Swiping your credit card is an easy way to pay for purchases, but it's more complicated behind the scenes. In many cases, one company processes the payment while another provides the money to cover the cost.
As a consumer, it may seem unnecessary to know the difference between credit card processors and credit card issuers. However, your processor can impact where you can use your card, and your issuer defines your card terms, such as how much you can charge and what interest rate you'll pay. To complicate matters, some companies act as both the card issuer and processor.
Confused yet? Don't worry. We sort it out below with an easy-to-understand overview of everything you need to know about processors and issuers.
What is a card issuer?
The card issuer is the financial institution that provides the credit card. It could be a local bank or credit union who is the card issuer, or it could be a national bank.
Some of the most popular credit cards come from these issuers:
- Bank of America
- Capital One
- Wells Fargo
There are also two card issuers that are unique in that they are also processors:
- American Express
What is credit card processing? Good question. Let's talk about that next.
What is a card processor?
The processor essentially serves as the go-between for the merchant and the card issuer. They make it possible for information gathered from your card at the cash register to be transmitted to the card issuer.
There are four credit card payment processors, also known as card networks:
- American Express
As mentioned before, Discover and American Express serve as both the card issuer and processor for their cards. Other credit cards have both an issuer and a processor. With the Chase Sapphire Preferred® Card, for example, Chase is the issuer and Visa is the processor.
Who is the card processor matters because not all merchants work with all card networks. Costco is a good example of this. If you want to pay with a credit card at one of the warehouse club's locations, you'll need a Visa card. The retailer doesn't accept credit cards processed by other networks.
For the most part, though, all four processors are widely accepted for payment at U.S. banks. However, if you are traveling overseas, you may find businesses don't accept Discover and American Express as readily as Visa and Mastercard.
It should be noted that the term processor can also apply to what are known as merchant services providers. These are companies, such as Square, that send credit card data to a card network.
How credit card processing works
Although credit card approvals may seem almost instantaneous at the register, a transaction must go through a number of steps before approval is granted:
- Data from your card is collected by the merchant's point-of-sale terminal
- The terminal sends the information through a processor to the card network
- A request is made to the issuing bank for authorization
- An approval or denial is sent back through the card network to the merchant terminal
At this point, assuming the transaction is approved, you walk away from the register with your purchase. However, the processor and issuer are not done with their work yet.
The merchant sends its authorized transactions to its financial institution, known as the acquirer. The acquirer relays those to the processor who, in turn, sends the information to the card issuer. Money is then sent from the issuing bank to the merchant's bank.
There are two more important questions that need to be answered about this process:
- How do credit card issuers make money?
- How do credit card processors make money?
Your card issuer makes money in several ways. They may charge a variety of fees, collect interest on balances and receive a portion of transaction fees.
These transaction - or processing - fees are usually a percentage of the purchase total and may range from 1.5% - 3.5%. Card issuers also make money by receiving a portion of these fees, which are paid for by merchants accepting credit cards.
Card transaction fees can be complex since they contain several components that are split among the various companies involved in completing the purchase. However, as a consumer, you simply need to know that accepting credit card payments is not free for businesses, and that brings us to our final point…
How card issuers and processors affect you
Because processors charge different fees, it can impact where you use your card. Businesses may choose not to accept cards from certain card networks if they deem the transaction fees too expensive.
For years, American Express was not accepted by many businesses because its processing fees were deemed too high. A more recent example is an announcement by Amazon that the online retailer will no longer accept Visa cards issued in the United Kingdom because of the cost of processing those payments.
Still, most card processors are accepted by most businesses in the United States. Unless you plan to use your card overseas, the card network is often less important than the card issuer. The issuer will determine what rewards you receive, how much interest you pay and whether you get extra perks such as statement credits for certain spending.
That said, some card benefits come from card networks. For instance, cards classified as Visa Signature or World Mastercard may come with added perks beyond what is offered by the issuer. These may include cell phone protection, travel services and extended warranty protection.
Ready to find your next card? Check out the best credit cards on the market today and compare options from a variety of issuers and processors.