In addition to the card network, the payment platform, and the acquiring bank, the last essential element that makes the payment process possible is the issuing bank.
The definitions of the card network and the acquiring bank might be familiar to merchants, but understanding the role the issuing bank plays isn’t as obvious and needs some explanation.
So, what is an issuing bank and how do we define its role in the payment process?
What Is an Issuing Bank?
An issuing bank (also called an issuer) is one of the key components in the online payment process. In short, it is a financial institution providing customers with credit and debit cards.
The cards are issued to customers on behalf of card networks like Visa, Mastercard, Discover, and American Express.
Although the total number of issuers worldwide exceeds 100,000, there are only around 4 or 5 banks that play a significant role in a particular country, wielding a prevailing market share.
For example, in the United States, the main issuing banks are:
However, from a global perspective, the Big Four Banks term refers to the following:
Every time a customer purchases goods or services and pays with their credit or debit card, the issuing bank is involved.
The Issuing Bank’s Key Responsibilities
From the merchant’s perspective, the issuing bank sits at the opposite end of the payment transaction.
Once the customer makes the purchase (thus initiating the transaction), the information from the merchant goes through an acquiring bank, via the card network, to the issuer.
The latter is then responsible for authorizing the transaction. In other words, it is liable for the cardholder’s ability to pay off the debt accumulated by using the credit card or line of credit.
The authorization process begins with ensuring that the customer has the available credit or funds required for the purchase. It also includes the account details verification phase and subjecting the transaction to its own fraud and risk rules.
Aside from being in charge of the customer’s financial information, the issuers provide necessary card maintenance, including card renewals, limit-setting, suspensions, blockages, and card activations.
They also bear responsibility for paying the debts incurred by their cardholders. In case of a non-payment, following the card network’s rules, the issuer and the acquirer share the credit liability. In order to manage the risk of the cardholder defaulting on their payments, the issuers collect a fee for every card transaction.
In brief, the issuing banks handle everything that’s customer-related.
The Issuer’s Role in the Payment Process
To make a long story short, the issuer’s role in the payment process is to authorize the transaction.
The transaction starts when the cardholder uses their payment card for a purchase. Once the customer submits the transaction, the payment processor forwards the tokenized transaction request to the issuing bank.
Then, depending on the data sent by the issuer to the card network, the transaction will be accepted or rejected. Assuming the customer’s account covers the costs of the purchase, the issuing bank sends the approval to the acquiring bank. The purchase is marked as completed in the aftermath and the issuer transfers the funds to the merchant’s acquiring bank.
In conclusion, the issuing bank’s role is to serve as an intermediary between the acquiring bank or card network and the cardholder. It is possible due to the contracts with the card owners on the account terms and repayment of credit card transactions.
In addition to the payment acceptance process, dealing with chargebacks and disputes also falls within the scope of the issuing bank’s role. Whenever a customer disputes a transaction, the issuer deals with the dispute.
Note that it’s not unusual for the banks to operate as both acquiring and issuing entities.
Key Takeaways
- Any bank issuing debit or credit cards is considered an issuing bank or issuer.
- The issuer’s role is to send money to acquiring banks during a transaction.
- Card brands don’t issue their cards directly to customers. They do it via the issuing banks, taking responsibility for the potential risk related to a cardholder’s credit balance.
- When the payment is made, the issuer receives and authorizes payment tokens. It determines whether the customer transaction will be accepted or rejected.
- The issuing bank represents customers and their interests, whereas merchants are backed up by their acquiring bank, managing their merchant account and processing card transactions.