Glossary Of Payment Processing Terms And Definitions
Sometimes the payment processing and merchant services process can seem daunting and overwhelming. Do you feel like you have to learn a new language? Are you running into difficult problems because your industry has been labeled “high risk”. Don’t worry! We’re here to help! Below you’ll find our glossary of terms you should know when you’re starting your processing journey.
As always if you have any questions or would like to get started on your free quote, feel free to reach out to us at 1-866-415-2636 or CLICK HERE to apply for your FREE quote!
ACH (Automated Clearing House): A processing organization networked with others to exchange (clear and settle) electronic debit/credit transactions (no physical checks are actually presented to a bank). ACH transactions are regulated by NACHA. eCheck, ACH, and Demand Draft are all 3 types of electronic checking payments, all with slightly different regulations and benefits.
Acquiring Bank: The Visa/Master Card member bank that establishes and maintains the merchant relationship and processes all merchant transactions.
Address Verification Service (AVS): AVS is a tool for merchants to reduce the risk associated with “card not present” transactions, such as mail order, telephone order or Internet transactions. The billing address given by the customer is passed in the transaction and it is checked against the billing address on file at the customer’s card issuing bank. AVS can *only* check the numeric digits (0-9), so it *only* verifies the street number & zip code in the address (but not the customer’s name, street name, or city/state). A merchant can set their gateway to require a FULL AVS match (street address & zip code must match) match, or a PARTIAL AVS match (at least the zip code or the street address must match).
Annual Fee: A fee charged to Merchants by the processing bank.
Application Fee: A fee for processing the paperwork and setting up the account. Most reputable processors will only charge a “Setup Fee” where they only invoice you for their services after the account is established. If someone wants you to pay money up front, BEWARE!
Authorization: The process when a transaction is approved by an issuing bank, authorized agent, or Visa/MasterCard on behalf of that issuer, before the transaction is completed by the merchant via telephone or terminal. A merchant can process an “Authorization” (sometimes called a pre-authorization) via telephone, a POS terminal, or their gateway.
Average Ticket Size (AVT or ATS): The average Visa/MasterCard dollar amount of each transaction the merchant anticipates processing or actually processes over time. Your maximum ticket may be $1000, but your average ticket may still be $200.
Batch Out (Settlement): When a merchant transmits the “batch” of daily sales for processing. An “open” Batch is one that is not yet “closed.” Batching generally occurs at the end of the day. A retail merchant will batch or settle their POS terminal at the end of the business day, while a gateway will batch the sales in the evening usually, either way once per day.
Batch Upload: A merchant submitting a .cvs or .xcl file to a gateway for processing of electronic transactions (either ACH or credit card). Many telemarketing firms use a spreadsheet to gather sales for the day, and then upload that file to the gateway instead of manually entering each sale for processing.
Card Issuing Bank: A cad issuing bank is any Visa/MasterCard/AmEx/Discover member bank that enters into contractual relationships with cardholders for the issuance of cards. Popular card issuing banks in the US for example are MBNA and CapitalOne.
Card Not Present: A transaction where the credit card is not physically present. This simple fact means that fraud is a possibility, since you cannot verify the true card holder is the one submitting the transaction! For this reason, ALL card not present merchants pay a higher discount rate for these transactions, even merchants selling low-risk products like T-shirts. And, you will find that not having a signed receipt from your customers, means that a merchant will always have a risk of not being able to win chargeback disputes from their customers.
Card Present: A transaction processed by swiping a card through a terminal or by an imprinted and signed credit card slip. When the customer’s card is swiped through a POS terminal, the card information is read through the magnetic stripe and passed along to the processor. Having a card present lowers the risk on transactions as the merchant is able to verify the customers identity to prevent fraud, as such card-present merchants enjoy lower rates than card-not-present merchants.
Chargeback: A chargeback is the result of an action taken by a cardholder who disputes a credit card transaction through their credit card issuer. The card issuer initiates a chargeback against the merchant’s account. The sale amount of the disputed transaction is immediately debited from the merchant’s bank account. Merchants have 30 days in which to dispute the chargeback. This may be accomplished by providing the card issuing bank with a proof of purchase by the cardholder. This could be a signature or proof of delivery. A chargeback fee is generally assessed to the merchant account by the merchant bank for the handling of this process. Read more about chargebacks in Durango Merchant Service’s Smart Business Blog.
