An “issuing bank” is one that directly issues credit cards to consumers. A consumer uses a credit card, obtained from an issuing bank, to purchase a product or service. The merchant – whether a brick-and-mortar store, an e-commerce website, or both – must already have a relationship with what is called an “acquiring bank” in order to process the card transactions.
The acquiring bank, also referred to as a merchant bank, is a bank or financial institution that accepts payments on behalf of the merchant. It “acquires” transactions done with a credit card issued by a bank other than itself.
At the time of the transaction, the acquiring bank obtains approval from the issuing bank. For online credit card use, most merchants use secure electronic transaction (SET) specifications and real-time online payment processing software to send the transaction to the acquiring bank. The acquiring bank then sends a request for payment authorization to the acquiring processor, a company that provides credit card processing, reporting, billing and settlement services. The processor sends the request to the issuing bank, which sends either an approval or denial code back to the acquiring bank and/or the acquiring processor. The merchant will have the answer in some 10 to 15 seconds.
In the case of credit cards, the issuing bank is the one that originally extended the line of credit to the consumer. However, in practice, the liability for non-payment of a processed transaction is shared by the issuing bank and acquiring bank according to rules established by the particular card association brand (Visa, Mastercard, etc.).
Many people do not realize that their credit card is not charged precisely at the time of purchase. The issuing bank actually just places a hold on the card for the transaction amount, while the merchant’s “batch” of credit card transactions is normally settled at the end of the business day. The point at which the consumer’s credit card is charged, and the merchant’s acquiring bank finally receives the funds from the consumer’s issuing bank, is known as an “interchange.” Those funds finish their journey by landing in the merchant’s bank account.
In the past, of course, credit card transactions were processed by either a retail outlet or by mail or telephone order (MOTO) merchants. Today, e-commerce has led to a growing number of transactions occurring directly on the Internet, and issuing banks continue to play a hugely important role in the process.