Use the glossary below to understand the terminology in the payments industry. If you come across a term that you do not understand and it is not defined below, e-mail us and we will define it for you.
ACH – Automated Clearing House is a form of electronic funds transfer. ACHs by design are secure and efficient way to send routine payments electronically to bank accounts within the U.S. ACHs have a two day settlement period where the merchant receives the funds in his bank account by the second business day. By contrast, wire transfers are non-routine electronic funds transfer as they are relatively labor intensive and consequently expensive to transact. Wire transfers are typically used for international transactions, or domestic transactions that require same-day settlement.
Acquiring Bank – A financial institution that contracts with merchants to settle electronic transactions. The acquiring bank provides the merchant with its credit card processing account. This acquiring bank sends credit card and purchase information from transactions to a credit card association (such as Visa and MasterCard), which forwards it to the issuing bank.
Adjustment – An adjustment is initiated by the acquirer (a Visa / Master Card Affiliated Bank or Bank/Processor that is the host of the merchant’s merchant bank account) to correct a processing error. The error could be a duplication of a transaction or the result of a cardholder dispute. The acquirer debits or credits the merchant DDA/Bank account for the dollar amount of the adjustment.
Authorization (or “Pre-Authorization”) — This action reduces a cardholder’s account’s limit to buy for a predetermined amount of time. A Pre-Authorization is the first half of a sale. A Pre-Authorization specifies that amount to be set aside for a potential transfer of funds. An authorization also ensures the merchant that the cardholder has sufficient funds or credit limit in his account to proceed with the sale.
Assessments – Fees levied by Visa and MasterCard associations for all settled transactions. Assessment are fixed and apply uniformly to all merchants in the U.S. Assessments for Visa are 0.0925% and MasterCard are 0.0950%. In other words, for every $100 in transactions, Visa gets $0.0925 and MasterCard gets $0.095.
Authorization Code – A code that notifies you that you have obtained the authorization for a specific card transaction. Note: You should print this on the sales draft.
Automated Teller Machine (ATM) – An unattended, magnetic stripe-reading terminal that dispenses cash; accepts deposits and loan payments; enables a bank customer to order transfers among accounts and make account inquiries. AVS (Address Verification System) – In 1996, Visa/MasterCard introduced a new regulation requiring all businesses who manually key in the majority of their credit card transactions to have a special fraud prevention feature on their credit card processing equipment. This feature is referred to as an address verification system (it checks to see that the numeric value of the street address and zip code given by the customer matches the information the credit card company has on file). If you do not to use AVS, VISA and MasterCard charge a higher Interchange fee on those sales. Bankcard -A debit or credit card issued by a bank or other financial institution, such as a Visa Card, MasterCard® or Maestro card.
AVS – Address Verification System is a security feature used to verify the identity of the person claiming to own the credit card. The system will check the billing address of the credit card provided by the user with the address on file at the credit card company. AVS verifies the numeric portions of a cardholders billing address. For example, if your address is 101 Main Street, Highland, CA 92346, AVS will check 101 and 92346.
Bank Rate – Also known as “Discount Rate.” This is a percentage of each sale that the bank charges as per Visa and MasterCard Rate requirements. This is typically a percentage and a per item – such as 1.87% + $0.20. The bank rate blends typically blends together Interchange fees, assessments fees, and a processing fee from the payment processor. Batch – A collection of credit card transactions saved for submitting at one time, usually each day. Merchants who do not have real-time verification systems must submit their transactions manually through their terminal or other specified method of processing. Batch fees may be charged to encourage a merchant to submit his or her transactions at one time, rather than throughout the day.
Capture – The submission of a credit card transaction for processing and settlement. POS terminals and real-time processing software capture transactions to submit to merchant account providers or credit card processors. Cardholder Information Security Program (CISP) – A Visa program intended to protect cardholder data – wherever it resides –ensuring that members, merchants, and service providers maintain the highest information security standard. Cash disbursement – A transaction that is posted to a cardholder’s MasterCard card account in which the cardholder receives cash at an ATM, or cash or travelers checks at a branch of a member financial institution or at a qualified and approved agent of a member financial institution.
Chargeback – A chargeback occurs when a card holder disputes a credit card transaction with his or her credit card issuer. The card issuer initiates a chargeback against the merchant account. The amount of the disputed transaction is immediately withdrawn from the merchant’s bank account, and the merchant has 10 days in which to dispute the chargeback with proof of purchase, signature, proof of delivery, etc. A chargeback fee is usually assessed to the merchant on top of the actual transaction. See also retrieval request.
