’s be reminded of the complex process of payment.
It’s a symphony of financial transactions that keeps our world of commerce turning, and now you’re one of the people who can appreciate it.