Issuing Banks Explained
When you process a customer’s credit card payment, the transaction moves through multiple financial institutions and systems before the payment ends up in your business bank account. It’s a complex chain of which one key component is the issuing bank.
What is an Issuing Bank?
An issuing bank is a bank that “issues” or provides people with debit and credit cards. You might not have thought about it too deeply, but if you have, you might have assumed Visa or Mastercard were the ones issuing credit cards, but in fact, these big card brands use financial institutions (think Royal Bank, Chase, Wells Fargo, Scotiabank, etc.) as an intermediary through which to distribute cards. Card brands do not directly issue credit cards to customers because of the risk that a customer could default on their credit balance.
Contrary to acquiring banks, which service merchants, issuing banks service cardholders.
Why Are Issuing Banks Necessary When it Comes to Processing?
Issuing institutions are given the job of underwriting a potential cardholder’s risk and issuing the card to the customer when they are approved. If a cardholder is not able to pay their credit card balance, it is written off by the issuing bank, and it is they, not the card brands, who are responsible for working with the customer to recoup the costs.
Now you might be asking, why would a bank do this? Is this all for the privilege of giving their customers access to the credit card networks? Partially. When it comes to credit card processing, we need to remember that there is a lot of money changing hands, and a single purchase goes far beyond the simple exchange between merchant and customer. Issuing banks, like the card brands and payment facilitators, get their slice of the payments pie too. In their case, by way of charging credit card interest to customers who don’t pay their card balance.
Worldwide, there are more than 100,000 issuing banks providing payment cards to consumers. Their relationship with the card brands is a strategic one, whereby both entities work together to their mutual benefit.
How Issuing Banks Work With Card Brands
If a card issuing bank wants to issue a credit card to its customers, they will work closely with the card brands (Visa, Mastercard) to create a co-branded card as well as the structured reward program that customers can benefit from by using it. The issuing banks and card brands work together closely to ensure their customers are able to use their cards wherever credit cards are accepted and to provide customer service as needed.
Issuing Bank Role & Responsibilities
The issuing bank plays an important role in any given transaction. When a credit card transaction is processed, an approval request gets sent from the merchant’s terminal, through the processor and card networks, back to the issuing bank. The issuing bank then checks to see if the cardholder has enough credit on their account for the requested transaction and whether or not any holds are in place on the card. If everything checks out, the issuing bank then sends an approval code back through the card network and processor, to the terminal, completing the transaction.
When the merchant later settles the batch, the card network will transfer the funds from the issuing bank to the processor, who will then transfer the funds to the merchant account. Confused yet? It’s okay, this process is complicated, but it's all part of one chain reaction to how your customers' money becomes your money.
Issuing banks are an important component of the credit card processing chain. They do a lot of the heavy lifting when it comes to credit card fulfillment, and taking on risk so that people like you and I can have access to a personal credit card. If you want more information on how credit card processing works, check out this article. If you want to learn more about what an acquiring bank is and how they compare to an issuing bank, click here.