A merchant's ultimate guide to credit card issuers

We’ll admit it — managing small business finances isn’t a picnic. While everyone’s familiarity with the ins and outs of credit cards and payment processing differs, it’s safe to say that fintech details aren’t what get entrepreneurs out of bed in the morning... unless they work at Heartland.

What’s equally true? The financial world can’t be avoided. As a consumer, you’ve probably opened a new credit card without reading every word of the fine print in the contract. The majority of business owners decide to take card payments as a way to improve their customer experience, even though it means paying fees and navigating the complicated world of payments technology.

In short: We all interact with card brands, credit card issuers and the payment authorization network eventually. As both a consumer and a merchant, it’s worth learning how these mega enterprises work, and what the differences are between them. It will allow you to make more confident, informed decisions about who you partner with to make a prosperous financial future for the people you care about.

Having been a staple of the payment processing industry for more than 20 years, and the author of the Merchant Bill of Rights, we’d be honored to be your guide to answering these questions and several more:

Intro to issuers: The lenders behind everyday purchases

Credit card issuers are banks (or financial institutions, if you want to get fancy about it) that partner with card brands to offer credit cards to everyday people.

Practically, that means when you buy something using your credit card, your issuing bank is responsible for backing your card purchases by paying for them on your behalf.

Here’s an example that might feel a little more familiar.

Card issuers are a type of lender. The application process for a credit card is as in-depth as it is because issuers take on a fair amount of responsibility when they approve an applicant and extend a credit card limit. We’ll cover how they make money by taking on this responsibility a little later in this piece.

Earning back your credit limit is part of what separates credit cards from regular loans or debit cards. Let’s say the issuing bank checks out your credit history and starts you off with a $350 credit limit. You charge $50, bringing your credit limit down to $300. If you pay that $50 off before the due date, you’re back to having $350 of available credit to spend however you please.

Major credit card issuer names you may know

According to findings published in a February 2020 Nilson Report, The top US credit card issuers at the close of 2019, measured by market share were:

Credit unions are also part of the card issuing game. They share some similarities with banks, but differ in that they are nonprofit financial institutions owned by their members. Banks are for-profit, meaning they’re privately owned or publicly traded. Prominent examples of credit union card issuers include Penfed Federal Credit Union and Navy Federal.

What credit card issuers do

Provide credit cards to consumers

We mentioned earlier that card issuers partner with card brands (sometimes called credit card networks) to offer credit cards to the public.

Take a closer look at this sample card below, and you’ll notice Visa’s logo in the corner. Bank of America is the credit card issuer, while Visa is the card brand.

Quick tip: If your issuer’s logo isn’t on the front of your card, try looking at the small print on the back.

While issuers and card brands manage different parts of the payments journey, there’s nothing keeping a company from doing both.

The four major card brands are Visa, Mastercard, American Express (sometimes called Amex) and Discover. American Express and Discover are both card issuers and card brands.

To summarize in simple terms, here’s what each entity does:

Authorize cardholder transactions

Credit card authorization is the process a transaction goes through to confirm a customer has not reached their credit limit and that the cardholder account is in good standing. This takes place before a purchase is approved.

As you read all of the steps below, don’t forget that these checks and balances between various organizations are happening in a few seconds.

The authorization network is made up of all the groups who play a role in getting a transaction authorized — from a card being swiped to the cardholder signing their receipt. They are:

The acquirer…

is a transaction’s first stop on the authorization network. An acquirer is the entity that enables merchants to accept credit and debit card payments, like Heartland. Acquirers receive credit card authorization requests and essentially help the merchant get paid by cardholders. They rely on credit card issuers to make sure everything is in order with the card and associated bank account before approving a transaction. They also sometimes use a payment gateway provider as a go-between.

The payment processor…

provides tech to send transactions through the electronic network of data for authorization. Essentially, payment processors are the mediator between the merchant and financial institutions (acquiring banks and issuing banks) involved in a transaction. They use encryption to secure the transaction details they receive from the merchant and forward them to the issuer or card brand for verification. Sometimes, the acquirer and payment processor for a transaction are one and the same.

The card brand…

is sometimes referred to as a network or card association network. Whatever you call it, each card brand has their own authorization requirements, rules and interchange costs. This network of systems communicates with both issuers and acquirers during the credit card authorization process. Visa and Mastercard are the most popular card brands.

The issuer…

responds to transaction requests based on cardholder account info. When they receive an authorization request, they make sure a customer’s card is valid and connected to a bank account with sufficient credit to cover the purchase being requested. When an acquirer contacts an issuer for approval, the issuer sends a code back that gets relayed as an “Approved” or “Declined” message on the merchant’s POS screen.

