A card issuer is a bank or financial institution that provides “card association” branded payment (credit or debit) cards directly to consumers. Card association brands include Visa, MasterCard, American Express, and Discover. Visa and MasterCard issuers co-brand with other banks that are affiliated with the card association; for instance, Citibank-MasterCard, MBNA-Visa, and WellsFargo-Visa. Both Visa and MasterCard card associations encompass more than 20,000 card-issuing banks and credit unions. Together, both Visa and MasterCard account for approximately 70% of today’s credit card market. Both card associations issue credit cards through member banks and establish and maintain certain rules for processing. Banks wanting to become card issuers become members of either Visa or MasterCard, or both. The card issuers then share the program costs.
Card issuers retain full authority over the use of the card by the consumer. The issuer lends money to the consumer (via the card) and the money is then later paid to the merchant for services or goods. The moment a transaction is authorized by the card issuer, the card issuer makes a commitment that the merchant will be paid as authorized, even if the consumer should later default on payment (except for legitimate disputes). The card issuer assumes primary liability for the consumer’s ability to pay off the debt incurred by use of the card. However, if there is an acquiring bank involved, then liability for non-payment is shared between the card issuer and the acquiring bank according to the rules established by the card association brand.
For each card transaction, the card issuer charges the merchant a commission for its ability to accept the card. Often, the commission is a percentage of the full transaction amount, plus a pre-approved fixed fee. Some merchants are penalized or have their ability to accept payment using a card issuer’s cards restricted if it has had too many charge-backs as a result of disputes or cancellations. In order to compensate for the transaction costs that are typically affiliated with accepting credit card payments, small merchants often require credit card purchases to be at a minimum amount such as $5 or $10.
- Card Issuer: The bank or financial institution that issues cards to consumers. The card issuer bills the consumer for repayment of the charges made.
- Acquiring Bank: The bank or financial institution that accepts payments for the services or products on behalf of a merchant. The term “acquirer” refers to the entity that “acquires” transactions performed using a credit card that is issued by a bank or financial institution other than itself. Acquiring banks can outsource services.
- Affinity Partner: Some businesses have lent their names to card issuers in order to draw consumers to obtain and utilize their cards. Typical affinity partners are sports teams, charities, and universities such as NASCAR Visa and UCAA Bank of America Visa card. Affinity partners get paid a fee or a percentage of the balance for each card that is issued using their name.
Top 10 Card Issuers
- JP Morgan Chase
- MBNA America
- Bank of America
- Capital One
- HSBC Bank
- Wells Fargo
- U.S. Bancorp
- USAA Federal Savings
It is important to note that consolidation among card issuers has increased. During 2005 alone, the three largest card issuers – MBNA America, Capital One, and Providian all were consolidated with other companies. MBNA America was acquired by Bank of America, Capital One acquired Hibernia Corporation, the holding company for a regional bank, and Providian was acquired by Washington Mutual. Today, the largest ten card issuers control 90% of the credit card market.
How Cards are Issued
After a card issuer approves a consumer, a credit card is issued. Certain criteria must be met by the consumer for approval, such as minimum income requirements and credit scoring. Once a card is issued, the consumer can use the credit card to make purchases or pay for services offered by merchants that accept that card. When the consumer uses the credit card to pay for products or services, he or she agrees to pay the card issuer as stipulated in the credit card holder agreement. The consumer indicates his or her consent to pay by signing a receipt with a record of the card and transaction details, which indicates the amount to be paid. Many merchants are now able to accept verbal authorizations over the telephone and through the Internet, which is referred to as a “Card/Cardholder Not Present” (CNP) transaction.
Throughout the years, card issuers have marketed their credit cards by offering rewards or loyalty programs. These reward and loyalty programs encourage greater card usage and tend to reinforce consumer loyalty to the card issuer. It is estimated that between 12 and 24 percent of cards issued have some sort of rewards associated with them.
Today, more than 1.5 billion credit cards are in circulation. An estimated 78% of families have some type of credit card. Recent estimates show that among those households with incomes of more than $30,000 per annum, 92% have at least one credit card.