In every discussion related to accepting payments, merchants are likely to run into several terms like MDR, acquiring bank, T+1 settlements, and more. Since the terms are quite commonly used, many of you might assume that merchants are quite familiar with them. A similar other term is issuing bank that is involved in the card payment process.
If you are a merchant but still do not know much about issuing bank meaning and its role in the payment process, you’ve come to the right place.
What is an issuing bank?
An issuing bank, also known as an issuer, is a financial institution or bank that offers cards – both credit and debit, to consumers on behalf of card associations/networks (Visa, MasterCard, etc.). Typically, it is a major commercial bank and plays the role of a middleman between the card network and consumers.
When a customer pays a merchant online or offline using their payment cards, the amount gets transferred from the issuing bank to the acquiring bank.
Issuing bank as a part of 4-party payments model
An issuer forms a part of the four-party model of payments. Being a consumer-side bank, it is responsible to pay the merchant-side banks for the products or services consumers purchase.
4-party payments model at a glance
There are four parties involved in a digital payment transaction (Source), including:
- Consumer or cardholder
- Issuing bank (or consumer’s bank)
- Acquiring bank (merchant’s bank)
- Merchants who sell goods or services
Here, it is the issuing bank that assumes the primary liability for consumers’ financial strength to pay off debts they incur using their payment cards. Particularly for credit cards, the liability for non-payment is shared between the issuing bank and acquiring bank as per the rules established by the card association.
Risks faced by issuing banks
An issuer handles three main types of risks:
| Type of Risk | Description |
| Account fraud | It is related to accounts opened with a stolen identity or by a fictional person. In many cases, the cardholder makes purchases but disappears without paying for the same. |
| Transaction fraud | It is related to fraudulent charges being made to a legitimate account. Since the cardholder is not responsible for such charges, the liability to pay for them falls on the issuing bank. |
| Credit risk | It is related to extending credit without checking the creditworthiness of the consumer. |
Responsibilities handled by the issuing bank
- The issuing bank extends a line of credit to credit-worthy consumers.
- It also provides financial backing for transactions made using the cards offered to the consumers.
- It assumes the responsibility to check the creditworthiness of the cardholder to pay off the debt they accumulate.
- An issuer is also in charge of the financial information and account data of its consumers.
- It offers the required services for card maintenance, card renewals, limit setting, blockage, suspension, or activation.
- It also handles chargebacks and customer disputes.
As you can see here, an issuing bank handles everything related to the consumers.
Role of an issuer in the payment process
Being a part of the online payment process, an issuing bank plays a vital role to receive and authorize tokens.
When a consumer uses his/her card to make a purchase, the involved payment processor forwards the transaction request to the issuer. In the next step, the issuer sends the payment information to the card network to confirm whether the transaction will be processed or rejected.
In case the balance in the customer’s account or card limit is enough to cover the purchase cost, the issuing bank transmits an approval message to the acquirer to complete the transaction. It then sends the funds to the merchant’s acquiring bank.
As detailed above, the issuing bank serves as a middleman between the card network/acquirer and cardholders. In some cases, banks can operate as both issuers and acquirers.
You May Also Like to Read: All You Need to Know About RBI’s Tokenisation Rule and Its Impact
Acquiring bank vs. issuing bank: differences
While many merchants think of acquiring banks and issuing banks to be the same thing, there are differences between the two.
The terms ‘acquirer’ and ‘issuer’ do not only refer to the involved banks but are indicative of their role in the payment process. An acquiring bank lies on the merchant end of the transaction, while the issuing bank is at the consumer’s side.
Also Read: All About an Acquiring Bank
TL;DR
- Banks that issue cards to consumers are called issuing banks or issuers.
- An issuer is responsible for sending money to the acquirers as a part of the payment process.
- An issuing bank receives and authorizes tokens during the transactions and decides whether to reject or approve a transaction.
- As a whole, it manages the customer’s interest.
FAQs
Can an issuer and acquiring bank be the same?
Several financial institutions represent both consumers and merchants. This is the reason they can serve as both an acquirer and an issuing bank.
Is Visa an issuer or acquirer?
Visa is neither an issuer nor acquirer but a card network that does not issue its own cards.
What is an acquiring bank in relation to payment gateways?
It is the financial institution that maintains merchant accounts and passes the transactions to the issuer to accept payments.
