What is an Issuing Bank? Top Differences vs Acquiring Bank
An issuing bank is an institution that issues a credit or debit card to a consumer.
When it comes to consumer purchases, the issuing bank approves or denies transactions on behalf of the credit card network attached to a payment card. The institutions issue credit and debit cards and handle many things that make them important for merchants.
Today, we go through what issuing banks are and what they mean for your business.
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What does an issuing bank do?
Also known as an issuer, the issuing bank reviews a consumer’s application for a card, ensures that the consumer is qualified, and determines credit limits.
The credit card issuer is also the party that takes on the liability for payments. When they authorize a transaction process, the issuer assumes that the cardholder will pay them back at a later date. Issuers can deny transactions from the cardholder's account, too. This might happen if a cardholder makes a purchase that is greater than their available credit card balance.
Activating new payment cards, approving raises to credit limits, and resolving transaction disputes are part of the services provided by an issuing bank as well.
Issuing bank vs. credit card network
You might be thinking: What does a credit card network do if the issuing bank does most of the legwork involved with a credit card transaction?
To make it simple, the credit card network provides communication between the consumer and the issuing bank. For example, if you purchase a new pair of shoes online, you input your Visa credit card information on the merchant’s website. The merchant’s payment processor contacts Visa, Visa contacts your bank, and your bank tells Visa to approve or deny the transaction.
That said, not all credit card networks need an issuing bank because they can act as an issuer independently. American Express and Discover are good examples. Both of these credit card networks can issue credit.
That means they do not need to work with a bank to approve (online) transactions. On the other hand, Visa and Mastercard only work as credit networks and therefore need to partner with banks for a purchase to be completed.
| Issuing bank | Credit card network | |
|---|---|---|
| Main role | Issues credit or debit cards to consumers and manages their accounts. | Connects merchants, acquiring banks, and issuing banks to process transactions. |
| Examples | Chase, Bank of America, Wells Fargo, Citibank | Visa, Mastercard, American Express, Discover |
| Responsibilities | Approves or denies transactions, sets credit limits, manages billing and disputes, and assumes payment risk. | Routes transaction data between parties, enforces network rules, and sets interchange fee structures. |
| Customer relationship | Directly serves the cardholder through statements, support, and account management. | Does not interact directly with customers but ensures secure and standardized communication between banks. |
| Can issue cards independently? | Only if the institution partners with a network (except when acting as both issuer and network, like Amex or Discover). | Yes, for networks like American Express and Discover that also serve as issuers. |
| Revenue sources | Interest, late fees, and interchange fees from transactions. | Network fees charged to banks and merchants for payment processing. |
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One purchase, multiple parties in the payment process
The issuers and credit card networks aren’t the only players in the payment game. One small transaction can involve the consumer, the payment processor, the credit card network, the issuing bank, the merchant, and the acquiring bank. Let’s break down all the parties involved in completing a transaction.
Issuing bank vs. acquiring bank
We now know what an issuing bank is, but how does it differ from an acquiring bank? An acquiring bank is a financial institution that the merchant uses to process the payments made by their customers. A merchant can’t accept card payments unless they have a contract with an acquiring bank.
When a consumer puts their card into a credit card terminal, the acquiring bank contacts the card network. This is when the credit card network communicates with the issuing bank. When the transaction is approved through the issuing bank, the funds get transferred from the issuer to the acquirer.
Once that process is complete, the acquiring bank can then transfer the funds to a merchant account after taking out card processing and interchange fees.
| Issuing bank | Acquiring bank | |
|---|---|---|
| Main role | Provides credit or debit cards to consumers and manages their accounts. | Processes card payments on behalf of merchants and deposits funds into merchant accounts. |
| Customer type | Individual consumers or cardholders. | Businesses or merchants that accept card payments. |
| Primary function in a transaction | Approves or denies transactions and releases funds to the acquirer. | Receives funds from the issuer and credits the merchant after deducting processing fees. |
| Risk responsibility | Takes on the risk of the cardholder’s ability to repay credit. | Takes on the risk of merchant chargebacks and potential fraud. |
| Revenue sources | Interest, annual fees, and interchange fees. | Transaction fees, merchant service charges, and setup or monthly account fees. |
| Example institutions | Chase, Capital One, Citibank | Wells Fargo Merchant Services, Elavon, FIS Global, Bank of America Merchant Services |
What role does a payment processor play in the card transaction?
Credit card processors are yet another step in the nearly instantaneous financial transaction that occurs when a consumer makes a digital payment. Their primary responsibility is to transfer transaction data from the consumer’s card to the acquiring bank and then on to the card network and issuing bank.
If data is missing or incorrect, the credit card processor will pick up on that and relay the information to the merchant. An example of missing or incorrect data is an expired credit card or a billing address that doesn’t match the information on the card.
Once all the data is transferred to the necessary banks and the transaction is complete, the merchant will have received their payment, and the issuing bank will have issued credit to the cardholder. It is then the cardholder's responsibility to pay off their credit card promptly.
The key takeaway here is that issuing banks do most of the legwork behind a transaction. They can approve or deny transactions, take on the responsibility for their cardholders’ ability to pay off credit, and provide services such as raising credit limits, protecting you from fraudulent charges and distributing new credit and debit cards.
Need help finding the right payment solutions? TailoredPay can help
Issuing banks are just one piece of the puzzle when it comes to collecting payments for an ecommerce business. Whether it’s payment gateways, merchant accounts, or chargeback mitigation, TailoredPay’s team of experts can help you find reliable, affordable, and secure solutions. To get started, give us a call at 1-888-599-6482 or fill out our simple online application for a free quote!
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Frequently asked questions
1. What is the main role of an issuing bank?
An issuing bank provides consumers with credit or debit cards, manages their accounts, and approves or denies transactions. It also assumes the financial risk if a cardholder doesn’t repay their balance.
2. How is a credit card network different from an issuing bank?
A credit card network, such as Visa or Mastercard, doesn’t issue cards or manage accounts. Instead, it connects issuing and acquiring banks to route transaction data and ensure secure payment communication between parties.
3. Can one bank act as both an issuing and acquiring bank?
Yes. Large financial institutions sometimes operate as both issuers and acquirers, offering services to both consumers and merchants under separate divisions. However, most businesses partner with specialized acquiring banks to process payment transactions.
4. What are interchange fees, and who receives them?
Interchange fees are small charges paid by the merchant’s acquiring bank to the issuing bank for each card transaction. They compensate the issuer for handling risk, fraud protection, and credit management.
5. How does a payment processor fit into the transaction flow?
A payment processor acts as the technical bridge between the merchant, acquiring bank, and card network. It transfers data securely, verifies information such as card validity, and ensures the transaction is completed smoothly.
| TailoredPay |
|---|
| Digital application process |
| Approvals within 48-72 hours |
| No setup fees |
| Wide range of industries accepted |
| Focus on high-risk merchants |
| Chargeback prevention system |
| Traditional Providers |
|---|
| Digital application process |
| Approvals within 48-72 hours |
| No setup fees |
| Wide range of industries accepted |
| Focus on high-risk merchants |
| Chargeback prevention system |
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