An Issuing Bank Defined and Explained
Almost everyone in the modern world has a relationship with an issuing bank. They are a fundamental component of our modern payment ecosystem, and the competition between them will grow for years to come.
We’re going to cover what an issuing bank is, the role they play in the payments ecosystem, and exactly what you need to know without getting bogged down in payments jargon.
What is an issuing bank?
Also known as card-issuing banks, issuing banks are financial institutions that distribute credit and debit cards.
This is far from the only service they provide, but at its essence, any bank that provides cards to consumers is an issuing bank. We are most familiar with large commercial issuing banks like CHASE, Wells Fargo, etc., but these also include any smaller banks that issue cards as well.
Issuing banks act as an intermediary between the card networks like VISA, Mastercard, etc., and the consumers, us.
An issuing bank is a broad term, but some of the major players are:
- Wells Fargo
- Charles Schwab
- Bank of America
It’s worth noting that many financial institutions don’t act as one type of bank. Many banks function as multiple types of banks and have an intricate financial system backing them. For example, CHASE operates as both an acquiring bank and an issuing bank.
The responsibilities of issuing banks
Issuing banks are the ones who front the funds to merchant accounts when someone pays with a credit card. This carries inherent risk, which is why issuing banks charge a per-transaction fee. If someone defaults and their credit line is tanked, the issuing bank takes part of the hit.
An essential part of an issuing bank’s business model is betting that they will make more money from interest and credit card fees than they payout in rewards and defaulted payments.
What services do issuing banks provide?
Issuing banks handle everything consumer-related. From card maintenance to chargebacks, they’re the ones staffing the customer service lines and handling disputes.
Here are a few examples of what issuing banks do, and this is where the competitive landscape resides. Companies that do a better job at these services end up winning more customers:
- Payment dashboard. Issuing banks set up payment portals and handle the user experience of paying and interacting with your credit or debit card accounts. Whenever you pay your credit card balance, you’re paying an issuing bank.
- Credit limits. They handle all concerns based on card limits. Because higher limits carry more risk, it’s up to issuing banks to set them.
- Fraud prevention & data security. Data security is critical for issuing banks. Any breach can damage the reputation of an issuing bank and cause a mass exodus of customers. They are always looking for ways to better their encryption practices.
- Card activations. Whenever you call a bank to activate a new card, you’re calling your issuing bank.
- Card renewals. Whenever you need a new credit card, issuing banks send them to you.
- Receives and authorizes payment tokens alongside acquiring banks and transfers funds accordingly. Issuing banks send cash to a merchant’s acquiring bank whenever a transaction is approved.
- Rewards programs. Issuing banks create and control all aspects of credit card rewards. They are always balancing better incentives against their profit margins.
- Chargebacks and other disputes. Whenever you dispute a transaction for whatever reason, your issuing bank is the team handling that dispute.
This isn’t an exhaustive list, but it’s a good start.
What are the differences between issuing banks?
Some issuing banks act as both acquiring banks and their own credit card networks, but if we restrict the definition to just issuing banks, then issuing banks compete on all of the services we outlined above. They all have different rewards programs, they offer varying degrees of online portals, their customer service differs, and the partnerships they have within their credit card programs differ.
The bottom line: even though they perform similar functions, they all have a myriad of differences that are worth exploring before choosing an issuing bank.
Where do issuing banks fit into the payment ecosystem?
The payments ecosystem is full of moving pieces and underlying payment infrastructure that can be difficult to wrap your head around, but a simplified version of a payment goes like this:
- A customer pays a merchant with their credit card.
- The merchant’s payment processor forwards that transaction request to the issuing bank.
- The issuing bank checks the customer’s balance and makes sure there are enough funds to cover the transaction and that no fraud alerts fired.
- The issuing bank sends an approval token back to the acquiring bank, merchant, etc.
- The issuing bank sends the funds to the merchant’s acquiring bank (a.k.a. The place where the merchant’s credit-card-accepting account lives).
- The acquiring bank sends that cash to the merchant.
- The transaction is complete and the issuing bank gets their cash back whenever the person pays their credit card bill.
This is just one way for a transaction to happen and doesn’t cover all of the intricacies, but it should give you an idea of their role. They charge for every transaction to mitigate risk.
What’s the difference between an issuing bank and a credit card network?
You can think of credit card networks like the telephone lines that connect banks all over the world. They create and run the infrastructure that allows communication to happen. Their primary focuses are security, speed, and convincing more issuing banks to issue their cards. If Visa can create a safer and faster way of paying than MasterCard, then issuing banks have more of an incentive to offer VISA cards because they are offering a better service to their customers.
Issuing banks, on the other hand, handle all aspects of the quality of that communication. They want to make sure getting cards, paying cards, and using cards is simple and exciting for their customers.
Most issuing banks aren’t credit card networks, but there are two major exceptions: Discover and American Express. Amex and Discover function as both issuing banks and credit card networks. They both created the ability to have that interbank communication and handle the customer-side of that communication.
There’s no rule saying Chase and other issuing banks can’t make their own cards, but the relationships and costs to break into that market are staggering, so it’s just not as appealing.
What should merchants know about issuing banks?
Issuing banks are mostly on the side of your customers. Business owners don’t have to think too much about them, even though they are a part of all card transactions you accept. It’s good to know where they sit in the payment ecosystem so you can deepen your understanding of how credit card transactions work, but they won’t affect your day-to-day activities.
Acquiring banks, however, are important to understand as a merchant since you will have to work with one in some form or fashion in order to accept credit cards.
The bottom line on issuing banks
Issuing banks are often much more than just issuing banks, but they all provide the same core service: issuing credit and debit cards to their clients.
Any bank that issues cards is considered an issuing bank, and they make their money through transaction fees, account fees, and interest on credit cards. They are also responsible for sending money to acquiring banks during a transaction, and if a payment isn’t delivered by a customer, then they have to pay part or all of that balance to the merchant.
Your best bet for working with a good issuing bank is to focus on their customer service, payment portal, and reward programs. This is where most of the competitive differences lie.