Behind every transaction, you will find two essential pieces of the puzzle: the issuing bank and the acquiring bank. The difference between the issuing bank and the acquiring bank is that the issuing bank represents the cardholder, and the acquiring bank means the merchant.
While this seems simple enough, there are cases in which one of the banks might help with an issue regarding the other party. This article will break down the differences between issuing and acquiring banks as well as provide an explanation for the essential functions of each bank.
Before breaking down issuers vs. acquirers in full, let’s discuss the payment flow.
While the transactional flow is payments 101, it’s crucial for understanding the importance of the acquiring and issuing bank.
When a consumer decides to purchase with a credit card, the transaction is sent to the acquiring bank. The acquiring bank allows the merchant to accept payments.
Once the acquiring bank receives the transaction, it is then routed through the card brand networks such as Visa or Mastercard to the issuing bank, the cardholder’s bank.
Once the issuing bank receives the transaction, it verifies that the cardholder has available funds to make the purchase.
If the issuing bank verifies that the funds are available, it authorizes the transaction and routes it through the card networks, ultimately landing at the acquiring bank. The acquiring bank accepts the movement of funds from the consumer’s account to the merchant’s account.
To sum up the payment flow, it looks like this:
- The customer purchases from a store/merchant
- The settled transaction is sent to acquiring bank
- Acquirer sends transactions through card network (Visa, Mastercard)
- The Card network sends the transaction to the issuing bank (cardholders bank)
- The issuer submits payment from the cardholder’s account to the card network
- The Card network sends the cardholder’s payment to acquiring bank through a payment processor
What Is An Issuing Bank?
Issuing banks are typically the banks that the consumer will be more familiar with. The issuing bank is the bank that issues the credit card to the consumer. Issuing banks are also members of card brand networks such as Visa and Mastercard.
The issuing bank is the opposite of the payment transaction of merchants. A consumers issuing bank is responsible for authorizing the transaction. The issuing bank allows the transaction by making sure the cardholder has available funds in their account.
It’s important to note that issuing banks also include verification of account details, such as subjecting the transaction to risk/fraud rules.
To sum up issuing banks, follow below:
- Provides credit cards to customers
- Approves and denies credit card applications
- Authorizes/declines cardholder’s ability to pay based on account balance
An Issuing bank is an essential part of the payment process from a consumer’s perspective. They make sure the cardholder can afford the transaction.
Issuing Bank Risk
Issuing banks take on many different risks than acquiring banks, as the issuing bank deals with the risk associated with the cardholder, not the merchant.
Typically, we see three different forms of risk that issuing banks take on. Account fraud is when an account is opened through a stolen identity or fictional person. Typically these accounts are opened, and payment is never made back to the issuer.
The next is credit risk which is when a consumer extends their credit line but often isn’t able to pay their balance.
Finally, transactional fraud is when a fraudulent charge is made on a legitimate account. An example of this is a consumer having their credit card information stolen. In most of these cases, the consumer isn’t on the hook to pay for illegitimate charges, so long as they can prove the charges were fraudulent.
What is An Acquiring Bank?
The acquiring bank is the bank or financial institution that processes credit card transactions for a merchant. Acquiring banks or acquirers are one of the most important relationships a merchant will develop.
The acquiring bank is the institution that allows merchants to accept credit/debit card payments from the issuing banks of the cardholder.
Acquiring banks are responsible for giving merchants a bank account and giving them a line of credit. When a merchant signs with an acquiring bank, they give the acquirer permission to act on their behalf when communicating with issuing banks.
Acquiring Bank Risk
The acquiring bank takes on the overall risk that the merchant possesses. In addition, acquiring banks are on the hook for funding payment reversals.
When it comes to chargebacks, the acquiring bank must be strict with which merchants it chooses to give merchant accounts to. Should the merchant exceed the chargeback threshold in which 1% of transactions result in a chargeback, the acquiring bank will be fined by card networks such as Visa or Mastercard.
With this being said, acquiring banks will typically pass these fines onto the merchants. If the merchant exceeds their chargeback threshold, they are putting themselves at risk of being fined and paying higher fees and possibly having their account frozen or terminated.
Summing up acquiring banks:
- Maintains a business’ merchant account
- Processes payments
- Forwards consumer transactions, allowing the merchant to receive payment
- Provides businesses with a line of credit
- Allows merchants to accept payment from major card brands such as Visa or Mastercard
Can Credit Card Transactions Be Processed Without An Issuer?
The short answer is no. Cardholders are required to have an issuing bank issue their card. With this being said, Discover and American Express can issue cards while maintaining their card network.
Why Issuing Banks And Acquiring Banks Matter When It Comes To Chargebacks
Both issuers and acquirers play a significant role when it comes to chargebacks. Therefore, while a merchant’s relationship with the acquiring bank is more important, they should still focus on their relationship with issuing banks.
Remember, issuing banks are the ones that will decide where the customer dispute goes. The most significant thing a merchant can do when it comes to issuing banks is to respond and professionally present yourself throughout the chargeback process quickly.
We recommend all merchants to contend fraudulent disputes as issuing banks might think you are taking responsibility for the chargeback if you do nothing.
This is where we come in. At CB-ALERT, we are confident that we can significantly reduce your chargebacks and help you fight fraud. If you’re looking to reduce your chargeback ratio, increase your ROI, and learn how to reduce your chargeback ratio, fill out the application below.
The rule of thumb for issuers vs. acquirers is that the issuer usually pertains to the cardholder while the acquirer relates to the merchant. So if you’re looking to improve your ROI by reducing chargebacks, sign-up below for a free demo.