What is an issuer processor? An explainer

With cash payments, a credit note is literally handed over at the point of sale in return for goods or services.

To merchants and customers, card or online payments appear similarly simple and instantaneous.

But to achieve this level of convenience, a number of steps need to take place, from authorizing the transaction through to settling payments.

An issuer processor's role in these steps is vital. Let’s clarify what they are, what they do, and where they fit into the wider payments process.

What is an issuer processor?

An issuer processor (also known as an acquirer or payment processor) is a financial institution that mediates payment networks for merchants and issuers (banks or other types of financial institutions).

It primarily acts on behalf of the issuer by authorizing, settling and securing transactions. It also records and manages the issuance of cards which could be physical plastics or virtual for online use only.

In short, an issuer processor provides the infrastructure to unify and facilitate the moving parts of a payment network for issuers.

Examples of issuer processors

Examples of issuer processors include:

• Visa
• Mastercard
• American Express

As well as being issuer processors, these are also famous global payment schemes (also known as payment rails).

And in addition to these, there are many independent issuer processing companies around the world.

As they are more singularly focused on developing issuer processor technology, independent providers are likely to be able to offer more leading-edge capabilities. This may be important to your customers.

What's a payment gateway?

A payment gateway is a technology service that connects payment components for merchants and issuers. It encrypts payment information and securely transmits it between the parties involved in the payments process.

What's the difference between an issuer processor and payment gateway?

An issuer processor is a financial institution that manages and authorizes transactions for issuers (customers' banks). A payment gateway is a technology service providing a secure connection for all parties' involved in processing payments - it does not authorize transactions.

How do issuer processors work?

Step 1: Receiving and processing data

Once a card payment is initiated online or in-store, the payment authorization process has begun.

Funds need to be moved - accurately and securely - from the issuing bank (i.e., the customer's bank) to the merchant's bank.

When the issuer processor receives authorization from the card network, it sends it to the merchant's payment gateway.

Step 2: Authorization or blocking of transactions

When an issuer processor receives a transaction request, it automatically runs a number of checks on it. These checks are designed to make sure that the transaction is legitimate and meets the card issuer's rules and regulations.

If a credit card is declined at a shop or online, it is because the processor prevented the transaction from happening.

A transaction can be blocked if there are aren't enough available funds in the purchaser's bank account. The cardholder will then be prompted to call their bank to resolve the problem.

If there's evidence or suspicion of fraud, issuer processors alert card issuers.

In some cases, this may lead the card issuer to text the cardholder to confirm legitimacy of the transaction. In others, it might tell the card issuer to suspend the associated credit card until the cardholder contacts the bank to confirm the transaction.

Step 3: Communicating with settlement entities

Once the payment authorization process is complete, the issuer processor helps the settlement entities (i.e., the issuer and merchant) settle transactions.

The issuer needs to securely send the merchant the correct funds. To do this, it relies on the issuer processor providing the correct details of what funds need to be deducted from which account.

Why is an issuer processor important?

Many major card brands offer issuer processor services. But because issuer processors don't have a consumer-facing role, their importance is often overlooked by the general public.

Below, the main reasons for their importance are outlined.

1. Customer experience

The quality of an issuer processor can have a big influence on customer experience.

Card and online payments always need to be more convenient for the customer than cash payments. This principle has always underpinned their enduring popularity and mass market adoption.

Consumers don't want to experience transaction processing delays, problems in the payments process or any other type of friction. This undermines trust in the merchant and lost business.

An issuer processor helps deliver the necessary level of reliability by rapidly, efficiently and securely managing the authorization and settlement processes.

2. Payment options

Having multiple payment options can increase a businesses' conversion rates.

Being able to accept card payments is a given for most businesses. But nowadays, there are multiple options to consider. Below are a couple of examples.

Virtual cards

Virtual cards enable consumers to pay virtually with their digital wallets on their smartphones. This can greatly improve the consumer's online payment experience.

Virtual cards can be issued instantly so consumers do not have to wait for a card to arrive in the post. They can be for ongoing use, like a traditional card, or one-time use only.

