What is an Issuer Processor?

Issuer processors play a crucial part in payments processing.

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Understanding their role can be confusing due to the similar names of the other players involved in the payments ecosystem, including issuers and acquiring processors.

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Even if people are familiar with the term, many still think of a payment processor as card processing on the acquirer side.

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Let’s clarify what they are, what they do, and where they fit into the wider payments process.

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What is an issuer processor?

An issuer processor facilitates the connection between a financial institution (issuer) and the broader payment ecosystem including merchants, acquirers and payment networks such as Visa and Mastercard).  They enable the management, authorization and settlement of payment transactions on behalf of the issuers cardholders.

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It's a vital part of the payments process that facilitates crucial tasks needed for consumers to make purchases.

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What are issuer processors' main tasks?

1. Provides technology platform

Issuer processors provide the technology that banks and fintechs use to offer cards to their customers.

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Everything from making transaction decisions in milliseconds to enabling PIN changes, fraud detection and prevention, customer support tools, support for digital wallets - and much else in between - is done by the issuer processor.

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2. Authorizes transactions on behalf of card issuing banks

Issuer processors manage accounts and authorize transactions on behalf of the cardholders of card issuing banks.

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They handleand record cardholder demographic, account and payment information and communicate with settlement entities to facilitate the processing of payments.

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Why issuer processors matter

Businesses and issuing banks without in-house payment processing need an issuer processor provider in order to provide these services.

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Without their services, consumers wouldn't be able to use their cards or payment devices to make purchases.

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Globally, there are many issuer processors enabling issuing bank customers to make payments at millions of merchants online, in-store and to withdraw cash from ATMs.

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Payment transactions in the US and UK

For example, in the UK, there were 2.1 billion debit card transactions and 355.1 million credit card transactions in November of last year alone. Collectively, these transactions amounted to £82.6 billion.

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And a review in 2019 also revealed that in some regions, the average consumer carries four credit cards.

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What are the differences between an issuer processor and an acquirer processor?

The main differences between issuer processors and acquirer processors lie in which part of the payments process they are involved in and which party they act on behalf of.

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Issuer processors authorize card transactions on behalf of issuers/issuing banks and their cardholders, whereas acquiring processors authorize acceptance of transactions on behalf of acquirers/acquiring banks and their merchants.

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Think of it as two sides of the same coin - the cardholder who wants to make a purchase (issuer side) and the merchant accepting the payments (acquirer side).

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So, by extension, issuing processors are also acting on behalf of cardholders (via issuers) and acquiring processors are acting on behalf of merchants (via acquirers).

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The practical result of this is that each payment processor is involved in different stages of a transaction. 

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How do issuer processors fit into the payments process?

Below is an outline of that process and where the issuer processor fits - or doesn't fit - in.

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Step one: Authorization  

Issuer processors are responsible for authorizing or declining transactions that have been initiated at a merchants point-of-sale (POS). This might be via an online store or in a physical store at a card reader with a plastic card or other payment device such as Apple Pay.  

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The POS initiates an authorisation request to determine if the cardholder has sufficient funds available to purchase the goods/services.  The authorisation request is routed from POS at the merchant onto an acquiring processor and then via the card network to the issuer processor.

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On receipt of the authorisation request, the issuer processor must determine if the request is valid and if the cardholder has sufficient funds to support the purchase.   This stage is largely related to asking two main questions:

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1. Does the cardholder's account have sufficient funds to cover the transaction?

Sometimes an authorization might be declined despite there being sufficient balance. When this happens, the cardholder will be prompted to call their card issuer to rectify the issue.

2. Is the card being used fraudulently?

Even if the transaction passes the test for sufficient funds, it might still be declined for other reasons e.g. invalid PIN or because the issuer processor detects something unusual about the transaction.

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If the issuer processor suspects fraud, it may suspend the payment card and alert its issuer. The issuer will then contact the cardholder to verify the requested action is legitimate.

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Once the authorization request has been evaluated, the issuer processor formats a response to send back to the merchant via the card network indicating if the request was approved or declined.  

Step two: Clearing  

Where the authorization request was approved and the merchant was able to provide the goods/services to the cardholder, the merchant must now receive the funds from the cardholders account.

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This process is called clearing.

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After providing the goods/services, the POS at the merchant initiates a clearing request.  The clearing request is routed from POS at the merchant onto an acquiring processor and then via the card network to the issuer processor.

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The issuer processor records the clearing message on the cardholders account.

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For an issuer/issuer processor the clearing message represents the debit of the funds from the cardholders account balance.  For an acquirer/acquiring processor clearing message represents the credit of funds to the merchants account balance.

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Step three: Settlement

The clearing process represents the movement of funds.  Funds are actually exchanged by the process of settlement. 

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In effect, using funds from the cardholders account, the issuer bank pays the value of the cleared transaction to the card network on behalf of the cardholder. The card network pays the acquirer bank who then pays the value to the merchant.

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(The acquiring bank is the financial institution that operates the merchant's bank account, enabling the business to accept card payments.)

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Choosing the right issuer processor

Payment processing services (and functionality) can make a huge difference to the customer experience. Here are some key features to look out for when choosing an issuer processor.

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1. Unique features

Some issuer processors will go beyond basic services and help a business to offer more functionality and support.

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Different issuer processors are likely to have strengths in different areas. That means it's important to know what you need in terms of functionality as well as geographical reach now and for the foreseeable future.

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Examples of additional features that an issuer processor could offer are:

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• Cryptocurrencies
• Virtual cards
• Digital banking services
• Real Time Fraud verification 
• Management of payment wallets
• Multi currency account support
• Account management and customer support  tools and portals
    

Choosing an issuer processor that offers the latest payment methods and services is likely to help your service stand out in the market.

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There are other factors to think about, too. For example, the environmental impact of service providers is increasingly becoming a consideration for many fintechs, especially if they want to establish credible ESG credentials.

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2. PCI DSS compliance

The Payment Card Industry Data Security Standard (PCI DSS) is an information security standard for institutions involved in processing and storing card information or payments.

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It is essential that an issuer processor offers a PCI compliant platform certified to the latest published standard in order to ensure cardholder information is stored securely.

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PCI DSS non-compliance can leave cardholder data and your business vulnerable to breaches and fines.

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3. Reputation and customer service record

Checking industry reviews of issuer processors is a good way to determine their potential strengths and short-comings.

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Sites such as Trustpilot are useful for doing this. And asking around at payment industry events will also give you an insiders' view of issuer processors.

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CLOWD9 issuing processor services

CLOWD9 is built entirely in the public cloud and designed to operate anywhere in the world with its unique global decentralized platform.

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As well as being easier to scale as your business grows, cloud-based technology is more environmentally-friendly than legacy payment technology.

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Conclusion

Issuer processors are institutions that manage payments on behalf of issuers and their cardholders.

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They are an integral part of the payment process, facilitating the relationship between cardholders and merchants.  

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Issuer processors provide technology to banks and fintechs that support the processing of  payment transactions.

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Payment method capabilities, PCI DSS compliance, reliability, resilience, scalability, speed of response (technically and operationally)  are key criteria but a good reputation is also important.

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It is essential to choose the right issuer processor. Making this decision will involve finding a provider that offers the functionality you need to bring your payment solution to market today, as well as what your product road map will demand in the future.

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