Chargeback defense – A customer who does not receive his goods or services, or says he did not place an order, can ask his issuing bank to charge back the merchant. The Issuing Bank sends the chargeback request to the merchant bank, which forwards it to the merchant asking to validate the charge. Information such as the amount, an invoice or folio, customer signature, or shipping documents, and the shipping address (used in AVS during the authorization) are needed to defend against a chargeback.
Clearing – The process of exchanging financial transaction details between an acquirer and an issuer to facilitate posting of a cardholder’s account and reconciliation of a customer’s settlement position. Cobranded card – A credit card issued jointly by a member bank and a merchant, bearing the “brand” of both. “Code 10” Authorization – This is a voice authorization code that you might initiate when you suspect a card is stolen or fake, or when a customer is acting suspiciously.
Commerce server – A Web server that contains the software necessary for processing customer orders via the Web, including shopping cart programs, dynamic inventory databases, and online payment systems. Commerce servers are usually also secure servers.
Corporate card – A bankcard issued to companies for use by company employees. The liability for abuse of the card typically rests with the company and not with the employee.
Credit – This action increases the cardholder’s limit to buy. It authorizes a transfer of funds from your account to the cardholder’s account. Usually performed when a customer returns an item not on the same day as the initial purchase. Credit card – A plastic card bearing an account number assigned to a cardholder with a credit limit that can be used to purchase goods and services and to obtain cash disbursements on credit, for which a cardholder is subsequently billed by an issuer for repayment of the credit extended at once or on an installment basis.
Credit card processors (or third-party processors) – Merchant services providers that handle the details of processing credit card transactions between merchants, issuing banks, and merchant account providers. Web site operators usually must first establish their own merchant account before contracting for credit card processing services.
Currency conversion – The process by which the transaction currency is converted into the currency of settlement or the currency of the issuer for the purpose of facilitating transaction authorization, clearing and settlement reporting. The currency of transaction is determined by the acquirer; the currency of the issuer is the preferred currency used by the issuer, and most often, the currency in which the cardholder will be billed.
CVV2 – Card Verification Value is a 3- or 4-digit value on a credit or debit card and it is intended to provide another security feature for “card not present” situations. When a merchant receives this code, it is intended to verify that the customer has the card in their possession. MasterCard, Visa, Discover, and JCB credit and debit cards have a 3-digit code printed like the card number, and is always the final group of numbers printed on the back signature panel of the card. American Express cards have a 4-digit code printed on the front side of the card above the number, referred to as the CID (or Unique Card Code).
DDS (digital data storage) debit card – A financial instrument used by consumers in place of cash. Unlike a credit card, debit card purchases are deducted automatically from the cardholder’s account, like a check. Visa and MasterCard now offer debit cards through banks and other financial institutions.
Debit card – A plastic card used to initiate a debit transaction. In general, these transactions are used primarily to purchase goods and services and to obtain cash, for which the cardholder’s asset account is debited by the issuer.
Digital wallet – A consumer account set up to allow e-commerce transactions through a particular credit card processing system. Before the consumer can make a purchase, he or she must first establish an account with the credit card processor, who provides an ID and password. These can then be used to make purchases at any Web site that supports that transaction system. CyberCash’s “Digital Coin” system is an example of a digital wallet system.
Discount Rate – See “Bank Rate.”
Draft/Sales draft – A record (usually paper) used to document that a good or service was purchased. Electronic Commerce Indicator (ECI) – A system in which the transaction data from an Internet transaction is tagged with this indicator and sent on to Visa or MasterCard. It is a requirement (October 1st, 2000) for all merchants with a majority of sales via the Internet to use an approved and ECI compliant payment gateway. Hand keying of credit card numbers in to standard credit card terminals would not capture and pass on the ECI, therefore this method is not compliant.
Electronic funds transfer (EFT) – A paperless transfer of funds initiated from a terminal, computer, telephone instrument, or magnetic tape.
Emboss – The process of printing identifying data on a bankcard in the form of raised characters. Equipment – Most credit card transactions are conducted electronically by using Electronic Draft Capture (see EDC). Typically this is performed by terminal (like the popular Hypercom T7PlusP or Verifone Omni 3730LE), Software or via the Internet.
Factoring – The purchase of debts owed, or “accounts receivable,” in exchange for immediate payment at a discount. In e-commerce, the term is often applied to ISOs that offer to process credit card transactions through their own merchant account rather than through an account established by the merchant, in exchange for a percentage of the transaction or other fee. Factoring of credit card debt is illegal.
