If your credit card displays logos for both your bank and Visa, which organisation operates the account? And what is the exact relationship between your bank and Visa? For consumers, how credit card transactions work and which party does what are not important, nor is knowing what terms like "card issuer" and "card network" mean. But when you're running a business and start accepting card payments from customers, understanding the complete process becomes important to your day-to-day operation.
When dealing with debit and credit cards as a business, you've probably encountered the term "issuer" or "issuing bank". Whether you're thinking of launching your own card program for your business with Stripe Issuing or you simply want a more functional understanding of the topic, here's everything you need to know about card issuers: what they are, how they work and how they are factored into payment networks for businesses.
What is a credit card issuer?
As of 2022, the United States has over 200 financial institutions that issue credit cards. An issuer, also called an issuing bank, is a financial institution that gives, or issues, credit and debit cards to cardholders. Issuers give cards to account holders on behalf of credit card companies, such as Visa, Mastercard, American Express and Discover. While some credit card networks supply cards directly, it's much more common for issuers to act as their intermediaries, distributing cards to cardholders and managing the accounts associated with those cards.
Acquiring bank vs issuing bank
For credit card payments, the issuing bank (or issuer) is the cardholder's bank, and the acquiring bank (or acquirer) is the bank where the funds are being sent: the merchant's bank.
Issuers vs card networks
To understand the difference between issuers and card networks, and how they work together to make credit card transactions possible, it's important to recognise their distinct roles in the payment process.
Credit card companies operate card networks through which credit card transactions can be authorised and processed. These networks set terms and conditions for the transfer of funds between cardholders, merchants and their banks. Essentially, card networks provide the mechanism that banks use to communicate with each other to process credit card transactions.
Credit card issuers are financial institutions that provide cards to their customers. In consumer transactions, issuers are the party responsible for confirming that the cardholder has the adequate funds or credit needed to cover the payment.
Both issuers and card networks play key roles in the completion of credit card payments, but they serve different purposes.
Issuers and card networks are separate entities – most of the time
While the majority of issuers are not card networks, some networks do also act as issuers, meaning that they extend credit directly to cardholders without using third-party banks or credit unions.
Here's a breakdown of the four major US-based credit card companies:
- Visa and Mastercard are credit card networks but not issuers: their credit cards only reach consumers via third-party providers such as banks and credit unions.
- Discover and American Express are networks and issuers: they extend credit accounts directly to cardholders and do not need to involve a bank or credit union.
What role do issuers play in payment networks?
Credit card issuers play an important role in three main areas relating to payments: processing card transactions, settling previously approved transactions and dealing with chargeback requests.
Let's start with the role issuers play in processing customer card transactions. Here's what a basic card transaction looks like:
- The customer submits a credit or debit card for payment, either online or in person.
- For in-person transactions, the merchant's card reader and point of sale (POS) accepts the card information and relays it to the merchant's payment-processing provider.
- For online transactions, the same thing happens, except there is no card reader: so the customer either manually inputs their card information, uses a digital wallet to pay with a stored credit or debit card, or uses a card on file with the merchant.
- The merchant's payment processor (Stripe, for example) sends an approval request to the card issuer via the card network.
- The card issuer checks to verify three things related to the transaction:
- The card itself is valid.
- The cardholder's identity is verified: typically by matching the billing address provided during checkout to the address on file for the card.
- There are sufficient funds or credit available to cover the amount being requested for approval.
- The card itself is valid.
- If the card issuer is able to verify this information, they will approve the transaction and send an authorisation code to the payment processor through the card network.
- The payment processor conveys the approval to the merchant's payment terminal, and the transaction is completed – usually within a few seconds.
When a transaction is authorised, the funds don't leave the cardholder's account and enter the merchant account straight away. That takes place later, during a process called settlement.
Settlements often happen in batches at a date later than the initial transactions. Although most transactions are settled (meaning the issuer releases funds to the acquirer within 24–48 hours), most card authorisations are good for up to 30 days (although this varies by card network). Because of this, transactions can be settled anywhere from a few hours to several weeks after a transaction takes place.
During settlement, the issuing bank transfers funds through the card network directly to the merchant account (if they have one). If the merchant uses Stripe to process payments, the funds are sent to Stripe, which provides businesses with merchant account functionality.
The final key role that issuers play concerns chargebacks. A chargeback is a reversal of funds following a debit or credit card purchase, prompted by the customer filing a dispute over the charge. The card's issuer receives and processes the request and ultimately decides whether or not to grant the funds' reversal. If the merchant decides to fight the chargeback, they can contact the customer who contested the charge directly, but often, in order to resolve the matter, the merchant will deal with the issuer.
