Acquiring Bank

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ACQUIRING BANK

Acquiring banks, also known as merchant banks, act as middlemen in the online transaction route. They are the link between online merchants and credit-card-issuing banks, and play a vital role in coordinating the relationship and data flow between them. When a customer agrees to an online purchase and enters his or her credit card information, it travels first to the merchant, who sends it along to the acquiring bank. The acquirer processes the transaction information, coordinates and updates its accounts, and then relays the sales data directly to the issuing bank, which actually authorizes the sale in accordance with the customer's account. The authorization then is submitted back to the acquirer, who informs the merchant that the sale has been approved.

Acquiring banks operating in the e-commerce world have not gone without criticism. The most common complaints leveled at acquirers are that they spend too little time and money on customer service, and that they are reluctant to process payments for companies trying to establish new and unproven online storefronts. Acquirers defend themselves on the latter charge, claiming such scrutiny is necessary for protecting themselves from risky investments. Acquirers attributed the claim of poor customer service to rapid expansion, during which current accounts were neglected at the expense of broadening customer bases. Such neglect can damage merchants' online sales efforts. For example, Zona Research found that one-third of customers who encounter a delay in online transactions, usually defined as more than eight seconds, simply abandon the purchase, and only seven percent of those move on to another Web site. Acquirers were thus urged to keep up their customer service and infrastructure in order to facilitate the high-speed Internet culture customers expect.

Credit card fraud was another particularly troublesome issue for e-commerce acquiring banks in the early 2000s. Acquirers had to concern themselves with protecting their issuing-bank clients from losses stemming from online fraud, as one facet of nurturing their customers' comfort level in working with online merchants. Sectors of the e-commerce market deemed risky, such as Internet gambling and online pornography, caused a great many headaches because customers in these sectors were more likely to generate charge-backs and fraud, as well as other account hassles. Some acquirers simply dumped such industry sectors from their portfolios. Meanwhile, credit card companies increasingly put extra restrictions on the latitude acquiring banks could extend to such customers. Acquirers with a high proportion of their business concentrated in risky sectors could see decreased revenue stability.

Acquiring banks also faced increasing competition from online services offering one-stop e-commerce solutions. In order to defend and expand their market share in the online world, merchant banks sought to add value by offering bundled services. They thus began augmenting traditional acquiring activities with a broader array of financial services, such as streamlined account management and advanced tools for transaction authorization, routing, and settling.