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's bank account.
The issuing bank is responsible for providing the initial approval code which ultimately gets sent back to the customer. So, what exactly are issuing banks?
An issuing bank is a bank that provides – or “issues” – the debit and credit cards to your customers, who are also known as cardholders.
A common misconception is that it is the card brands that issue credit cards. Makes sense, right? VISA would issue a VISA credit card? However, card brands do not directly issue credit cards to customers because of the risk involved in a customer defaulting on their credit card balance. Because of this risk, a bank is required to underwrite the risk and issue the card to the customer, now considered a cardholder. If a cardholder is not able to pay their credit card balance, then it is written off by the issuing bank, and they are responsible for working with the customer to recoup the costs.
Most people have their own personal or commercial bank accounts and accompanying credit or debit cards with these financial institutions. Some of these “big banks” include TD, Scotiabank, Citibank, Chase, BMO, and many others. Worldwide, there are more than 100,000 issuing banks providing payment cards to consumers.
If an issuing bank wants to issue a credit card to its customers, they will work closely with the card brands (Visa, Mastercard, Discover) to create a co-branded card as well as the structured reward program that they 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.
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, 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 if there are any holds on the card. If everything checks out, the issuing bank then sends an approval code back through the card network and processor, back to the terminal, approving 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.
In the event of a customer disputing a fraudulent or unfamiliar charge on their statement, it is the issuing bank who ultimately decides whether to proceed with a chargeback or not.