Card-Issuing Bank

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CARD-ISSUING BANK

Card-issuing banks issue credit cards to consumers. When a consumer uses a credit card to purchase a product or service, an acquiring bank, also known as a merchant bank, obtains approval from the card-issuing bank at the time of the transaction. A merchant is a business—or in terms of e-commerce, a Web site—that accepts credit or debit cards in exchange for goods or services. Merchants must establish a relationship with an acquiring bank in order to process transactions and obtain cash from credit card purchases. A merchant also must utilize online credit card processing software in order to accept credit or debit cards as a method of payment on the World Wide Web.

A basic credit card transaction begins when a consumer selects goods or services on a merchant's Web site and begins filling out a merchant commerce application. Because of consumer fears about the risks associated with online credit card use, most merchants utilize secure electronic transaction (SET) specifications that support credit card payments over the Web. Once a commerce application is complete, the merchant sends it to the acquiring bank by way of real-time online processing software, which allows for real-time transactions. A real-time transaction is one that either is accepted or declined immediately after the commerce application is completed. Once the acquiring bank receives the commerce application, it then sends a request for credit card authorization to the acquiring processor—a company that provides credit card processing, billing, reporting, and settlement services. The acquiring processor sends the request to the card-issuing bank, which either issues an approval or denial code and sends a message back to the acquiring bank. The acquiring processor then sends the code to the merchant. This entire process usually takes 10 to 15 seconds.

A consumer's credit card is not charged at the time of purchase. However, the card-issuing bank does put a hold on the card for the transaction amount. A merchant's batch—all of the credit card transactions that took place during a specific timeframe—typically are settled at the end of the business day. The consumer's credit card is charged and the acquiring bank receives the funds, in a transaction known as an interchange, from the card-issuing bank. Those funds are then placed into the merchant's bank account.

In the past, credit card transactions took place either in a retail outlet or by mail or telephone order. However, e-commerce has led to a growing number of transactions that take place on the Web. Card-issuing banks will, no doubt, continue to play an important role in this process.