The Issuing Bank and Its Role in Payment Processing
As the 21st century rolls on, the credit card industry continues its steady growth. Banks and credit unions nationwide issue these cards to consumers of all ages and income levels.
However, just a few key players issue over 80% of the cards in consumers’ pockets. These well-known commercial banks include Bank of America, Chase, Citi, Wells Fargo, and a few others.
Rewards cards from issuing banks have proven to be especially popular with the perk-loving American consumer. Determined customers rack up points or miles they can redeem for rewards—ranging from merchandise to airline flights.
In this article, we’ll take a closer look at the issuing bank and its role in payment processing.
What is an issuing bank?
An issuing bank (or card-issuing bank) is a financial institution that markets credit cards and debit cards to consumers. It distributes cards for credit card networks (like Visa and Mastercard). These entities are also called card brands or card associations.
The issuing bank handles all consumer-facing credit card functions. First, this entity approves (or denies) customer credit card applications.
After the issuing bank approves a cardholder, the bank provides the customer with a line of credit. This enables them to complete credit card transactions with the issuer’s card.
Sometimes, customers do not make their monthly credit card payments. In this case, the issuing bank accepts some of this non-payment risk.
Key functions of an issuing bank
An issuing bank (or issuer) handles all consumer-related credit card functions. Acting as a middle-man, the issuer provides the customer with a card brand’s credit card. The issuer offers customer support while the cardholder is eligible to execute payment card transactions.
The following five examples show how issuing banks work. Note that banks and credit unions can both be classified as issuing banks.
1. Card user experience management
The issuing bank handles all details related to the customer’s use of their credit cards and debit cards. Examples include credit card approvals, activations, and renewals. An issuing bank also sets each customer’s credit limit based on their risk.
2. Transaction payment authorization
During the transaction process, the issuing bank approves the transaction amount. The issuer also routes funds to the acquiring bank when a transaction receives approval.
3. Data security and fraud prevention
Issuing banks go to great lengths to protect customer data and prevent credit card fraud. If there is a data breach, and a customer’s bank account is affected, the issuing bank’s reputation is tarnished.
4. Chargeback dispute management
When a customer files a chargeback complaint, the issuing bank leads the subsequent investigation. The issuing bank often obtains relevant information from the acquiring bank.
5. Rewards programs operation
The issuing bank manages its own credit card rewards program. While profit margins are important, banks also want to offer more desirable incentives to encourage higher cardholder spending.
Risks faced by an issuing bank
An issuing bank faces several funds-related risks.
- First, the issuer guarantees funds to the merchant during a credit card transaction. If the customer does not pay back those funds, the issuing bank is partially liable for that money.
- Bank account fraud is another significant risk. Here, a fictional person or an identity thief opens a credit card account.
- In a similar vein, transaction fraud occurs when a criminal makes a fraudulent charge on a customer’s account. The issuer must pay these fraudulent charges.
An issuing bank vs an acquiring bank
An issuing bank differs from an acquiring bank in several significant ways. First, the issuing bank is customer-focused. This bank approves (or potentially denies) customers’ credit card applications. Once issued, these cards enable customers to make credit card payments through the card networks.
In contrast, the acquiring bank handles the merchant’s bank and/or merchant account. This bank enables merchants to accept customer payments through credit card networks. The acquiring bank is focused on processing payments and ensuring the merchant receives their funds.
The issuing bank’s role in payment processing
The issuing bank plays an important role in every payment processing transaction.
- When a customer submits their credit card for payment, the issuer ensures that there is sufficient available credit.
- The issuer also verifies that the cardholder’s account has no active fraud alerts.
- Based on positive results, the issuing bank approves the purchase and puts up the money to pay the merchant.
- The funds then go to the acquiring bank (or merchant’s bank). This entity forwards the net transaction proceeds to the merchant.
The issuing bank will recoup its funds when the cardholder makes their regular monthly payment.
How a payment processing sequence works
Following are the steps involved in a typical credit card processing sequence. The transaction flow is the same regardless of the credit card type. A payment processing company executes the transaction.
- The cardholder swipes, taps, or dips their card at the merchant’s terminal.