CVV/CVV2/CCV: Called differently by different organizations, either CVV or CCV, its easiest to remember it by “Card Code Verification.” CVV is a three digit security code that is printed on the back of most credit cards (or 4 digits on the front of AmEx cards). The CVV verification is designed to reduce fraud in the card not present environment by validating that the customer making the transaction has the credit card in their possession. An internet merchant should almost always set their gateway to require a correct CVV match before approving a transaction to reduce fraud.
Debit Cards: Cards issued via Visa usually, that are similar to credit cards, with the main difference that the card is linked to a checking account instead of a revolving line of credit.
Discount Rate: A fee taken by the bank as a percentage of all sales transactions. If the discount rate is 2.39%, for example, the discount rate fee is $2.39 for a $100.00 charge.
Doing Business As (DBA): The DBA is the name that will appear on your customers credit card bill as the “descriptor.” Having a descriptor that easily reminds your customer of their purchase with you is the BEST way to prevent chargebacks. Be sure to tell your account manager the DBA that your customers will recognize. Often, for internet merchants, we will put the DBA as their truncated URL name, for example: RedWidgets.com
eCheck: The online and electronic processing of payments from a customers checking account. eCheck, ACH, and Demand draft are all 3 types of electronic checking payments, all with slightly different regulations and benefits.
eCommerce: Generic term referring to business done over the web and/or processed electronically.
Gateway: A service which connects the shopping cart with the eCheck or credit card processor. Essentially, the gateway accepts the transaction data from the shopping cart, translates it to the card processor’s format and sends it to the card processor. It then does approximately the same thing, but in reverse, when it returns the approval or decline and other codes (ex: reason for decline) to the shopping cart. Besides our own gateway that we offer, we are also compatible with many other gateways, including Authorize.net, PlugnPay.com, NetworkMerchants.com, eProcessingNetwork.com, and many more!
Gateway fees: The fee for the use of an online gateway. A gateway must be PCI compliant (a security qualification), and therefore is constantly on guard against a data breach. Banks & processors can ONLY accept electronic transactions from a certified partner for obvious security reasons. Gateways will typically charge a monthly fee and a per transaction fee.
Gift Cards: Cards issued with a Visa/MC/Discover/AmEx logo, with a fixed limit based on the deposit made to open the account. AVS is not able to be used on gift cards unless the customer registers their address with the bank that issued the gift card.
Guarantor: Merchant accounts in the US are almost always personally guaranteed. Guarantor agrees to personally guarantee (make good on) any processing losses a processing bank incurs as a result of the business relationship with this merchant. Generally (a few exceptions apply), the only accounts that can be approved WITHOUT a guarantor, are non-profits and publicly traded corporations.
Imprinter: The now old fashioned manual, slide type device used to produce an image of the raised (embossed) characters on a credit card, to a transaction slip. All merchants should have a manual imprinter for cases that demand a physical imprint or as a ‘back-up’ if your telephone line is out of service. These imprinters are also commonly referred to as “knuckle busters.”
ISO (Independent Sales Organization): This acronym refers to an organization who has contracted to sell merchant processing services.
Internet Merchant Account: A Merchant Account is a relationship between a retailing company and a processor, and specifically in this case allows the retailer to accept credit card payments from customers via the Internet.
Keyed: A transaction is “keyed” when the information from a credit card is manually typed into a terminal or computer. Keyed transactions pay higher rates than “swiped” transactions, as the card associations know that higher incidences of fraud and chargebacks occur on card not present transactions (if the card is present, it should be swiped to lower the risks associated with accepting card payments, and to obtain lower rates).
Member Alert To Control High Risk Merchants (MATCH): MATCH is an electronic bulletin board used to track people and businesses whose merchant processing accounts are reported “terminated” by acquiring banks. This is also commonly referred to as the TMF list, which is a “black-listing” of merchants if they have a merchant account terminated for violating their merchant agreement. The problem with this is, once you are on the TMF list, you will most likely *not* be able to get approved for another merchant account. Read more here in our FAQ section.
Mid-Qualified: A discount rate that is billed in addition to the “Qualified” discount rate, usually for these reasons: (A) with a “retail” merchant account, where the transaction is keyed instead of swiped, or (B) transactions on a specialty credit card like a business or rewards credit card. The discount rate for this transaction is higher than the discount rate for a qualified transaction.
