Issuing banks are financial institutions that provide credit and debit cards to customers, in association with a card network. These banks are responsible for underwriting credit risk, managing cardholder accounts, and ensuring card transactions are processed smoothly. In the case of card payments, they also provide authorization for the cards to be moved from the cardholder to the merchant.

Understanding issuing banks

An introduction to issuing banks

Issuing banks cater to a broad range of consumers. This includes individual customers who utilize credit and debit cards, businesses for operational expenses through corporate cards, and merchants who accept payments through cards issued by the banks.

Regulatory bodies

Issuing banks partner with card networks to provide branded credit and debit cards. The card networks offer the infrastructure and standards for transaction processing, fraud detection, and security protocols. Issuing banks adhere to the rules and guidelines set by these networks like PCI DSS to ensure seamless and secure payment processing.

In the United States, issuing banks are governed by several regulatory bodies, including the Federal Reserve, Office of the Comptroller of the Currency (OOC), Federal Deposit Insurance Corporation (FDIC), and more. They oversee the overall functionality of the banking system, supervise national banks, insure deposits, and regulate operations.

In India, issuing banks are governed by the RBI (Reserve Bank of India). The RBI oversees all the primary functions and operations of issuing banks.

Issuing bank fees

Issuing banks are associated with several types of fees, including processing or interchange fees paid by the merchant. Cardholders may pay annual fees for certain types of cards, interest charges for credit balances, and late payment fees. Network fees, on the other hand, are paid by the issuing bank to the card network for using the services of the card network to facilitate transactions.

Role of issuing banks in card payments

When a customer applies for a card, the issuing bank evaluates their credit risk and decides to approve or decline the application. The bank assesses factors such as credit score, debt history, monthly income, mortgages, and more. If approved, the bank issues a card that the customer can use for various types of purchases.

Merchants and issuing banks

Understanding the role of issuing banks in processing payments is important for merchants. Issuing banks charge interchange fees, for processing card transactions, at rates set by the card networks. Merchants need to pay the interchange fees to the issuing banks for using their services. The fees may vary based on the card type, transaction amount, and merchant category. Interchange fees are charged by the issuing bank to mitigate the credit risk involved as a form of insurance. Almost 70% of the transaction fees are taken for interchange fees.

Issuing banks play a key role in chargeback management: handling disputes and chargebacks. The customer registers disputes with the issuing bank, and the issuing bank is the highest level of authority in deciding refunds. If the dispute is found to be valid, the issuing bank will refund the money back to the customer by procuring it back from the acquiring bank through the card network.

Fraud monitoring and prevention

Issuing banks employ advanced security measures to detect and prevent fraudulent transactions, which helps protect merchants from potential losses. Some of these include data encryption, tokenization of card information, complying to PCI DSS, and fraud alert services to notify cardholders of suspicious activity in their accounts. Fraudulent activities are tracked with tools such as transaction monitoring, two factor authentication, and EMV (Europay, MasterCard, and Visa) chips, that provide enhanced security against counterfeit fraud.

Conclusion

Issuing banks are critical players in the payment ecosystem, facilitating secure and efficient transactions for customers and merchants alike. They operate under stringent regulations and employ advanced technologies to manage credit risk, prevent fraud, and protect cardholder data. For merchants, understanding the role and operations of issuing banks is essential for effective payment processing, minimizing fraud risk, and managing transaction costs.