Here’s a no-frills look at the different roles banks play in a transaction. It’s also important to know how the card networks fit into this process. There’s the issuing bank, which issues the payment card to the consumer. There’s the credit card network that authorizes the issuer to distribute their cards. And then there is the acquiring bank that receives the funds from a transaction for the merchant.
The issuing bank is the consumer’s bank. It’s the bank that issues the card used by the consumer to make purchases. In the transaction process, the issuing bank delivers the authentication that the card belongs to the consumer making the purchase and that they have sufficient funds or credit for it. The also set credit card interest rates, rewards and benefits, and fees like overdraft charges and credit limits. Most importantly to merchants, they handle the customer service for disputes and initiate chargebacks.
The Acquiring bank is the merchant’s bank. It’s the bank that acquires the funds used to purchase goods and services from the merchant. Acquirers sign merchants up with the various card schemes to process Visa, MasterCard, etc.
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Credit Card Networks:
Credit card networks or “card schemes” connect the dots between the issuer and acquirer. Specifically, there are non-bank networks like Visa and MasterCard. Then there are networks like American Express and Discover which also function as issuing banks. They authorize transactions, enabling the funds to travel from consumer to merchant via the processor. Networks also set the interchange/swipe fees merchants pay per transaction. They decide where their cards are accepted. Non-bank networks decide who can issue their cards, while bank networks issue them directly.