Any discussion about chargebacks or other dispute and fraud-related topics in the payments industry would be incomplete without referring to the two kinds of banks involved in credit card transaction processing: the acquiring banks and the issuing banks. Accordingly, credit card networks or “card schemes” act as a conduit between acquirers and issuers.
Outlined below is a detailed overview of how issuers, acquirers and networks are associated.
Issuer:
The issuing bank (issuer) is the bank of the consumer. To make purchases, the consumer must use a credit card issued by the bank. When a purchase is authorized, an issuing bank authenticates that the card used belongs to the cardholder and that he/she has enough funds or credit to make the purchase.
In addition, they determine interest rates, rewards and benefits from credit cards, as well as transaction fees such as overdraft fees and credit limits. Specifically, they are responsible for handling disputes and initiating chargebacks for merchants.
Payments made by credit or debit cards are received by an acquiring bank on behalf of a merchant. Managing the merchant’s bank account is one of its functions. In every transaction via credit or debit cards, the acquiring bank acts as a middleman.
Every transaction between a merchant and a buyer involves an acquirer. Credit card transactions and chargebacks originate with them; they’re both destinations for funds.
Credit Card Networks:
The networks or schemes that facilitate the transfer of credit cards between issuers and acquirers are called credit card networks. There are non-bank networks that also function as issuing banks. Funds are authorized to reach the merchant from the consumer via the networks. As a result, issuers, merchants, and acquirers must all adhere to PCI compliance standards in order to transact.
Additionally, networks determine the interchange fees merchants pay per transaction. Cards are accepted where they choose. Non-bank networks decide who will be able to issue their cards, while banks issue them directly.
Where It All Begins
Everything begins with a contract. Payments can be processed with either card-present (customer is in-store) or card-not-present (customer is online or over the phone).
Under the terms of that contract, the acquirer authorizes the merchant to receive payments and connects the merchant to credit card processors. A merchant acquirer takes the risk that the merchant will remain solvent, and accepts the payment processing responsibility.
In the event of a merchant’s bankruptcy, it’s the acquiring bank that must handle all chargebacks and refunds. To cover their investment in the merchant, the acquirer hedges the risk with fees. Consequently, the merchant should minimize the acquirer’s risk to avoid incurring additional fines and fees. PCI-compliant gateways and the handling of fraud and chargebacks will help save on high-risk processing costs.
To Conclude
Neither can exist without the other. Acquiring banks are an integral part of the entire process; without them, not a single deal could be closed. The bank cannot, however, handle every transaction independently.
As a consequence, acquiring banks authorize transactions, but issuers must confirm the validity of the credit card and the practicality of the purchase. You now have a well-oiled mechanism that should seamlessly work every time you make a purchase or swipe your credit card.
