What Is An Issuing Bank?

Basically, an issuing bank is a bank that issues consumer credit cards. These banks are members of credit card associations, such as MasterCard and Visa. Credit cards are not issued directly from the credit card associations. They are issued through these member banks, known as issuing banks.

But that’s just the beginning of the relationship between an issuing bank and its cardholders. When an issuing bank approves a credit card application, they’re actually giving the cardholder a line of credit. So the issuing bank also acts as the lender for the cardholder during credit card transactions. If the cardholder fails to make his credit card payments, his issuing bank also assumes a portion of the liability for the charges he made on the card. So an issuing bank actually issues credit cards, manages their cardholders’ accounts, and takes on liability for the debts incurred by their cardholders.

There Are Two Sides To Every Story…

… and, there are two parties to every sale: the seller and the buyer. As you can see, the buyer’s interests are managed by an issuing bank. As the seller, your interests are represented by your acquiring bank, the bank that manages your merchant account and processes your credit card transactions. So how do these two banks interact during a credit card transaction?

When a buyer makes a purchase from your place of business and uses a credit card to pay for that purchase, it starts a process that transfers the money for the purchase from your buyer’s account to your account. When your buyer swipes his credit card at your point of sale terminal, or inputs his card information into your on-line shopping cart, the information is transferred to your acquiring bank, either directly from your terminal or through your credit card processing company. Your acquiring banks transmits the information to the bank that issued the credit card. If there is enough balance to cover the cost of the purchase, the particular card brand associated with the card and the issuing bank approve the purchase. Within seconds, this approval is transmitted back to your acquiring bank, and you can complete the sale. But you still don’t have your money, and neither does the issuing bank.

When the transaction settles, the cardholder’s issuing bank transfers payment to the seller’s acquiring bank and then bills the cardholder. Essentially the issuing bank is the intermediary that loans the buyer the money to pay the seller, and then bills the buyer for this amount. Provided the cardholder honors his part of the deal, and makes enough payments to cover that transaction (and nothing is returned for credit), the life cycle of the purchase is closed. The issuing bank got back the money they loaned on behalf of their cardholder, and you got paid for the sale.

But if the cardholder defaults on his payments, the issuing bank shares that loss of income with your acquiring bank. And just like your acquiring bank, issuing banks collect a fee for each credit card transaction they handle to cover their part in the transaction process, and to cover the risks they take as money lenders. The partnership between the card brand associations and card-issuing banks determines these fees, as well as other operational guidelines that apply to your acquiring bank and credit card processing companies.

So you see, there are more players than you might have realized along the path that leads between you and your money from credit card transactions. The more you know about the key players in this process, the better prepared you’ll be to manage your credit card transaction expenses.