What Is An Issuing Bank?
If you have a Visa or Mastercard, then you already have an intuitive understanding of what an issuing bank is. It is the bank whose name is on the card, alongside the Visa or Mastercard brand. It is the bank where you applied for the card, the bank that sends you a bill each month, and the bank that you (hopefully) pay each month. As a cardholder, the issuing bank is the only entity you work with, and you probably don’t care how the money you charged eventually ends up with the merchant.
If you are also a business owner, however, you do indeed care about how the money gets to you, and the issuing bank plays an important role in the process. Read on to find out what an issuing bank is, and why it is important to a merchant.
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Defining An Issuing Bank
The credit card business can be complicated. Its technical terms can make a person’s head spin, and one of these terms is issuing bank or, sometimes, issuer.
The issuing bank is the entity that owns the relationship with the cardholder. The issuing bank finds the consumer it wants to do business with, investigates the creditworthiness of the consumer, issues the consumer a revolving line of credit in the form of a credit card, fronts the money for the consumer’s purchases, and then collects all or some of the money in one invoice to the consumer every month. They assume some of the risk if the consumer is unable to pay back the credit card debt.
There are four major credit cards brands in the US: Visa, Mastercard, American Express, and Discover. Each card has a slightly different relationship with its issuing banks.
Visa and Mastercard
With Visa and Mastercard, it is easy to identify the issuing bank of each card—the bank’s name is always on the card. The reason this is so has a lot to do with how the modern-day credit card got started.
Visa was formerly called BankAmericard. It was the first successful consumer credit card, and it was started by Bank of America in 1958. Mastercard came along soon after. It was formed by a consortium of banks who wanted to compete with Bank of America in the credit card business.
In the beginning, BankAmericard was only available in California because that was where Bank of America did business. As the card became more successful, Bank of America wanted to expand the card into other states. However, at that time, a bank from one state could not operate in another state, so Bank of America had to license the card’s name to individual banks authorized to operate in specific states.
BankAmericard became a franchising business and the licensee banks found their own consumers and issued their own cards, but all under the BankAmericard name. They used the payment infrastructure from Bank of America to move money from the cardholders to the merchants to pay for the goods and services.
Mastercard grew in a similar way with a similar business structure. It started out as a consortium, so it had always been a licensing business.
The BankAmericard continued to belong to Bank of America until 1970, when it became an independent company. In 1976, it changed the card’s name to Visa, and became the company we know today.
Because of this history, with Visa and Mastercard, the name of the issuing bank always appears on every card along with the card’s brand. Because each individual bank had the responsibility of finding new cardholders, the cardholders worked with the issuing banks whenever a payment or purchase issue arises.
The American Express card originally started as a charge card instead of a credit card, and only the American Express company issued the card.
Charge cards are slightly different than credit cards. There is no stated limit on a charge chard–it changes as the creditworthiness of the cardholder changes, so it can change on a month-to-month basis. Charge cards must be repaid in full at the end of every month. In contrast, a credit card is a line of credit with a stated limit that can be paid back over a longer period of time.
American Express still issues charge cards, and the issuing bank for these charge cards is American Express itself (it became a bank holding company in 2008). However, American Express also offers a line of credit cards, and the credit cards can be issued by third-party banks such as Bank of Hawaii (actually owned by Bank of America), MBNA, Citibank, Wells Fargo, and quite a few others.
So American Express is sometimes its own issuing bank, but it also works with other banks to issue credit cards. When an American Express credit card is issued through a third-party bank, the issuing bank’s name is on the card, along with the American Express logo.
Discover works a little bit like American Express because it functions as the issuing bank. That bank is called the Discover Bank, but its name does not appear on the card. It is the only issuing bank of Discover cards in the US. (There are international arrangements, so a few banks outside the US do issue Discover cards in their respective countries.)