How the money gets made

Ok, so we get what credit card issuers do, what card brands do and how they interact with other groups in the authorization network. What might not be as clear after all this intricate tech talk is how they turn a profit.

Some key examples of customer fees:

• Annual fees. These are (unsurprisingly) a yearly charge to customers for use of their credit cards. You’ll find them on cards with high rewards rates, or cards for people with bad credit.
• Balance transfer fees. When customers transfer debt from one card to another to get a lower interest rate, there’s usually a fee of 3-5% of the amount transferred.
• Cash advance fees. Issuers charge this when a customer uses their credit card to get cash out at an ATM. This fee ranges from 2-5% of the amount of cash taken out, often with a minimum dollar amount.
• Late fees. If a customer doesn’t pay the minimum amount on their credit card by the due date, they can expect a late fee. Some cards waive these fees or don’t charge them at all. But it’s worth remembering that your credit score can suffer if you consistently pay late, regardless of fees.
• Foreign transaction fees. Like late fees, this is one some card brands waive to attract customers. Capital One, for instance, was the first credit card issuer to remove foreign transaction fees from their cards entirely.

Customers aren’t the only ones who pay fees. Each time a customer swipes their card, the merchant pays the credit card issuer “interchange” — a fee between 1% and 3.5% based on the transaction and type of card the customer is using. Generally, the credit card issuer splits this fee with their card brand partner.

According to data from research firm R.K. Hammer, credit card brands (plus American Express and Discover, who are both card issuers and brands) posted $176 billion in income in 2020. That number was down from $178 billion in 2018. Of the $176 billion in 2020, interest fees accounted for $76 billion and interchange fees accounted for $51 billion in 2020.

Q2 2021 Card Brand Revenue in Billions

As you might imagine, all of this potential profit to be made keeps competition in the card-issuing space fierce. If you’ve ever wondered why credit card companies roll out massive holiday advertising campaigns, big-budget commercials and a steady stream of credit card offers that land in your mailbox all year long...it may seem a little less surprising now.

How big of a budget, you ask? According to a Statista report on US credit card brands in 2020, JPMorgan Chase & Co. spent $72 million on advertising and marketing, American Express spent $117 million and Discover spent a whopping $179 million. To compare, you could buy four islands in Fiji’s pristine Northern Lau Group covering 5,187-acres for a cool $155 million in 2021.

In all these big numbers, it can be easy to forget that merchants are often small, local operations with a handful of employees. Many — perhaps even you, dear reader — are looking to increase your average ticket size and would need a small business loan to cover any large unforeseen expenses.

With a keen eye on the bottom line, some business owners accept card brands based on cost (specifically avoiding high-fee card brands).

What’s the deal with co-branded credit cards?

Have you ever had a friend with a particular gift for redirecting any conversation, regardless of topic, to mention the amazing airline miles they’re getting with their credit card?

It’s easy to get confused at first glance. The co-branded partner’s logo is sometimes more prominent both on the physical card and in the marketing to sell the cards. But a bank or credit union is always the one doing the financial backing and the issuing of the cards. This is true even if the credit card issuer’s name only appears in small print on the back of the card.

If a cardholder has problems with their card, they’ll need to contact the credit card issuer, not the co-branded partner that appears on the card.

When a consumer signs up for a co-branded rewards card, the card issuer will purchase reward points or miles from the co-branded partner and distribute these rewards to the cardholder’s account with the partner. If the cardholder has questions or concerns with the reward program associated with their card, they’d need to contact the co-branded partner that operates it.

Co-branded cards draw in customers with the promise of earning merchandise discounts, cashback opportunities or reward points, and can be used anywhere a non-co-branded credit card would be accepted.

As with all things in life…there is a catch with rewards cards. The way they provide cardholders with competitive cashback and rewards is partly by charging you, the merchant, a higher interchange fee than you’d generally pay for a regular debit or credit card. They then take a portion of that higher fee to cover the cost of the rewards. Don’t stress just yet, though! We’ll talk about ways to offset these higher costs in the final section of this blog.

Top card brands and the perks they’re known for

There’s no shortage of credit card offers for the average consumer. The challenge is finding the specific credit card — or mix of cards — that best fits their needs. Young consumers in their first year of college who hope to build credit may be satisfied with a low interest credit card with a low limit and no annual fee. Consumers with a big purchase coming up who want to score a tidy account opening bonus with the right card will be on the hunt for a rewards card. A retired consumer set on traveling to their heart’s content won’t settle for anything less than a travel rewards credit card that can offer reliable trip cancellation insurance, too.