Floor limit – A specific dollar limit used to determine which Visa card transactions you must authorize. If your business has a floor limit $1,000—you must get authorization for any transaction over that amount. Note: All airline, telephone, and mail order transactions must be authorized, even if the amount is under your floor limit.
Holdback – A portion of the revenue from a merchant’s credit card transactions, held in reserve by the merchant account provider to cover possible disputed charges, chargeback fees, and other expenses. After a predetermined time, holdbacks are turned over to the merchant. Note: Merchant account providers almost never pay interest on holdbacks.
Imprint – A physical impression you make from a customer’s card which appears on the draft. This proves that the card was present when the sale was made. Note: An imprint can be created electronically if you use a magnetic-stripe-reading terminal that includes the correct point-of-sale (POS) entry code.
Imprinter -A device to produce an image of the embossed characters of the bankcard on all copies of sales drafts and credit slips. The fee that the Card Association charges the merchant to get the funds into his bank (merchant bank) and to get the billing information to the cardholder’s bank (issuing bank). Interchange fees are based on following credit card regulations and capturing appropriate data including card swipe, address, and electronic signature as needed. These fees are also based on the timeliness of the settlement of transactions.
Interchange – The single largest cost driver in the processing of debit/credit card transactions. This fee is a part of the merchant’s discount rate and can range from 70% to 95% of the total card processing fees. This fee goes from the merchant to the payment processor to the debit or credit card issuer of the card. For example, if a customer hands you a Citi MasterCard then the Interchange eventually goes to Citi Bank.
ISO (independent service/sales organization) – A firm or organization that resells credit card processing to small and mid-sized merchants. ISOs typically price their services higher versus a merchant going directly to an acquiring bank.
Issuer – The member that enters into a contractual agreement with MasterCard to issue MasterCard® cards. Issuing bank – The bank that maintains the consumer’s credit card account and must pay out to the merchant’s account in a credit card purchase. The issuing bank then bills the customer for the debt.
Level III (Level 3) – Level III purchase card information refers to the ability to process detailed purchase information with the financial credit card transaction. The supplemental information typically includes data elements like a Customer Code, Invoice and Order number, Part Number, Item Description, Quantity, Unit of Measure, Unit Price, etc. Level III (Level-3) is a feature associated with purchase card (or purchasing card) programs. Typically Private Companies, and Government agencies have these cards for their employees.
Magnetic stripe – The magnetically encoded stripe on the bankcard plastic that contains information pertinent to the cardholder account. The physical and magnetic characteristics of the magnetic stripe are specified in ISO Standards 7810, 7811, and 7813.
Magnetic stripe reader – A device that reads information recorded on the magnetic stripe of a card. Also known as a card swipe reader.
Mail Order/Telephone Order (MO/TO) – A transaction initiated by mail or telephone to be debited or credited to a bankcard account.
Merchant – A retailer, or any other person, firm, or corporation that (pursuant to a merchant agreement) agrees to accept credit cards, debit cards, or both, when properly presented.
Merchant Account – A specialized bank approved and issued account to process credit card transactions. One of three parts needed to accept credit cards. Other parts required, a local bank checking account (to deposit funds) and a Processing Solution (to access your merchant account).
Merchant bank – A bank that has entered into an agreement with a merchant to accept deposits generated by bankcard transactions; also called the acquirer or acquiring bank.
Merchant Identification Number – The number a financial institution assigns to a merchant to identify your business. Merchant services provider – A bank, ISO, or other firm that provides services for processing financial transactions, usually credit card sales. Many MSPs provide merchant accounts, while others require their clients to establish merchant accounts on their own. Some MSPs claim that they do not require merchant accounts; this may indicate factoring, which is illegal in many areas.
Merchant Underwriting – Merchant underwriting & approval policy helps control credit risk. The policy is effective in designating and targeting merchants who meet the acquiring banks processing criteria. The policy also acts as a an agreement between the third party billing agent & the acquiring banks as to what information is needed from the merchants to measure the merchant against the acquiring desired list of criteria. The policy also outlines and lists what information is needed from the merchant, for the merchants agreement.
Monthly minimum – This is a fee that is imposed if your credit card charges (Discount Rate) do not add up to their monthly minimum amount. For example, your monthly minimum is $25 a month. If your discount rate was 2.25% and you processed $1000.00 in credit card volume, $22.50 is charged to the account plus an additional $2.50 (the difference of the $25.00 minimum and actual discount fees). also: The minimum amount in fees and percentages charged by a merchant services provider in a given month. If account activity does not generate the monthly minimum, the account holder must make up the difference.
