What is an Issuer?
The simple answer is that issuers (issuing banks) are institutions who issue credit and debit cards to consumers. The credit card issuer acts as the middle-man between the consumer and card schemes like Visa and Mastercard. The card schemes have ultimate control over cards that bear their logo, but the issuing banks do a lot of the legwork...and take on much of the liability.
An issuer—sometimes called the issuing bank or card issuer—is a member of a card scheme, and issues credit cards to consumers. They provide banking services to customers, allowing individuals to initiate purchases using payment cards.
[noun]/* i·shoo·ur /
Issuing Banks: One Piece of the Puzzle
There is an entire complex process going on behind the scenes of every card swipe, with multiple parties involved. Besides the issuer, there is also:
Accepts card payments in return for goods or services.
The Acquiring Bank
Often called the merchant bank or simply the acquirer. Accepts deposits generated by card transactions for the merchant.
The Payment Processor
Contracts with the acquirer to process credit card transactions.
There are other third-party service providers used by card-not-present merchants. These may supply web hosting, SSL certificates, shopping carts, payment gateways, and more. And of course, there is the actual cardholder, who uses a payment card to purchase goods or services.
Understanding the Process & Role of the Issuing Bank
A typical transaction starts when the cardholder uses a payment card for a purchase. After the customer submit his or her transaction:
- Card information is sent from the merchant to the payment processor.
- The processor submits the request through the card scheme, then on to the issuing bank.
- Issuing bank checks whether the card account is active, whether the requested amount is available to the account, and more.
- The transaction is either authorized or denied, with the decision being transmitted back the way it came, from card scheme, to acquirer, to merchant.
- The merchant sends batches of authorized transactions to the processor, and eventually funds are transferred from the cardholders’ accounts to the merchant account.
As we mentioned, this is a typical transaction. There are numerous opportunities along the road where the process can deviate from the norm.
When the credit card issuer provides a customer with a payment card, it is essentially extending a line of credit to that consumer. The bank provides the financial backing for any transactions made with the card. In other words, the bank is assuming the responsibility for the cardholder’s ability to pay off any debt accrued by use of the card.
When a bank wants to issue a credit card to their customers, representatives start by working closely with the scheme to craft a co-branded card. This includes building a rewards program that incentivizes consumers to use the new card over any others they may have.
Part of the network’s job is to provide customer service while making sure cardholders are able to use their cards as universally as possible. The issuing bank, on the other hand, handles individual authorizations, as well as providing ongoing services to the account. These include:
- Sending card renewals
- Setting or raising individual card limits
- Resolving disputes
- Activating new cards
- Suspending accounts or blocking charges when necessar
Most importantly, it is the credit card issuer’s job to protect the consumer’s personal information, financial data, and account access. This includes maintaining high levels of security for stored data and transaction connections, but it can also involve account monitoring. For example, banks may monitor purchases by type, location, or total transaction total, as dramatic variations from the norm in these areas could indicate fraud.
Why Are Issuing Banks & Card Schemes Necessary?
For the most part, card schemes work on behalf of multiple member issuers. There are exceptions, however; American Express, for example, functions as both a card network and issuing bank. It can get confusing, but there’s no law that prevents a company from both issuing and facilitating card purchases. If that’s the case, though, why don’t all credit card issuers do that?
As mentioned above, there are multiple players involved in every card transaction. For banks to process their own card transactions, each would need to build out its own network and establish relationships with other institutions to facilitate interbank transactions. It would be incredibly complicated, messy, and inefficient.
Card schemes are interbank networks. Rather than requiring every issuer to transact with every other bank, they can all use the card scheme as a universal, impartial middle man. So, while adding more steps to the process isn’t necessarily ideal…it’s better than the alternative.
That said, there’s always the chance that customers could default on their credit card balance. Banks are required to underwrite the risk. Visa and Mastercard are not banks; they’re more like custodians of their respective brands. They serve as overseers of all the various parties involved in the process.
In practice, this means that if a cardholder is not able—or simply decides not—to pay a card balance, the networks are off the hook. It’s up to the issuing bank to try and recoup the costs from the customer. Thus, it makes sense that whenever cardholders dispute fraudulent or unfamiliar charges, the issuing bank has an incentive to proceed with a chargeback. The issuer could even file a bank chargeback without the cardholder's knowledge in the event of an authorization error.
All-told, banks do a lot of work and accept a lot of risk to issue payment cards. That’s why issuers charge a fee for every card transaction.
Understanding the Essentials
If all of this sounds confusing…you’re not alone. Unfortunately, your payments management efforts won’t be as effective as they should be if you’re struggling to master the labyrinth-like processes and terminology associated with chargebacks. It’s quite possible you’re throwing away profits.
Luckily, we can help. Not only do we offer a turnkey solution that handles the entire chargeback process from beginning to end, we also make sure merchants are kept informed of what’s happening along the way. Contact us today to learn more.