The right card is out there for every goal or stage in life. But regardless of the card they select, consumers expect their choice in plastic to be honored at the businesses they frequent. Unfortunately, that isn’t always the case. Below, we’ll give you a brief overview of the major card brands, what they’re known for in the market and the advantages and challenges of accepting them at your business.

The Visa network is the largest payment network in the world. According to operational performance data published by Visa, there were 343 million Visa credit cards in circulation in the US and 798 million Visa credit cards in circulation outside of the US at the end of September 2020. The Visa network is currently accepted in more than 200 countries and territories around the world. Customers looking for a card with an incredibly high chance of being accepted anywhere — in or outside of the United States — carry Visa.

As a merchant, you’re likely to have plenty of customers hoping to pay with a Visa card. If you choose to accept Visa at your business, (and you definitely should), you can’t reject Visa’s rewards cards as a form of payment just because of the higher rate you’ll pay.

But there are other ways to keep your costs down, like ensuring you always process chip cards through an EMV-enabled terminal. In general, the more security measures a card transaction has, the lower the rate. So for example, if a card won’t swipe and you key it in manually instead, you’ll end up paying the highest interchange rate.

For online transactions, be sure to use an address verification system (AVS). An AVS heightens security by confirming that the billing address entered matches the address on file for the cardholder.

Globally, there are over 230 million Mastercards in circulation, making it the second most popular payment network by volume. They have three benefits tiers: Standard, World and World Elite.

Mastercard has an ever-so-slightly larger acceptance network than Visa. The simple rule of thumb is that anyone who accepts Mastercard will probably accept Visa, and vice versa. Cardholders looking for a broad acceptance network with an equally wide variety of benefits might settle on Mastercard.

As mentioned above, merchants can lower the interchange rates they’ll pay for Mastercard by using all the security measures available, including an AVS tool. And while the fees associated with accepting cards are non-negotiable, you can always take a hard look to make sure you’re getting a fair deal from your payment processor.

Discover is an issuing card brand, which means they’re a card brand that directly issues cards to consumers. In contrast, Visa and Mastercard only issue cards to consumers via third-party financial institutions.

As a card brand, Discover is known for offering attractive promotional offers on their credit cards, like cash back, miles and 0% intro APRs. In the past, many merchants declined to accept Discover cards due to the higher rate and buyer protection that come with processing those transactions. However, the difference in rates is no longer a strong outlier compared to other card brands’ rewards cards. Plus, many merchants see Discover card acceptance as a way to tap into strong customer loyalty from a typically younger, wealthier base of cardholders.

Since not every merchant accepts them, Discover cardholders are more likely to spend more, and return more often to businesses that do.

Roughly 10% of US credit cards feature an American Express logo. That may sound small compared to competitors, but there’s a strategy behind Amex’s approach. They target high-income cardholders with strong credit scores, which is how they’ve gained the highest purchasing volume despite having fewer cardholders than Visa or Mastercard. They claimed the top spot in J.D. Power’s 2020 U.S. Credit Card Satisfaction Study among national credit card issuers, the tenth time in the 14 years the study has been conducted. Customers with good (or great!) credit who are interested in rewards credit cards are often drawn to Amex cards.

If you’re hoping to maximize potential sales by accepting American Express but are concerned about the cost, you’re in luck! Amex’s OptBlue program allows your processing provider to bundle American Express’ interchange rates with the other cards you accept.

It’s also worth noting that Amex’s Small Business Saturday campaign, which encourages US consumers to shop at independent retailers and restaurants, reached an estimated $23.3 billion, up 18% from $19.8 billion in 2020. Getting an extra boost in patronage from Amex cardholders determined to shop small right before the holiday season could well make up for the slightly higher acceptance rate.

Take steps to elevate your processing

While you can’t avoid interchange fees as a business owner, we have a few other tips to share on how you can offset them. Settle your batches every day to avoid chargebacks from confused customers, ask for a different payment method if a customer’s card isn’t swiping (manual keyed-in transactions have the highest processing rate) and consider running a smart surcharge program.

We hope this blog gave you a thorough introduction to the payment authorization network and your place in it, and left you feeling confident about making your next financial decision. If you still have questions about best practices for accepting credit cards as a business owner, we have great resources on contactless payment solutions to elevate your business, why EMV chip card tech matters and much more. Happy hunting!