Discover began its life in 1985 at Sears, when Sears wanted a general-purpose credit card in addition to its own store card. When the card started, it was issued by The Greenwood Trust Company located in Delaware, which Discover bought in the same year. Even to this date, the trust has one physical location, in Delaware. Discover changed the trust’s name to Discover Bank and the bank continues to issue Discover cards as well as offer a suite of traditional financial products like checking accounts. You can explore its traditional banking services online on Discover’s website.
Now that we understand how to identify an issuing bank for each card, let’s look at the issuing bank’s role in payment processing.
The Issuing Bank’s Role In Payment Processing
As mentioned above, the issuing bank owns the relationship with the cardholder. The issuing bank is the entity that investigates the creditworthiness of the cardholder, grants the line of credit to the cardholder, and fronts the money for purchases made with the card to send to the merchant.
A highly simplified flow of the process is as follows:
- Cardholder presents the card to pay.
- Merchant takes the information and contacts its own credit card processing entity, which, for the sake of simplification here, is a bank (called the acquiring bank).
- Acquiring bank contacts the issuing bank.
- Issuing bank verifies the cardholder’s funds and sends the purchase amount to the acquiring bank.
- Acquiring bank pays the merchant.
- Issuing bank recoups the money from the cardholder based on a regular billing cycle.
As can be seen above, as a merchant, you do not have to deal with the issuing bank in this normal process flow. However, sometimes the cardholder disputes the charges, maybe because of buyer’s regret, maybe because they never got the goods/services, or maybe because the charge is fraudulent in some way.
The cardholder’s relationship is with the issuing bank, so they file a complaint with the issuing bank. The issuing bank then works with the acquiring bank and the acquiring bank might come back to you and ask you about the disputed charge. Note that the issuing bank has a direct business relationship with the cardholder while you have no direct business relationship with the issuing bank–your relationship is with the acquiring bank.
Unfortunately, it is the issuing bank who has the final say on disputed charges, and it often decides in the cardholder’s favor. This results in a chargeback and you end up not only having to pay the money back, but also pay a fee for the investigation. Even if you do win the dispute, you may still not get the investigation fee back.
Issuing Bank VS Acquiring Bank
There are a few things to note about the acquiring bank or acquirer. First, this is the bank that owns the relationship with the merchant. It fronts the credit card payment to the merchant and then shares some risk with the issuing bank on not being able to eventually recoup the money from the cardholder. Some acquiring banks work directly with a merchant, others farm out the work to another specialized entity called the payment processor (who then owns the direct working relationship with the merchant), yet other acquiring banks do both.
In the above simplified flow, the acquiring bank is a bank different from the issuing bank. Real life, however, is never this simple. As discussed above, the first widely accepted credit card was started by Bank of America. They had to build an entire backend infrastructure to pay the merchants, so they were their own issuing bank as well as the acquiring bank. Even to this date, Bank of America continues to be both an issuing bank and an acquiring bank. Many other big banks work the same way.
As a merchant, the most important bank for taking credit card payments is the acquiring bank, so it is worth your time to get a deeper understanding of what they are and how they work. We have a terrific in-depth article on acquiring banks, so be sure to check the article out.
How Important Is The Issuing Bank To Merchants?
If you have a business credit card, then, of course, the issuing bank is important to you because you work with the issuing bank on your business’s purchases. As a merchant who accepts credit card payments, however, the issuing bank is only important when a chargeback occurs.
If your business experiences very few chargebacks, then you would have to deal with the issuing bank only occasionally. If you have a lot of chargebacks, you would have to deal with issuing banks often, but only indirectly. Because you do not have direct contact with issuing banks on chargebacks, it could handicap your ability to dispute a chargeback. It is, therefore, not the actual issuing bank that is important to a merchant, but the role of the issuing bank in the credit card processing that is important to the merchant.
How often do you have to deal with issuing banks? Is there an issuing bank you found particularly difficult or easy to work with? Leave us a comment below.