Issuing Bank | B2B Finance Glossary

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’s bank (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 (this is usually a checking account).

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:

• 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.
• 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.
• 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:

• The merchant. The merchant is the business that accepts credit cards as payment for goods and services.
• 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.
• The cardholder. The cardholder is the customer who uses a credit card to buy goods and services from the merchant.
• 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?

1. When cardholders decide to purchase online with their credit card, they enter their credit card information into a payment portal and submit it.
2. From there, the information is passed to the merchant acquirer.
3. The acquirer then passes the information to the card scheme tied to the customer’s card.
4. The card scheme then needs to authenticate the cardholder’s identity and authorize the payment by ensuring enough funds are available on the cardholder’s end to make the transaction.
5. 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.
6. Then, the acquirer relays this information to the merchant, who confirms that the payment has gone through.
7. Now, the transaction is complete, and it’s up to the merchant to follow through on delivering the goods and services that have been paid for to the customer who made the purchase.

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

1. When a customer decides to use his or her debit card to make a payment online, he or she will have to submit the debit card information through an online payment portal to purchase the desired goods or services.
2. From here, the card information is read and passed to the customer’s card processing network. This network must authorize the transaction and ensure that it is not fraudulent. Then, the processing network sends the information to the issuing bank – in this case, the bank that issued the debit card to the customer.
3. The issuing bank has to ensure enough funds are available in the customer’s account to make the purchase that the customer intends to make.
4. If enough funds are in the account to cover the transaction, the issuing bank will confirm the transaction and pass along approval to the merchant.
5. The funds are debited from the customer’s bank account, and the transaction is complete.