- The merchant’s terminal transmits the card data to the acquiring bank (or merchant’s bank).
- The acquiring bank sends the data to the issuing bank (or the customer’s bank).
- The issuing bank verifies that the cardholder has sufficient credit available. Next, the issuing bank transmits the purchase total to the acquiring bank.
- The acquiring bank sends the funds to the retailer’s merchant account (less the processing fees).
- The credit card network pays an interchange fee to the issuing bank.
- The issuing bank recoups the funds they earlier fronted to the cardholder. The bank receives this money when the cardholder makes their monthly payment.
How payment facilitators fit in
As a side note, merchant accounts can be organized in two different ways. Payment facilitators provide each business with a distinct merchant identification number. Each merchant’s number appears under the payment facilitator’s master account. This enables faster registration and more control over the payment experience.
In contrast, payment processors consolidate all merchant accounts into a single master account from which payments are made. Each merchant must submit their own application.
Issuing banks have several distinct characteristics. Learn about the finer points of these key payment processing partners.
Are Visa and Mastercard issuing banks?
Many people incorrectly think Visa and Mastercard are issuing banks. In reality, these two entities are card brands (or card networks) that do not issue their own cards.
Banks and credit unions are card-issuing banks (or issuers) that offer credit card networks’ cards to customers. For the Visa and Mastercard card networks, every card contains the card brand and issuing bank name.
However, American Express and Discover use a different structure. Each entity can serve as both the card brand and issuing bank (or card issuer).
Can your issuing bank and acquiring bank be the same?
Yes, a specific bank can serve as both an issuing bank and acquiring bank. In fact, the bank can play both roles in a single transaction.
Can your business accept credit card payments without an acquirer?
If a merchant wants to accept credit cards and debit cards, they must work with an acquirer during checkout. This rule applies to brick-and-mortar retail store transactions along with e-commerce sales (or online payments).
An acquirer is also called an acquiring bank (or merchant’s bank). The acquirer partners with card brands to enable merchants to accept customer payments via each brand’s cards. The acquirer provides a merchant account for each transaction’s net proceeds.
Can the issuing bank help you fight chargebacks?
Sometimes, a cardholder may dispute a credit card charge. Maybe they did not receive the items they ordered from an e-commerce retailer or perhaps they completely overspent their budget and now cannot pay their rent. Sometimes the cardholder even believes that their card may have been involved in credit card fraud.
Regardless of the reason, the cardholder now has buyer’s remorse and files a chargeback complaint with their issuing bank. Essentially, the customer wants to reverse the transaction and remove the charge from their card.
How the chargeback investigation works
First, the issuing bank contacts the acquiring bank (or the merchant’s bank) to obtain details of the disputed charge. The acquiring bank may contact the merchant to get their side of the story. Some acquiring banks also perform their own investigations.
Note that the merchant has no direct contact with the issuing bank. This makes it difficult to effectively present the merchant’s case against the chargeback. Remember, the issuing bank is working on behalf of the cardholder.
Finally, the issuing bank makes its decision, and this entity frequently sides with the cardholder. Therefore, the merchant must refund the customer’s money and pay for the chargeback investigation (and likely the associated fee).
How to deal with issuing banks to avoid chargebacks
When the customer files a chargeback complaint, the merchant has the right to present their side of the story. Therefore, the merchant should write an impactful rebuttal letter to the issuing bank. Ideally, the merchant will include ironclad evidence that the chargeback is not legitimate.
Note that issuing banks have varying chargeback response procedures. Therefore, the merchant may find it useful to contact a chargeback management firm for assistance.
Preventing future chargebacks
Although there’s no guaranteed way to prevent a chargeback, merchants can take several steps to lessen their risks. First, they should keep their merchant account current.
They should also make sure to use payment processing technology from one of the top merchant services providers. Finally, the merchant should confirm the cardholder’s identity to eliminate the chances of a stolen card transaction.
It’s advisable for small business owners to work with a payment processor that uses the latest anti-fraud technology, such as Payment Depot. Our membership-based pricing, zero add-on fees, and superior customer service make us a favorite among small- and mid-sized retailers.