What is an Issuing Bank? Exploring Its Role in the Payment Cycle

Table of Contents

1. What is an issuing bank?
2. How do I find my issuing bank?
3. What types of risks do issuing banks have?
4. How do issuing banks operate within the payment cycle?
5. How does the payment cycle work for customers who use credit cards?
6. How does the payment cycle work for customers who use debit cards?
   

Key Takeaways

• Central Role in Transactions: Issuing banks are pivotal to the payment process, ensuring secure and seamless credit and debit card transactions.
• Risk Management: Issuing banks face key risks, including credit risk, transaction fraud, and account fraud, requiring advanced tools and systems to mitigate them.
• Payment Cycle Participation: Issuing banks work in tandem with merchants, acquirers, and cardholders to authenticate, authorize, and process payments efficiently.
• Credit vs. Debit Transactions: While credit transactions involve extending credit to cardholders, debit transactions require the issuing bank to verify and deduct funds directly from the cardholder’s account.
• Enabler of Financial Trust: Beyond processing payments, issuing banks ensure financial security and stability, standing at the intersection of trust and technology.

Every time you swipe your card at a store or type your details into an online checkout, a series of actions happen in the blink of an eye. But behind this seamless process is a network of institutions working to make it happen—and at the center of it all is the issuing bank. Acting as both the enabler and protector of your transactions, the issuing bank plays a vital role in ensuring your payments are secure and successful. In this blog, we’ll unpack the mystery behind issuing banks, their responsibilities, the risks they face, and their critical function within the digital payment cycle.

What is an Issuing Bank?

An issuing bank – also called a credit card issuer – is a cardholder's bank. The issuing bank is responsible for paying the merchant account (also called the acquiring bank or the acquirer) when the cardholder initiates a transaction and purchases a product or service from the merchant.

The issuing bank issues the credit card or debit card to the consumer. It assumes the primary liability for the consumer’s ability to pay off the debts they will incur with the card. For credit cards, this means extending credit so that consumers can make purchases. In these cases, the issuing bank offers a line of credit to the consumer, and according to the rules created by the card association brand, liabilities for non-payment are shared by both the issuing bank and the acquiring bank.

For debit cards, issuing banks are responsible for debiting funds from the consumer’s bank account associated with the card (usually a checking account).

How do I find my issuing bank?

Wondering how to find your issuing bank? Your issuing bank is the financial institution that issued your credit or debit card. You can typically find their name and contact information on the back of your card or in your cardholder agreement.

What Types of Risk Do Issuing Banks Have?

Issuing banks have to inevitably assume certain risks. Here are the top three types of risk that they have to prepare for:

1. Credit Risk:

   When an issuing bank gives out a new line of credit, the issuer needs to assess how likely it is that it will be repaid on the credit that will be borrowed. Therefore, credit limit assignment and payment delinquency forecasts are critical to profitability.

2. Transaction Fraud:

   Transaction fraud occurs when a fraudulent charge is made to a legitimate account. For example, if someone steals a credit card number, they can make fraudulent purchases using a card tied to a verified account holder.

3. Account Fraud:

   Account fraud occurs when an account is opened in the name of someone who does not exist or in the name of a stolen identity. The cardholder makes many purchases using these fake identities and then never pays.

How Do Issuing Banks Operate Within the Payment Cycle?

Issuing banks play an important role in the payment cycle. Here are the four major players that make up this cycle and that allow credit card transactions to be processed:

1. The Merchant:

   The merchant is the business that accepts credit cards as payment for goods and services.

2. The Acquirer:

   The acquirer, also known as the merchant acquirer or acquiring bank, is the bank account provided by the merchant’s financial institution; it allows the merchant to accept credit cards as a form of payment from its customers.

3. The Cardholder:

   The cardholder is the customer who uses a credit card to buy goods and services from the merchant.

4. The Issuing Bank:

   The issuing bank, also known as the issuer, is the cardholder’s account that is debited once the transaction goes through.

How Does the Payment Cycle Work for Customers Who Use Credit Cards?

When cardholders decide to purchase online with their credit card, they enter their credit card information into a payment portal and submit it.

1. From there, the information is passed to the merchant acquirer.
2. The acquirer then passes the information to the card scheme tied to the customer’s card.
3. The card scheme authenticates the cardholder’s identity and authorizes the payment by ensuring enough funds are available on the cardholder’s end to make the transaction.
4. If the cardholder is authenticated and the payment is authorized, the issuer brings this information to the card scheme, passing the approval response to the acquirer.
5. The acquirer relays this information to the merchant, who confirms that the payment has gone through.
6. The transaction is complete, and it’s up to the merchant to deliver the goods or services to the customer.

How Does the Payment Cycle Work for Customers Who Use Debit Cards?

When a customer decides to use their debit card to make a payment online, they submit their debit card information through an online payment portal to purchase the desired goods or services.

1. The card information is read and passed to the customer’s card processing network.
2. This network must authorize the transaction and ensure that it is not fraudulent. Then, the processing network sends the information to the issuing bank.
3. The issuing bank ensures enough funds are available in the customer’s account to make the purchase.
4. If enough funds are available, the issuing bank confirms the transaction and passes approval to the merchant.
5. The funds are debited from the customer’s bank account, and the transaction is complete.

Issuing banks are the unsung heroes of payment transactions, ensuring your purchases are processed smoothly while safeguarding against fraud and credit default risks. Whether approving credit or managing debit transactions, they stand at the intersection of trust, technology, and finance. Learn more about the future of finance in our latest ebook.