Merchant acquiring is the business of signing up shops to accept card payments, and collecting those payments for them. The bank or company that does this is called the acquiring bank, or acquirer. In payments, a shop or any other business that accepts payments is called a merchant. A company that runs the technical systems for an acquirer is called a payment processor.
Take, for example, a new furniture showroom in Indore that wants to accept cards. It signs a contract with an acquirer. The acquirer checks the showroom's documents, such as its PAN card and bank account details. Then it gives the showroom a POS terminal, or it connects the showroom's website to a payment gateway.
Every time a customer taps a card, the acquirer receives the payment request. It sends the request to the right card network, such as Visa or RuPay. The card network asks the customer's bank to approve the payment. The answer comes back through the acquirer to the terminal, in about two seconds.
Say the showroom takes ₹2,00,000 in card payments in one day. At the end of the day, the acquirer collects this money for the showroom. It deducts its fee. This fee is a small percentage of each payment, and it is called the merchant discount rate, or MDR. If the MDR is 1.5%, the fee is ₹3,000. The acquirer then credits the remaining ₹1,97,000 to the showroom's bank account, usually on the next working day. The approval and the later payment are the two halves of authorisation and settlement.
The acquirer knows exactly how much each shop sells every day. So some acquirers also lend money to shops. The shop repays the loan with a small part of each day's card sales. This is called revenue-based financing. Acquirers also process payments for software companies that build payments into their own products, such as billing software for gyms. This is called embedded payments.