Issuer Processors 101: What They Are and How They Power Card Programs

As a bank, fintech, or brand that’s launching a card program, you must find a way to integrate into the card network rails and build systems to manage complex transaction authorization, clearing, and settlement processes.

The good news is, you don’t have to do it alone. Issuer processors are built for the job.

In this article, we will cover what an issuer processor is, where they sit in the payments landscape, and how they help you grow your card program.

What is an issuer processor?

An issuer processor connects card issuers, cardholders, card networks, and banks to ensure payment transactions are processed smoothly. 

It serves as the interface to the card networks, and processes and orchestrates millions of daily transaction messages, and ensures that card issuers and card-issuing banks can deliver safe, reliable and seamless experiences to their customers.

The tasks an issuer processor handles vary depending on the type of relationship you establish. However, some of the common tasks every issuer processor manages are:

• Approving or declining a transaction on behalf of the card issuer: Issuer processors check available cardholder balances and authorize (or decline) payment transactions.
• Settling and reconciling transactions: Issuer processors ensure funds flow properly in and out of cardholder accounts for the issuer to settle up with the card networks.
• Monitoring and protecting the card issuer’s program from fraud: Issuer processors monitor each transaction for the possibility of fraud, protecting card issuers from penalties and cardholders from fraudsters with tools such as 3DS and transaction risk scoring.

The three phases of issuer processors

Issuer processors have evolved in phases due to the way the payments industry has evolved. Here is a breakdown of each phase and a brief explanation of what they do:

• Legacy issuer processors: ‍‍This category includes firms like Jack Henry, FIS, and TSYS (all founded before 1984). They're built to work with large traditional banks and are known for their core banking software. These providers still leverage COBOL, IBM JCL, and mainframe applications.

• Second-gen issuer processors: Firms like i2c, Galileo, and Marqeta belong in this category. Emerging in the 2000s, these providers began catering to non-bank card issuers while bundling compliance, risk management, and support services for fintechs.

• Developer-first issuer processors: “Developer-first” refers to the approach the third generation of issuer processors like Lithic take. They focus on delivering flexibility, control, and program observability. With their API-first approach, developer-first issuer processors are powering hundreds of innovative card programs.

How to work with an issuer processor

Generally speaking, the best way to build a card program is by working directly with a sponsor bank and leveraging your issuer processor as a pure technology layer. 

Going "direct-to-bank" gives you and your bank significant oversight over your program and allows you to own your relationship with your sponsor bank.

Under this model—known as a “processor-only” relationship model—your issuer processor “plugs into” your core system. It is responsible for transaction processing, managing integrations for personalization data, maintaining issuance files, etc.  

It will also implement your BIN and card profiles with a card manufacturer. 

To get started with this relationship you’ll need to:

•  Establish relationships with network entities like:
  • Sponsor banks (Read our guide to landing a sponsor bank)
  • Payment card networks
  • Any third-party vendors
• As a bank, fintech, or brand that’s launching a card program, you must find a way to integrate into the card network rails and build systems to manage complex transaction authorization, clearing, and settlement processes. 
• Acquire a bank identification number (BIN)
• Obtain any additional approvals as needed.  

Once you’re ready to launch your card program, you’ll also need to manage legal and compliance matters in-house by hiring people with extensive experience in these fields.

This setup is ideal for mature companies that want to own their relationship with their sponsor bank, and have the resources and expertise needed to build a card program in-house from scratch. 

But if you’re not ready to build an in-house compliance function just yet, you can work with an issuer processor that can manage your program for you until you’re ready.

The benefits of working with developer-first issuer processors

The issuer processor is arguably the most critical infrastructure provider behind any card program. As we previously noted, issuer processors have experienced a few evolutionary phases as payments have evolved.

A developer-first issuer processor is purpose-built to give card issuers high levels of flexibility in their programs. This helps issuers craft unique products that cater to customer needs while offering the highest levels of security.

Here are some of the advantages of working with a developer-first issuer processor.

High levels of program visibility

A modern card program needs high levels of visibility. This is how tech-forward companies can self-debug, optimize resources, and efficiently manage business workflows.

Developer-first issuer processors deliver visibility through real-time webhooks. In contrast, issuers working with legacy issuer processors must rely on daily batch processing to build reports. These real-time features help card issuers in the following ways:

• Real-time transaction settlement views
• Review digital wallet tokenization attempts
• Offer chargeback and dispute failure evidence to customers
• Visibility into the reasons for translation failure.

Robust fraud protection

Fraud is increasingly sophisticated and card issuers need high levels of control over their program to combat it. Developer-first issuer processors are built with features tailored for modern fraud prevention.

For instance, digital wallet fraud is not disputable since the networks consider them authenticated via the cardholder's Face ID or phone password. A developer-first issuer processor helps you fight fraud by using parameters like device risk scores, IMEI numbers, and geolocation.

Other features 3DS decisioning protect issuers from chargeback fraud, giving them full control over their programs.

Endless customization 

Legacy issuer processors force card issuers into one-size-fits-all boxes. While this approach worked historically, modern consumers demand personalization. A developer-first processor helps you build unique products by giving your product team a seat at the table during the design phase.

This helps you create highly customized workflows to suit your program’s needs. Whether using proprietary signals to combat fraud or building custom ledgers, a developer-first issuer processor’s modular approach can help you endlessly customize your program and differentiate your product in the market.

Switching issuer processors

At some point, you might discover that your current issuer processor is no longer a good fit for your program. Whether you’re seeking better transaction processing or enhanced security measures, switching issuer processors can take your program to the next level.

However, switching issuer processors without disrupting your cardholders and avoiding downtime is challenging. Careful planning is the key to executing a smooth switch. 

Here are a few key considerations you must take into account before planning a switch:

• What are you solving for? 
• What is your target timeline? 
• Do you have a live program today? 
• How’s your relationship with your current issuer processor?
• Who will own and operate your new ledger? 
• What partnerships do you need?
• Are you PCI-compliant? 
• Is your current issuer processor your program manager?

These questions will help you define the scope of your switch and create realistic deadlines. But what are the steps you must execute within your migration plan? Check out Lithic’s Guide to Switching Issuer Processors to learn more.

Is your issuer processor a good fit for your card issuing program?

Issuer processors are an integral part of every card-issuing program, but there are several different kinds, and they have different strengths.

A developer-first issuer processor like Lithic can help you create unique products by accommodating your product team's needs.

Explore what a developer-first issuer processor can do for your program by speaking with one of our payments experts.

FAQs

What is an issuer processor?

An issuer processor connects card issuers, cardholders, card networks, and banks to ensure payment transactions are processed smoothly.

What are the different phases of issuer processors?

There are three phases of issuer processors:

• Legacy – These companies cater to large banks and offer issuer processing in addition to core banking software.
• Second generation – These companies bundle fraud and risk-management solutions for fintechs, reducing the steep requirements legacy providers impose.
• Developer-first – These companies help you endlessly customize your program to create unique products that boost growth.

Is an issuer processor the same as an acquirer processor?

No. The acquirer processor sits on the merchant side of the payments ecosystem, while the issuer processor sits on the card issuer's side. 

In a transaction, the issuer processor makes sure the payment request is valid and debits funds from the customer while the acquirer processor credits those funds to a merchant's account.