When you’re on the acceptance end of payments transactions as a merchant or a payment facilitator, you’re likely most familiar with the role of acquiring banks.
But there’s another banking entity that plays a crucial role in card transactions: the issuing bank.
An issuing bank is the bank that issued the credit or debit card to the customer. These banks are also known simply as issuers. Like acquiring banks, they are members of the card networks, such as Mastercard and Visa, and in some instances may operate in both roles.
The issuing bank sits at the opposite end of a payment transaction from the merchant. When a consumer initiates a transaction by making a purchase at a retailer or other merchant, the transaction travels from the merchant through an acquiring bank, via the appropriate card network and finally on to the issuer.
The issuing bank is then responsible for authorizing the transaction. Primarily, this involves making sure the consumer has the available credit or the funds required for the purchase but also includes verification of account details and subjecting the transaction to its own set of fraud and risk rules.
The bank will then (hopefully) send authorization to complete the transaction back through the networks to the acquiring bank and on to the merchant.
The funds must then be moved from the issuing bank to the acquiring bank, a process known as settlement. This is a separate step from authorization, and it is usually handled later in batches with other transactions.
Similar to the way that an acquirer is responsible for the activities of a merchant within the payments system, the issuer bears financial responsibility for the activities of the cardholder.
For example, if a consumer uses a credit card to make a purchase, the issuing bank (after authorizing the transaction) will direct the funds to be settled to the merchant. If the cardholder is then not able to pay off the credit card balance, it falls on the issuing bank to recoup those funds.
For that reason, an issuing bank will underwrite consumer applicants to assess their level of credit risk before issuing them a credit card—similar to how an acquiring bank will underwrite each merchant it wishes to process transactions for.
Finally, the issuer is also the bank to whom a consumer will complain if for some reason they wish to dispute a transaction. The consumer might do so if they believe a transaction was fraudulent, they never received the goods, or they have a disagreement over the goods or services that isn’t resolved directly with the merchant. The issuing bank will research the dispute and, if it sides with the cardholder, it will initiate a chargeback.
While they may not be directly associated with payment facilitators, issuing banks are a critical part of making the entire payments ecosystem work, whose actions and responsibilities should be taken into consideration when managing a merchant portfolio.