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Great so far
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Great Company easy communication and great rates
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.
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 issuer is also the party that takes on the liability for payments. When they authorize a transaction, the issuer assumes that the cardholder will pay them back at a later date. Issuers can deny transactions too. This might happen if a cardholder makes a purchase that is greater than their available 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 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.
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.
What role does a payment processor play?
Credit card processors are yet another step in the nearly instantaneous financial transaction that occurs when a consumer makes a digital payment. A card processor is what transfers 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 responsibility of the cardholder to pay off their credit card promptly.
The key takeaway here is 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 and distributing new credit 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!