Prepaid Cards and the Issuing Bank | Powercash21
By definition, an issuing bank is a bank or financial institution that issues debit and credit cards to consumers or merchants. Through a card issuer, individuals or businesses can get credit, debit or prepaid cards from the most well-known card networks like Visa, Mastercard, and American Express.
What is an issuing bank?
To further define issuance, the bank offers credit to its customers and is charged with the responsibility of ensuring the validity of transactions made with the card. For example, during an online purchase, the customers enter their card details to buy a product or service. If the transaction is valid, the issuer will transfer the money to the acquirer – the bank that the merchant’s contract is with for their card acceptance and payment processing functions – to complete the sale. Both an issuing and an acquiring bank, as well as the credit card schemes, are thus very important in the card transaction flow.
The responsibilities of the card issuer
What is the role of the issuing bank?
Even though some people might think that Visa and Mastercard are issuing a cardholder’s credit or debit card, that’s actually an action performed by an issuing bank. The reason for this is that the risk involved in such a process requires the bank’s involvement to underwrite risk. For instance, when a cardholder disputes a chargeback due to a suspicious transaction that appears on their card statement, it’s the issuing bank who will decide if the chargeback will be processed or not. Or, in another case, when a cardholder doesn’t have enough funds in their credit card to complete a purchase, the issuer contacts the customer and not the card network (e.g. Visa, Mastercard) to resolve the issue.
Now that you have a better understanding of what is an issuer, let’s see the role it plays in the payment process. In an e-commerce environment, the card issuer receives a request from the merchant’s payment terminal, initiated by the payment processor and the card network, to either approve or decline the transaction. After a check of the cardholder’s card balance, if the funds are enough to cover the transaction, the issuing bank will send an approval code back to the merchant’s payment terminal. All approved transactions are added to the merchant’s batch, a group of transactions which are processed but not settled yet. When a batch closes, the credit card processing company of the business will receive the processed funds from the card issuer and will transfer the total batch amount to the merchant’s bank account. That is the precise moment when a merchant gets paid from customers.
What are prepaid cards and how do merchants use them
Prepaid cards, unlike debit cards, are not linked to a specific bank account. Owners of prepaid cards can only spend the money they have loaded onto their card ahead of time and do not have access to overdraft benefits like in the case of debit cards.
Prepaid cards have many benefits for cardholders, including, but not limited to:
- No bank account needed: Users of prepaid cards do not need to have a bank account. The cards are pre-loaded by the issuing party and the user can receive and use the funds without linking them to a bank account. This is an advantage as the unbanked population can access the benefits of a credit or debit card. What’s more, the fact that the card can only be used if loaded, limits the risks involved in lost or stolen credit and debit cards.
- Anonymity: Prepaid cards can be issued without a cardholder name on them. Cardholders prefer payment privacy in certain situations.
- No credit checks required: prepaid cards can be issued no matter what the user’s credit score might be, giving an opportunity to that consumer segment to make purchases using a payment card.
- Global usage: prepaid cards can be used anywhere where the card network they belong to can be used globally. For example, prepaid VISA cards can be used anywhere that VISA cards are accepted. Although many cardholders and merchants wonder what country of issuance means in terms of limitations when a prepaid card is used, the same limitations apply to a card whether it is a prepaid, debit or credit card. Country of issuance refers to the country in which a prepaid, debit or credit card was issued. In certain situations, for example in travel, merchants prefer that local cards are used as a way to mitigate risk and foreign exchange exposure. Or in certain geographies, transactions get declined by default if local cards are not used to make purchases online.
Businesses in many industries also manage prepaid card programs, in effect issuing cards to their client base, employees or partners. In this case, businesses collaborate with a prepaid card program provider such as Powercash21, who in turn works with a number of regulated EMIs or issuing banks to provide such programs.
Some prepaid card programs frequently used by businesses include:
- Corporate payments: businesses need to make pay-outs for expenses, incentives, payroll, procurement and many more.
- Employee and contractor expense management
- Gift card programs
- VIP customer pay-outs and rewards
The prepaid card programs are widely used by payment managers, HR and Payroll teams, and by industries such as gaming, multi-level marketing and shipping. Why do businesses opt for prepaid card issuing programs rather than simple bank wire transfers?
There are several reasons and benefits for opting to leverage an issuing bank’s prepaid card program for pay-outs in business:
- A more economical and speedier alternative to high-cost banking solutions
- Improved efficiencies in processing corporate payments
- Increasing the reach of those businesses can make pay-outs to, such as making payouts to the unbanked segments, or customers that strongly prefer payment privacy.
- Leveraging branded prepaid card programs to drive brand awareness and customer loyalty
- Reduction of payroll costs
If you are a business looking to adopt a prepaid card program, do not hesitate to contact us for more information on the different issuing bank prepaid packages that Powercash21 provides access to.