Enabling cryptocurrency payments

A survey by Deloitte found that 64% of customers have a significant interest in digital currencies (a further 32% have a moderate interest). And over 85% of businesses say that enabling cryptocurrency payments is a high or very high priority.

3. Payment security

A big part of an issuer processor's role is to authorize transactions securely.

The e-commerce industry, for example, is expected to lose approximately 48 billion USD to fraud in 2023 - and increase of 7 billion from 2022. So payment security is essential for every transaction.

Issuer processors can help reduce risk around payments by detecting fraud and maintaining compliance.

Payments fraud

Possibly the single biggest concern regarding card payments is fraud and other breaches of security.

For example, in the first half of 2020, there were 62,868 reported fraud cases in the UK alone, 40,914 of which were cases of online shopping and auction fraud, according to Statista.

This is a dramatic increase (37%) from the first half of 2019, in which there were 49,928 reported cases of fraud. Issuer processors play a vital role in the implementation of constantly evolving fraud measures to help drive down related losses.

4. Customer retention and loyalty

The reasons why customers choose to remain loyal to a merchant are many and varied. However, security and customer experience are two important considerations.

For example, a report by Trustpilot found that 34% of consumers are more conscious of security since the global pandemic.

Issuer processors have an important role in helping businesses retain customers by enabling them to offer secure, convenient and frictionless payment experiences.

How to choose an issuer processor

Choosing the right issuer processor is imperative. Below are some important factors to consider when choosing one.

1. Capabilities

It's important that a processor keeps up with emerging payment trends and consumer expectation.

In addition to the basics outlined above, it should enable consumers to use new local payment types that may be popular in certain regions.

That way, merchants can stand out from the competition and be able to accept card payments from more potential customers. This is especially important for merchants looking to grow their business into new territories.

Examples of other features that could be offered by a processor are digital banking via a digital wallet, virtual cards, voice assistance, or cryptocurrency.

Introducing virtual banking technology allows customers to access multiple currencies and transfer funds faster than before. Without a technologically advanced issuer processor, merchants can find it hard to compete and offer their customers the latest payment options.

2. Compliance

PCI regulations change often, so it's important to choose a processor that offers a PCI compliance program to keep up with the evolving standard. Although a necessary feature, not all processors offer helpful PCI compliance tools.

PCI DSS Compliance

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

Merchants processing payments must abide by this standard. Not doing so leaves cardholder data vulnerable. Non-compliance can often result in fines, fees and lost business for the merchant.

EMV

The EMV chip global standard used for many card payments. It describes the requirements for global inoperability between chip-based payment applications and acceptance terminals.

EMV stands for 'Europay, Mastercard, and Visa' - the three companies that jointly created and have managed it since the 1990s.

3. Cost

A merchant will need to consider the associated fees with a particular processor.

Some processors might, for example, keep costs low in the long-run, but have high set-up fees, or vice versa.

4. Reputation

A merchant should properly evaluate a processor's reputation and customer service record before making a commitment.

Some processors offer unique features that set it apart from others. But, if the processor's customer service record, for example, is weak or its systems go down on a regular basis, it is likely to impact your business and customers.

Check out a potential issuer processor's case studies and ask around at industry events to get an unbiased insiders' view.

Summary

An issuer processor is a financial institution that connects an issuer to card and bank networks and mediates the behind-the-scenes payment process.

It plays an important role in payment processing, by receiving and processing data, authorizing or declining transactions, and communicating with settlement entities.

The difference between an issuer processor and payment gateway lies in their respective roles in the payment process.

There are big branded issuer processing services that are also payment schemes. Merchants may be wise to compare their services and costs to independent providers who are more specifically focused on developing the latest issuer processing technology.

The right issuer processor will enable merchants to offer innovative services, such as local payment methods, while operating efficiently and securely. This will help merchants build a strong base of loyal customer in their target markets.

When done correctly, the issuer processor makes an important contribution to the positive customer experience the merchant is able to deliver.

Important areas to look out for in issuer processors are: capabilities, compliance, cost and reputation.

Ultimately, a high-quality issuer processor will enable you to offer the best possible service to your customers today, as well as keeping your business ahead of emerging payment trends and customer expectations.