An estimated 468 billion payment card transactions are processed globally each year. Behind every one of these transactions—which occur when a credit card is swiped, scanned, or tapped—there are two different but related parties: the issuing bank and the acquiring bank.

These financial institutions work behind the scenes to ensure that funds for the purchase are available and to transfer these funds from the purchaser’s account to the seller. They also return funds when a refund is necessary. While the issuing bank and the acquiring bank are located on separate sides of a transaction, they work together to make the system operate.

We’ll cover what you need to know about acquirers and issuers, including what they are, how they work, and the difference between them.

What’s in this article?

• What is an issuer?
  
• What is an acquirer?
  
• What’s the difference between an acquirer and issuer?
  

What is an issuer?

The issuer, also called the issuing bank or card issuer, represents the customer in a transaction. The issuing bank is the financial institution that supplies an individual with a payment card they use to initiate a transaction. An issuer can be a bank, credit union, or other financial institution.

Chase, Bank of America, and Capital One are three of the five largest card issuers in the US. Issuers can also be local financial institutions, like a regional bank or a small credit union.

Card issuers are typically not Visa, Mastercard, Discovery, or American Express. While these companies provide the networks that process payment card transactions, they are not involved in individual transactions or payments. The issuer and acquirer handle a given transaction.

In these transactions, the issuer takes on the risk of issuing credit to an individual. Issuers must consider a person’s creditworthiness based on a number of factors, including credit score and financial history. If an issuer approves a customer, they “issue” a card that allows the customer access to a line of credit.

Essentially, these lines of credit are loans granted to the cardholder. They are typically unsecured loans (meaning the lender doesn’t require the borrower to provide any collateral or security to guarantee the repayment of the loan), and the issuer collects interest if loans are not paid back by a certain deadline, typically after 30 or 60 days. If the cardholder is unable to repay the initial loan and defaults, the issuer becomes liable for the debt, so the initial transaction becomes the issuer’s responsibility.

Issuers also play a key role when a chargeback occurs, which is when a customer disputes a charge and requests the funds be returned or the transaction canceled. In the case of a chargeback request, the issuer serves as an arbitrator, determining if a consumer’s request for the reversal of a transaction is reasonable. The issuer does not have the final say on this as their decision can be challenged, but the issuer does determine if a chargeback should be upheld or reversed.

What is an acquirer?

If we think of the issuer as representing the customer in the transaction, then the acquirer, also called the acquiring bank, represents the business. Acquirers are banks or financial institutions that provide a company with the tools needed to collect payment from issuers. Acquirers do what their name implies—they acquire the money from the issuer and ensure that it gets deposited into the business’s account, allowing the transaction to be processed and completed. They also provide the business with a unique ID that allows them to communicate with card networks to complete these transactions.

While acquirers sometimes serve as payment processors, more commonly they function as a go-between that makes sure a transaction reaches the appropriate card network and is completed successfully. Typically, they are a member of a card network, and often work with several or all major card processors. The acquirer routes the money that is provided by the issuer to the correct merchant account. Stripe, for example, offers both payment processing and acquirer functionality, which eliminates the need for businesses to secure a separate merchant account or payment gateway.

Like issuers, acquirers also carry some financial risk. They are responsible for implementing security standards that meet the requirements of the Payment Card Industry Data Security Standards Council. Failing to do so increases a bank’s liability in the event of a data breach or information or cardholder data being stolen and used for malicious purposes during a transaction.

With a chargeback, the acquirer is liable for repaying the issuer, who will return the funds to the customer. This carries a cost for the acquirer associated with the internal resources required to review chargeback requests as well as fulfilling them. To do so, an acquirer may maintain a reserve account from which to issue chargebacks, or offer a line of credit to the business to cover these costs. If a business becomes insolvent and is unable to pay back the acquirer, the acquirer must accept the loss.

To limit this potential liability, acquirers often operate with strict standards for any business they represent. To be considered, businesses must go through a vetting process that assesses their risk, after which an acquirer will decide if they will represent the business.

What’s the difference between an acquirer and issuer?

Issuers maintain the debit or credit accounts of a cardholder, offering cardholders access to their money or a line of credit that can be used to make payments through a card transaction, while acquirers take that money and deposit it into a business’s account while maintaining records of transactions and forwarding any authorization request to the relevant card network.

Here’s how these banks work together during a transaction:

• The customer initiates a payment by swiping or tapping their card at a point-of-sale (POS) terminal, like Stripe Terminal.
  
• The business’s payment processing provider sends the transaction information to the acquirer, which submits it to the card networks.
  
• The card networks process the request and ask the issuer if the funds are available, which the issuer approves or declines after examining the cardholder’s accounts.
  
• That information is sent to the card network, which sends the approval or decline notice to the acquirer, who informs the business about the status of the transaction.
  
• If approved, money moves from the issuer to the acquirer to be deposited in the merchant account.
  

While the above example concerns a one-time, in-person transaction that takes place at a POS terminal, the working relationship between issuers and acquirers remains the same when the transaction is recurring, as in the case of a monthly subscription. These billing options also require close communication between the issuer and acquirer, but are initiated automatically based on an approved recurring transaction. A provider like Stripe can manage these different types of billing options for businesses.

In the case of a chargeback, the roles of the acquirer and issuer are reversed. A cardholder initiates the request for a refund and submits to their card issuer evidence that a refund should be issued. The issuer reviews that information and decides whether or not to process a chargeback. If approved, the issuer requests the return of funds from the business by communicating the dispute with the acquirer. The acquirer reviews the request and issues the chargeback, which the business then must pay for, either through a reserve fund available for such charges, or through a line of credit offered by the acquirer.

In short, the issuer (customer-facing bank) and the acquirer (business-facing bank) stand on opposite sides of a transaction, but work together to make sure a purchase or return is processed successfully.