When you’re wrapping up your MBA and starting a business, a lot of the focus is on lowering your overhead costs, paying attention to variable costs, and tracking your bottom line. Often, entrepreneurs forget about the many fees charged by payment processors. However, this forgotten fee can quickly add up. By being proactive about managing your payment processing fees, you can improve your company’s bottom line, reduce chargebacks, and ensure easy access to your cash flow.
When it comes to costs, the card issuer will play a key role in payment processing costs, chargebacks, and fraud handling. Ultimately, card issuers are more than just gatekeepers for consumer credit. They also determine whether you are paid for transactions or not.
So, what is a card issuer? Read on to learn more about how a credit card issuer impacts your company’s bottom line.
TL;DR
- A card issuer can be a bank, retailer, private label, credit union, or fintech company.
- Through card issuers, consumers receive access to the credit they need to buy things.
- While card issuers provide credit to consumers, card acquirers are responsible for processing payments on behalf of the merchants.
- Card issuers impact payment processing because of their role in authentication, risk management, fraud detection, settlement, and customer protection.
- For merchants, card issuers matter because their approvals allow customers to make purchases. Additionally, the card issuer involved can impact your interchange fees, chargebacks, and fraud handling.
What Is a Card Issuer?
A card issuer is a kind of financial institution that can create and approve credit applications from consumers. After approving a credit application, the issuer provides the consumer with access to credit. Currently, around 190 million people have credit cards in the United States.
In addition to providing funds for consumers, the credit and debit card issuer is responsible for facilitating transactions. When the consumer swipes their card, the card issuer is responsible for authorizing the transaction by verifying the consumer’s fund availability and approving the transaction.
There are more card types available than just credit or debit. Many issuers also offer prepaid cards that can be used like gift cards.
Who is the card issuer? And where can consumers go to get a payment card? The following table shows some card issuer examples, their normal clientele, benefits, and issuer type.
| Card Issuer Type | Major Examples | Clientele | Top Benefits |
| Banks | Bank of America, Citi, and Chase | General consumers | Credit building and card rewards |
| Retailers and Private Labels | Target, Macy’s, and Amazon | Shoppers who patronize the stores | Special financing and store-specific discounts |
| Credit Unions | Navy Federal, BECU, and Gulf Coast Educators Federal Credit Union | Members of the credit union | Low-cost option with a strong focus on the community or industry |
| Fintech | Petal, Upgrade, and Chime | Online users | No-fee options and a digital-first approach |
What Does a Card Issuer Do?
There are several important roles played by debit and credit card issuers. From handling transactions to spotting fraud, the issuer has a major role in ensuring the integrity and efficacy of the payment processing system.
- Account Management: When a consumer applies for a credit account, the issuer is responsible for approving it and setting a credit limit. Later, the issuer is also responsible for billing the consumer and collecting payments.
- Payments and Transaction Authorization: When the consumer buys something, the issuer is responsible for verifying the individual’s identity, making sure they have enough money available, and approving the transaction. If there is a problem with any of these steps, the issuer may decline the transaction.
- Fraud and Risk Management: If there are fraudulent transactions, it puts the issuer at risk. Because of this, issuers are on the lookout for potential fraud.
- Chargebacks: Sometimes, the cardholder will dispute a transaction. Initially, the dispute is heard by the issuer. If the dispute is considered valid, then the issuer begins the chargeback process and reverses the charge.
- Legal Compliance: As a financial company, the issuer is bound to a range of state and national laws. They are also responsible for protecting cardholder data through tokenization, encryption, and other digital techniques.
Card Issuer vs. Card Acquirer
When it comes to the card issuer vs. acquirer, there are a few major differences. While the issuer provides the customer with their card, the card acquirer is the intermediary between the business and the card issuer.
Often, you’ll hear financial institutions, like Visa and Mastercard, called four-party systems. This is because there are four essential parties involved in any transaction.
- Cardholder: This is the customer who uses the card.
- Merchant: The merchant is the business responsible for making the sale.
- Issuer: This is the institution that provided the card to the cardholder.
- Acquirer: The acquirer assists the merchant in processing the sale.
There are a few essential differences between the card issuer and acquirer.
| Card Issuer | Card Acquirer | |
| Main Responsibility | The card issuer is responsible for providing credit, debit, and prepaid cards. | The card acquirer is responsible for processing transactions. It serves as an intermediary between the merchant and the card issuer. |
| Role in Transaction Process | The card issuer must review the cardholder’s balance and credit limit to authorize and approve the transaction. | Once the issuer approves the transaction, the acquirer handles the settlement process. The acquirer must transfer the funds from the issuer to the business’s bank account. |
| Risk Mitigation | If the cardholder is unable to pay the money they borrowed, the card issuer bears the majority of the legal risk. | To manage risks, acquirers assess the companies they work with. Riskier companies may have higher holdback reserves and fees. |
| Customer and Merchant Relations | Issuers work directly with the cardholder, selling them products and handling lost card reports. | The acquirer works with the business to resolve any chargebacks and disputes that are initiated by the cardholder. |
| Revenue Source | The issuer’s revenue is derived from the interest and fees they charge the cardholder. | To bring in revenue, the acquirer charges a percentage of the transaction or a flat fee. This is paid by the business. |
What Role Do Card Issuers Play in Payment Processing?
Most of the time, a consumer swipes their credit card and doesn’t think about what happens next. Behind the scenes, a complex process is taking place. When the payment process is handled correctly, funds are safely transferred from the cardholder’s funds, through the card network and acquirer, into the merchant’s bank account. Throughout the process, issuers play several important roles.
Authorization
When the cardholder swipes a card or inputs their number on the checkout page, it starts the authorization process. The credit or debit card issuer must determine if the cardholder has enough funds in their account to pay for the transaction. Additionally, the issuer has risk models running to determine if this transaction is similar to the cardholder’s past transactions or if it is fraudulent.
Authentication
The authentication process is when the issuer determines if the person swiping the card is the cardholder. This may be done through a PIN, CVV checks, or fraud detection software.
Clearance and Settlement
If the transaction appears to be authentic, the next step is clearance and settlement. Once the transaction is officially approved, the money is moved from the cardholder’s account through the card acquirer, and to the merchant’s account.
Consumer Protections
If the transaction is fraudulent, the issuer may end up paying all or most of the cost. Often, issuers offer cardholders fraud protection, refund assistance, and chargeback support. Additionally, some issuers have zero liability policies, so the cardholder isn’t the one on the hook for fraudulent charges. Because of the issuer’s role in chargebacks and refunds, the policies they set can have a significant impact on the merchant.
Risk Management
In the payment process, the card issuer bears a significant share of the potential risk. They use fraud detection algorithms to detect and prevent fraudulent charges. Additionally, issuers are responsible for handling chargebacks and disputes. To mitigate risks, they have real-time tools for monitoring transactions and flagging suspicious activities.
Final Thoughts
While the card issuer is responsible for providing cardholders with a debit or credit card, their role in the payment process impacts your experience as a merchant. If the issuer doesn’t stop fraudulent transactions and chargebacks, it can directly impact your bottom line. In addition, the ability to process payments efficiently impacts your company’s day-to-day operations, brand reputation, and customer confidence.
At PayCompass, we are experts at helping merchants find the top-rated payment processing options they need. Whether you’re looking for B2B payment options or chargeback prevention, we can help.
Ready to elevate your payment processing experience? Reach out to our team of payment processing experts today to learn more.
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