In the complex world of credit card processing, banks play a pivotal role, serving as the backbone of the entire system. At the heart of this infrastructure are acquiring or underwriting banks, which are essential for facilitating transactions between merchants and their customers. This article explores the crucial services these banks provide and highlights the unique opportunities and processes involved in establishing an acquiring bank, particularly for international merchants.

The Role of Acquiring and Underwriting Banks

An acquiring bank, also known as an underwriting bank, is a financial institution that processes credit and debit card transactions on behalf of merchants. These banks provide a range of services that are vital for the smooth functioning of the credit card processing ecosystem:

1. Merchant Account Services: Acquiring banks open and manage merchant accounts, enabling businesses to accept credit card payments. These accounts are crucial for merchants, especially those located outside the United States, who wish to sell to American customers.
2. Transaction Processing: They facilitate the authorization, settlement, and funding of transactions. When a customer makes a purchase, the acquiring bank handles the communication between the merchant and the cardholder’s bank to ensure the transaction is approved and funds are transferred.
3. Risk Management: Acquiring banks assess the risk associated with each merchant. They hold reserves to protect against chargebacks and fraud, ensuring that both the bank and the payment processor are safeguarded.
4. Compliance and Security: They ensure that all transactions comply with industry standards, such as PCI DSS (Payment Card Industry Data Security Standard), and provide security measures to protect sensitive cardholder data.

The bottom line is that it’s impossible to process credit card transactions without the participation of an underwriting bank / acquiring bank.

Opening Merchant Accounts for International Businesses

For international merchants looking to process credit card transactions in the United States, partnering with a bank that has a license in a jurisdiction like Puerto Rico is advantageous. Such banks can open accounts for international businesses, allowing them to seamlessly engage in e-commerce within the US market. This is particularly important as it provides a legal and operational framework for cross-border transactions, which can otherwise be fraught with regulatory and logistical challenges.

The Path to Becoming an Acquiring Bank

Obtaining an acquiring license from major card networks like MasterCard and Visa is a lengthy and rigorous process, often taking a year or more. However, banks can begin their journey by establishing themselves as a partner to payment processors. Here’s how a bank can start as a master merchant account and evolve into a full-fledged acquiring bank:

1. Direct Broker for Acquiring/Sponsor Bank: Initially, the bank can operate as a direct broker for an acquiring or sponsor bank. This involves partnering with an existing acquiring bank to process transactions under the sponsor’s BINs. The bank facilitates the onboarding of merchants and manages the relationships while leveraging the infrastructure and licenses of the established acquirer.
2. Building Reserves and Capital: During this phase, the bank also holds reserves to mitigate risk and provide financial stability. These reserves protect the bank and the processor from potential losses due to chargebacks or fraudulent activities.
3. Partnership and Resource Provision: The bank supports the payment processor by providing capital and other resources, strengthening the relationship and building a foundation for future growth.
4. Transition to Acquiring Bank: Over time, as the bank establishes its credibility and operational capabilities, it can apply for its own acquiring license. This transition involves meeting stringent requirements set by card networks, including demonstrating robust risk management practices, financial stability, and compliance with industry standards.

Why Processors Value Early-Stage Banking Relationships

Payment processors are always on the lookout for new acquiring banks to enhance their service offerings and expand their reach. They value early-stage relationships with startup banks because:

1. Need for More E-Commerce Acquirers: The growing e-commerce market demands more acquiring banks to handle the increasing volume of online transactions. Processors seek to diversify their acquiring partners to ensure they can meet this demand.
2. Long-Term Partnerships: Processors are willing to invest in relationships with startup banks that show potential to become full-fledged acquiring banks. These partnerships provide processors with additional resources and flexibility, helping them scale their operations.
3. Innovation and Growth: New banks often bring innovative approaches and fresh perspectives to the industry. Processors benefit from these new ideas and the potential for collaborative growth.

The Question of Puerto Rico-Based Banks Processing US Transactions

A pertinent question that arises is whether a bank in Puerto Rico can process transactions in the United States. The answer lies in the type of Bank Identification Number (BIN) the bank possesses. Here’s a summary of the acquiring issues related to BINs:

1. US and PR BIN Requirements: To process US transactions, the bank needs a US BIN. For transactions in Latin America and the Caribbean (LAC), including Puerto Rico, a PR BIN (properly referred to as an LAC BIN) is required. Puerto Rico falls under the LAC region for MasterCard and Visa.
2. Formation of PR LLCs: Merchants wishing to use an e-commerce BIN based in Puerto Rico must domicile their businesses in PR by forming a PR LLC and opening a bank account at the IFE. This process does not require the merchants to have a physical office or employees on the island.
3. Interchange Fees and Transaction Approval Rates: Interchange fees can be higher in the LAC region compared to the US, but this is not always the case (this technically complex issue beyond the scope of this article). Additionally, transactions processed with an LAC BIN for US cardholders have a higher likelihood of being rejected by issuing banks or not being recognized by customers on their statements.
4. Dual BIN Strategy: A more efficient strategy is to request both a US e-commerce BIN and a PR e-commerce BIN from MasterCard and Visa. This allows the bank to onboard US merchants into the US BIN and non-US merchants into the PR BIN. This dual BIN approach is particularly advantageous for e-commerce and has been met with a willingness from the card associations to issue US e-commerce BINs to qualified IFEs.
5. POS Transactions: The issuance of a US POS BIN to a bank licensed in Puerto Rico is another crucial consideration. If MasterCard and Visa agree to issue a US POS BIN, the bank could process card-present transactions in the US, not just e-commerce transactions. Notably, Visa offered a US card-present BIN to Oriental Bank in Puerto Rico, but they declined, opting to focus on e-commerce within Puerto Rico.
6. Shared US POS BIN Option: Alternatively, a bank can use a shared US POS BIN. This involves negotiating with a sponsor bank to allow the PR-based bank to onboard clients into that BIN. This approach offers a quicker market entry but requires fee splitting and negotiation. The PR-based bank would own the merchant accounts but not the BIN itself.

In conclusion, banks serve as the foundation of the credit card processing industry, providing essential services that enable merchants to accept and process payments. For international businesses, partnering with a bank licensed in jurisdictions like Puerto Rico offers a pathway to engage in the US market. While the journey to becoming an acquiring bank is challenging, it is a crucial step for banks aiming to support the growing e-commerce sector. Early-stage relationships between processors and startup banks pave the way for mutual growth and innovation in the dynamic world of credit card processing.