Understanding the Role of Credit Card Issuers in Payment Processing

In the payment processing ecosystem, numerous organizations make up a piece of the puzzle. Banks, credit unions, card issuers, card networks, payment processors, and payment processing software providers each play a role. Knowing who does what will help you better understand how credit card processing works, so you can ensure that you’re accepting payments in the most optimal and cost-effective manner.

What is a Credit Card Issuer?

If you possess a U.S. credit card, you have dealt with a credit card issuer. The banks, credit unions, etc., extend credit limits to cardholders based on their FICO credit score.Someone with bad credit will find it hard to get a credit card. Or they will be set a low credit limit until they can improve their rating. Someone with an excellent credit rating may be granted the best credit card offers from all the major credit card networks.

The card issuer is the financial institution supplying the consumer credit card. Banks, credit unions, fintech companies, and various other lending institutions can issue credit cards. Issuers can set unique rewards programs and perks to entice customers, such as extended warranty, cashback initiatives, and bonus points. That means that if you have a Visa card, your benefits could be different from other Visa cardholders’ benefits.

All card issuers have to adhere to government bureaus and agencies, such as the Consumer Financial Protection Bureau (CFPB), that ensure consumers are treated fairly by banks, lenders, and other financial companies.

What is Their Role in Credit Card Processing?

Whenever a customer makes a payment with their credit card, the process of transferring funds from the shopper’s bank account to the merchant account starts with the credit card issuer.

As the merchant, you receive money in your bank from the credit card issuer. They approve the credit to the consumer, so the money comes out of their account to pay whomever the consumer chooses to transact with.

In the payment processing puzzle, the card issuer has the money that merchants receive when their customer pays with a credit card.

Credit Card Issuers vs. Credit Card Networks

We now understand that the card issuer approves the cardholder’s credit. The funds come from the issuer account to pay the merchant when a cardholder makes a payment. It’s the card issuer’s responsibility to have that money to pay the merchant. However, most card issuers don’t process their own credit card transactions.

When a customer pays with their credit card, the card issuer seldom processes the transaction to move the money from their bank into the merchant’s bank. This is done by the card networks.

Some examples of the relationship between issuer and network are:

• Chase offers the Chase Sapphire Reserve® card. Chase is the issuer, but the card is a Visa card run through the Visa network.
• Chase also offers the Chase Freedom Flex℠ card. Chase is the issuer of this card, but Mastercard is the network. Transactions would be processed through the Mastercard network.
• Bank of America offers the Bank of America® Unlimited Cash Rewards credit card. The network for that card is Visa. Transactions are processed through Visa’s network.
• Discover and American Express are not in these examples as they operate differently. We discuss this in more detail below.

What Fees Do Credit Card Issuers Charge?

Credit card issuers take a slice of every transaction that uses the credit card they have issued. These fees range between 1% and 3%, depending on the type of card, the purchase volume, and the transaction details. In most cases, the issuers split this fee with the payment processing network. Where they really make their money, though, is through the consumers.

The fees to consumers are typically a variety of the following:

• Annual fees: Most credit card issuers will charge consumers an annual fee for the convenience of having that credit card. Those fees are often negligible compared to possible savings through rewards and other perks.
• Late payment fees: All card issuers make the majority of their money on late payment fees. Interest rates are set up and charged when a balance hasn’t been paid within the set timeframe applicable to that card.
• Balance transfer fees: Balance transfers may interest consumers who have accumulated debt on their credit cards. This is a way to combine those debts to pay off just that one card or account. Issuers will charge consumers to complete that balance transfer.
• Foreign transaction fees: When the issuer and network have to calculate currency conversions, foreign transaction fees will be added on top of the exchange fee. This is for the service of having to perform the foreign transaction. Source