What Is a Credit Card Issuer and What Do They Do?

Credit cards have become a common financial tool, enabling convenient purchases and providing access to credit. Behind every credit card, a financial institution known as a credit card issuer plays a central role in managing the credit extended to consumers.

Understanding the Role of a Credit Card Issuer

A credit card issuer is a financial institution, such as a bank or a credit union, that provides credit cards directly to consumers. These entities extend a line of credit to cardholders, allowing them to make purchases up to a predetermined limit. When you apply for a credit card, you are essentially seeking to establish a credit relationship with an issuer. They are the primary entity managing your credit account. Issuers are responsible for approving transactions and initiating money transfers on behalf of the cardholder.

Core Responsibilities of Issuers

Credit card issuers manage cardholder accounts. They begin by evaluating the creditworthiness of applicants, assessing factors like credit scores, income, and debt-to-income ratios to determine eligibility and set appropriate credit limits and interest rates. This assessment helps them manage the inherent risk of lending unsecured credit. Once approved, issuers manage customer accounts, which includes processing transactions and handling billing cycles. They generate monthly statements detailing purchases, payments, and outstanding balances. Issuers also provide customer service, addressing inquiries, resolving disputes, and detecting fraud. They are also responsible for reporting cardholders’ payment history to credit bureaus, impacting an individual’s credit profile.

How Credit Card Issuers Earn Revenue

Credit card issuers generate income through several primary channels. A significant portion of their revenue comes from interest charged on outstanding balances that cardholders carry from month to month. The annual percentage rate (APR) applied to these balances is a substantial source of profit.

Issuers also collect various fees directly from cardholders. These can include annual fees for card membership, late payment fees if minimum payments are missed, and foreign transaction fees for purchases made internationally. Additionally, balance transfer fees are charged for moving debt from one card to another, and cash advance fees apply when cardholders withdraw cash using their credit card.

Another income stream for issuers is interchange fees, sometimes called “swipe fees.” These are small percentages of each transaction paid by the merchant’s bank to the card-issuing bank. Interchange fees typically range from about 1% to 3% of the transaction amount and help cover the issuer’s costs for processing transactions, managing risk, and funding rewards programs.

Credit Card Issuers Versus Payment Networks

It is common to confuse credit card issuers with payment networks, but they fulfill distinct roles in the transaction process. Credit card issuers are the financial institutions that extend credit and manage individual cardholder accounts, setting terms such as interest rates and fees. In contrast, payment networks, such as Visa and Mastercard, provide the infrastructure that facilitates transactions between the issuer and the merchant. These networks establish the rules for processing payments and ensure that transactions are securely routed and authorized. While most credit cards display both an issuer’s name and a network’s logo, some entities like American Express and Discover operate as both the issuer and the payment network, managing the credit extension and also providing the transaction processing infrastructure for their own cards.