Lately, we have received inquiries such as, “Who is responsible for underwriting: the gateway, the payment processor, or the acquirer?” or “Why do some gateways inquire about existing acquiring partner or merchant bank relationships others do not?” To address these questions, we must clearly understand the different entities in the payment processing industry, how they vary, and the types of relationships they have with each other. As a result, we have opted to write an article that will distinctly delineate the role of each entity and elucidate how acquiring banks, payment processors, and payment gateway providers are interconnected.
Acquirer and payment processor
There are instances where the connection between acquirers and processors is “one-to-one,” as is evident in the case of Vantiv. While Vantiv’s acquirer is Fifth Third Bank, many regard Vantiv as both the processor and the acquirer. However, this perception will likely shift with Vantiv’s procurement by WorldPay. Conversely, some processors, such as First Data and TSYS, have collaborated with numerous acquiring banks.
The processor is the technical branch of the acquirer, providing the necessary technology to authorize transactions and obtain information on transaction settlements. Essentially, processors manage the technological aspect of merchant services, including the transfer of funds. However, they do not bear financial liability for this process. Instead, this liability and associated risks rest with acquiring banks, just like we have said many times before, based on why it is crucial to have a bank partnership.
The risk departments in the acquiring banks will determine whether or not to issue merchant accounts or underwrite merchant applications. In addition, acquirers handle the physical transfer of funds to merchants through bank accounts associated with these merchants. As a result, acquiring banks serve as the gateway into the banking system for processors, which is why they bear financial responsibility.
If the merchant decides to authorize transactions using a processor, the funds must be returned to the merchant. The processor must be integrated into a banking system to transfer the corresponding amount to the merchant’s bank account. The acquirer is technically part of the banking system, and, as a result, there is always an acquiring bank supporting a processor.
Payment gateway, payment facilitator, and acquiring bank
Payment gateways enable merchants and payment facilitators to access multiple processors through a simplified technical interface. However, it is a common misconception that gateways carry out underwriting and assume liability and risk, such as with popular gateways like PayPal or Stripe.
Certain companies find it advantageous to conceal the providers of acquiring and processing services beneath their brands. With modern onboarding methods and processing technologies, it can appear as though payment gateway providers perform underwriting and onboarding tasks and assume associated risks. Although a significant payment gateway firm can become an all-in-one acquirer and processor by integrating directly with Visa and/or MC, a third-party entity typically provides the acquiring services for the gateway.
Usually, the terms of the partnership between the gateway and the acquirer are determined by a specific business arrangement between the two parties. Acquirers cannot uncommonly offer services at more competitive rates to payment facilitators and gateway providers in exchange for them taking on a more significant risk on behalf of the merchants they service.
When a gateway is permitted to offer merchant accounts at a low price to applicants and receive an increased share of residual revenue, for example, it may be required to assume 100% responsibility for credit card chargebacks received by a merchant if the gateway is permitted to offer merchant accounts at such a low price.
The acquiring bank usually assumes a merchant’s risks related to chargebacks, another reason the acquirer’s risk department decides to underwrite a merchant. However, we are witnessing the emergence of several payment facilitators in the modern market, which is an exciting development. Besides payment facilitation, they can even provide gateway services. As a result of the particular arrangement between PayFac and an acquirer, in some cases, the risk of underwriting can be assumed by PayFac due to that arrangement. It is possible to find a lot of information about the role of payment facilitators in merchant services in the article devoted to this topic.
Findings
Each processor has established a partnership with an acquiring company. The acquiring bank assumes risks and liabilities associated with underwriting. Typically, acquirers perform the following functions.
The acquirer’s risk department underwrites prospective merchants.
An acquirer from their portfolio funds a merchant’s (and a payment facilitator’s) bank account.
Sometimes, gateway providers and PayFacs are willing to assume certain risks in return for a better-acquiring agreement (a higher residual revenue share).
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