MOTO (mail order/ telephone order) discount rate – The discount rate charged by the merchant account provider for credit card transaction in which the actual credit card was not available to the merchant. MOTO discount rates are generally higher than swipe discount rates to account for the increased chance of fraud or nonpayment.
Non-Qualified Transaction Fees (Non-Qual) – Bankcard transactions that do not meet Visa/MasterCard criteria to be processed at the standard (Qualifying) Interchange rate. These transactions are charged a surcharge or higher rate. In most cases Corporate Cards and often Rewards Cards are considered Non-Qualified but non-qualification can also be the result of how the transactions were processed.
Payment Card Industry Data Security Standard (PCI DSS) – Is a joint standard developed by the major credit card companies as a guideline to help organizations that process card payments prevent credit card fraud, hacking and various other security issues. The standards outline specific requirements (based on the volume of transactions processed) that companies processing card payments must meet to be PCI Compliant. Non-PCI compliant processors risk being fined and/or losing the ability to process credit card payments.
Payment gateway – The code that transmits a customer’s order to and from a merchant’s bank’s transaction-authorizing agent — usually a MAP (merchant account provider). See also payment gateway provider.
Payment gateway provider – A company that provides code and/or software for an e-commerce site to enable it to transfer information from its shopping cart to the acquiring bank, and on through the rest of the credit card transaction. See also payment gateway.
Point of Sale (POS) terminal – A small device that allows you to slide the credit card through to make a charge. This is what most retail stores have. It is fast, easy and accurate to make a charge on a customer’s credit card within seconds. It is also known as a terminal machine.
Post Authorization – Is performed after a “Pre-Authorization” when you’re ready to actually withdraw the funds from the customer and have the funds go to your bank account you perform a deposit. This is a second half a sale for merchants that wish to split transactions, the first half is the pre-authorization, where the merchant authorizes the card and the second half is the Post-Authorization where the merchant actually sets the funds to move from the customer’s account to the merchant’s bank account.
Processing Solution – A device, software or virtual product that allows you to connect to a Merchant Account. With out a processing solution, like a credit card terminal, there would be no way to verify, approve and deposit credit card transactions.
Purchasing card – Designed to help companies maintain control of purchases while reducing the administrative cost associated with authorizing, tracking, paying, and reconciling those purchases. Real-time processing – Having your customer’s credit card information validated and processed for you automatically. The credit card will be charged and the money will be deposited into your bank account all automatically. This is perfect for an internet-based business.
Retrieval request – A retrieval request is what happens when a cardholder cannot remember a credit card transaction, or the bank wants order information for some reason. The card issuer initiates a retrieval request, in which the merchant has 10 days to respond with the order information or the retrieval request will turn into a chargeback. There is usually a retrieval request fee issued against the merchant also in these cases. SSL (secure socket layer) – A system for encrypting data sent over the Internet, including e-commerce transactions and passwords. With SSL, client and server computers exchange public keys, allowing them to encode and decode their communication.
Settlement – The process by which merchant and cardholder banks exchange financial data and value resulting from sales transactions, cash disbursements and merchandise credits. Setup fees – Fees charged for establishing a merchant account, including application fees, software licensing fees, and equipment purchases.
Shopping cart program – A software package that runs as part of a Web site to collect and record purchasing decisions by a visitor. Shopping cart programs are stored on Web servers.
Smart card – A plastic card containing a computer chip that can store electronic “money.” Unlike a credit card, a smart card can only spend out the dollar amount its owner has already put into the card account. It’s similar in function to a prepaid calling card but is available for all purchases.
Swipe discount rate – The discount rate charged by a merchant account provider for transactions in which a credit card is available for inspection by the merchant. Swipe discount rates are generally lower than MOTO discount rates because the merchant can match signatures and perform other checks for fraud or misuse.
Voice Authorization Center – The place a merchant calls to get verbal approval from a live operator at an issuing bank to accept a credit card. The Voice Authorization Center is used to process transactions if the merchant’s primary method of processing is temporary not working or if the Issuing Bank informs the merchant through a message sent tot the terminal that more information is needed on the Cardholder.
Void Authorization – This action cancels an authorization. Once you void an authorization, you are unable to capture any funds remaining on the authorization and you will return funds to the buyer, if applicable.
Void Credit – This action removes a Credit transaction. This action can only be performed before the end of day batch settlement/close.
Void Sale – This action removes a sale transaction. No funds will be received from this transaction. Use the Void Sale action to correct mistakes and on same-day returns. This action can only be performed before the end of day batch settlement/close.