In payment processing, one component of the payment processing tech stack involving credit or debit cards is the Bank Identification Number or BIN. Although BINs play a critical role in how payments are processed and authenticated, they often go unnoticed by the average consumer or merchant.
For payment processors and financial institutions, however, understanding BINs is essential for smooth transaction processing, security, and even risk management. This article provides an overview of what BINs are, how they work, and why they are important in payment processing.
What is a Bank Identification Number (BIN)?
A Bank Identification Number, or BIN, is the first six digits of a payment card number, such as a credit, debit, or prepaid card. These six digits identify the institution that issued the card, offering key information to parties involved in a transaction. BINs help payment processors, acquiring banks, and card networks verify the legitimacy of a transaction, match it to the correct bank or financial institution, and ensure funds are available.
BINs were initially established by the International Organization for Standardization (ISO), which set guidelines to ensure that each card-issuing institution has unique identifying numbers. Over time, BINs have become fundamental to payment processing systems worldwide, supporting a wide range of financial transactions.
Why is the BIN Important in Payments?
The role of the BIN extends beyond simply identifying the card issuer; it affects various aspects of the payment process:
Transaction Routing: When a customer makes a purchase using a card, the payment processor uses the BIN to route the transaction to the right financial institution. This routing allows the processor to request authorization for the transaction from the issuing bank, which then approves or denies it based on factors like available funds and fraud checks.
Security and Fraud Detection: The BIN can provide valuable data points that help prevent fraud. For instance, it indicates the issuing bank, card type (credit, debit, or prepaid), and sometimes the country of issuance. If a transaction shows unusual behavior, such as a high-value purchase made from a foreign country, the BIN information can help flag it for further inspection or denial.
Card Verification and Authentication: BINs support the verification process by providing immediate access to the issuing institution’s information. Payment processors use this data to authenticate the card details, ensuring that the card being used matches the card type, issuer, and other key characteristics tied to the BIN. This process helps reduce the risk of unauthorized transactions and fraud.
Data Analysis and Consumer Insights: BINs provide a wealth of information for data analysis. Companies can analyze BIN data to track transaction patterns, better understand customer demographics, and assess risk in different regions or among various card types. This data can also be used to create custom offerings or enhance customer experiences based on observed trends.
Supporting High-Risk Merchant Accounts: For high-risk industries, BIN information can be especially important. Merchants in high-risk categories, such as online gaming, travel, and adult services, benefit from BIN data as it helps processors manage risk levels and ensure compliance with industry regulations.
How BINs Work in Payment Transactions
Each transaction follows a flow in which the BIN plays a role:
Initiation: A customer initiates a transaction by swiping, dipping, or entering card information for a purchase.
BIN Identification: The payment processor reads the first six digits of the card number (the BIN) and identifies the issuing institution, along with the card type and country of origin.
Routing: The payment processor routes the transaction request to the appropriate issuing bank for authorization.
Verification and Approval: The issuing bank reviews the transaction, confirms the cardholder’s account details, and assesses if there are sufficient funds or available credit. The bank also conducts fraud checks based on the BIN and other data.
Response: Once verified, the issuing bank responds with either an approval or denial. The response is sent back to the payment processor, and the transaction is completed.
Settlement: If approved, the funds are settled, and the payment processor ensures that the money is transferred to the merchant’s account.
This entire process occurs in seconds, with the BIN being central to routing, verifying, and authorizing each step.
Types of Information Provided by BINs
How Payment Processors Obtain a BIN for Payment Processing
Obtaining a Bank Identification Number (BIN) is a crucial step for any new payment processor looking to enter the payments industry. By securing a BIN, a payment processor can issue cards, authorize transactions, and offer tailored services that align with their business model. However, the process to obtain a BIN involves several steps and requires navigating financial regulations and partnerships with established institutions.
1. Establish a Relationship with an Acquiring Bank
The first and most essential step in acquiring a BIN is to partner with an acquiring bank. In the payment industry, acquiring banks play a key role by sponsoring new payment processors and helping them gain access to card networks. Since only licensed financial institutions can directly request BINs from card networks, having a sponsoring bank is a requirement for new payment processors.
- Choosing the Right Bank: Not all banks are equipped to handle new payment processors, so it’s important to research and choose a bank that supports startups in the payments industry. The bank should ideally have experience with high-risk industries if the processor plans to serve that sector.
- Building a Strong Business Case: Acquiring banks will assess the payment processor’s business plan, compliance procedures, and financial stability. Payment processors should be prepared to present a detailed and compliant business plan, including risk management practices.
2. Apply to Card Networks (Visa, Mastercard, etc.)
Once a partnership with an acquiring bank is in place, the next step is to apply for BINs through one or more major credit card networks, such as Visa, Mastercard, American Express, or Discover. These networks issue BINs to acquiring banks, which then allocate them to payment processors or merchants under their sponsorship.
- Card Network Membership: Each card network has its own requirements and fees for issuing BINs. Payment processors typically must apply for membership and meet the network’s standards, including security, compliance, and transaction volume criteria.
- Compliance with Network Standards: Visa and Mastercard, for example, require strict adherence to Payment Card Industry Data Security Standards (PCI DSS). New processors must be prepared to demonstrate compliance and may need to undergo regular audits to meet these standards.
3. Undergo Regulatory and Compliance Checks
Because payment processing involves handling sensitive financial data, regulatory and compliance checks are rigorous. Payment processors must meet both local regulations and the specific compliance requirements of each card network and their sponsoring bank. Key areas of compliance include:
- Anti-Money Laundering (AML) and Know Your Customer (KYC) Policies: Processors must implement AML and KYC procedures to prevent fraud and money laundering.
- Data Security and Privacy Regulations: Payment processors need to comply with data protection laws, such as GDPR in Europe or CCPA in California, to ensure the safety of customer information.
- Transaction Monitoring: Card networks often require processors to implement transaction monitoring systems to detect unusual or high-risk activities.
4. Set Up and Test Payment Infrastructure
Once the BIN is issued, the payment processor needs to integrate the BIN with their payment infrastructure to handle transactions securely and reliably. This infrastructure includes systems for routing, fraud detection, and transaction settlement.
- Infrastructure Testing: Before going live, payment processors should conduct extensive testing to verify that transactions can be authorized, routed, and settled accurately. Testing should also cover security measures, such as encryption and tokenization, to protect cardholder data.
- Implement Fraud Prevention Systems: Fraud prevention tools, such as address verification services (AVS), 3D Secure, and real-time fraud monitoring, help secure transactions associated with the new BIN and protect both the processor and cardholders.
5. Launch and Monitor Transactions
Once the setup is complete, the payment processor can launch its services and begin handling transactions. However, this is only the start of ongoing responsibilities associated with BIN management.
- Monitor for Compliance and Security: Regular audits, monitoring, and updates are essential to ensure ongoing compliance with industry standards and regulatory requirements.
- Data Analysis and Performance Tracking: Payment processors often track BIN-specific data, such as transaction volume and fraud rates, to assess performance, make improvements, and optimize services.
6. Consider Partnering with BIN Sponsorship Providers (Alternative for Smaller Startups)
For new payment processors that may not yet have the scale or resources to obtain their own BIN directly, there is an alternative: working with a BIN sponsorship provider. BIN sponsorship providers are intermediaries that already hold BINs and allow smaller processors to operate under their BINs.
- Pros and Cons of BIN Sponsorship: While this option allows faster entry to market, it often comes with higher fees, and the sponsoring provider may place certain restrictions on the processor’s operations. However, for small or emerging processors, it’s an efficient way to start processing payments without needing to go through the entire process of obtaining a BIN.