Monthly Minimum: The minimum amount of discount fees charged by a processing bank in a given month. If account activity does not generate the monthly minimum, the merchant pays the difference. Example: Most banks in the US charge a $25.00 monthly minimum. If you have a $100.00 sale, and you are paying a 2.5% discount rate, the bank collects $2.50 for their services. The $2.50 is deducted from your monthly minimum, and if that sale were your *only* sale of the month, you would be billed the remainder of $22.50 by the processing bank.
Monthly Statement Fee: A fee for the statement of processing activity and charges mailed by the bank after the last day of each month the account is active. Usually billed at $10.00 per month.
Monthly Volume: The maximum monthly dollar volume a merchant is approved to process in Visa and MasterCard transactions. The monthly volume is important for underwriter consideration of the application from the merchant and also helps to determine what type of documentation will be required with the file. American Express processing volume is typically *not* included in the calculated monthly volume. Since a merchant account is basically a 6 month loan or provisional credit for every transaction the bank processes for you, if you are requesting $100,000/month that represents more risk to the processor than a merchant only requesting $10,000/month. Generally, if you are applying for more than $25,000/month, the processing bank’s underwriter will request financials on the company (or the guarantor if the business is new).
NACHA: The Electronic Payments Association, formerly the National Automated Clearing House Association. This association controls the regulations governing over 1000 check processing institutions, including eCheck and ACH processors.
Non-Qualified: A discount rate that is billed in addition to the “Qualified” discount rate, usually for one of these reasons: (A) a retail merchant passing a card-not-present transaction, or (B) card-present *and* card-not-present transactions made on Government, Signature, Corporate or Foreign Cards, or (C) when retail sales transactions are not batched within 24 hours. The discount rate for this transaction is higher than the discount rate for a Mid-Qualified transaction.
Pinpads: Pinpads are small boxes with a 10-key pad on them. Connected to a processing terminal, they are used by cardholders to enter PIN numbers for Debit card transactions.
POS (Point of Sale Terminal): No, not that kind of POS! A POS is the hardware used to process credit card or check transactions in a “retail” or card-present environment. Popular manufacturers of POS terminals are Hypercom, Nurit, and Verifone.
Purchase Cards: Purchase Cards are credit cards for use by employees of government agencies or corporations. What differentiates purchase cards different from regular credit cards is that they may only be used at certain types of merchant locations.
Qualified: The “base” discount rate that merchants are charged on Credit card transactions that are either (A) Card-present sales that are swiped through a POS and the merchant batches out at the end of the day or (B) Card-not-present, and the AVS is provided. Regardless of the method used to submit the transaction, certain card-types will never qualify for the Qualified discount rate, including corporate, signature, rewards, government and some international credit cards. Different processing banks have different account configurations, be sure to speak with an account manager to ensure that you are paying the lowest discount rate available for your transactions.
Refund Policy: Written policy regarding exactly how the merchant guarantees products or services sold to a cardholder. Merchant banks require a written refund policy for each applicant, as a liberal refund/return policy may encourage the reduction in the number of chargebacks that a merchant receives. Internet merchants *must* post their refund policy online.
Reserve: A common practice in which a cash reserve is established by the processing bank (similar to an escrow account) to protect themselves against catastrophic losses. Click here to read our article describing a reserve on a merchant account in more detail. There are 3 main types of reserve practices; the type of reserve employed depends on the processing bank’s system:
- “Rolling” reserve: A rolling reserve is what some banks use to cover their exposure to risk on accounts that are deemed to have higher than normal risk. This is a standard requirement from every offshore bank, and many domestic high risk processors. It works as such: for every deposit that is made to you from your sales, the bank will typically hold back 5% to 10% of that deposit, and will hold that 5%-10% for a period of 6 months, after which it is released back to you. It is called a rolling reserve then, because the reserve held from Month 1 is paid back in Month 7, and the reserve held back in Month 2 is paid back in Month 8, and so on.
- “Static” or “Capped” reserve: In this scenario, the processor will typically hold 5%-15% of your sales until they have on reserve the equivalent to either (A) one-half of your monthly processing volume, or (B) one month of your processing volume. For example: if you are applying to process $20K/mo, the processign bank may ask for either $10K or $20K to be on reserve, and to obtain this amount via a 5% to 15% holdback (depending on an underwriting review). Since each transaction they allow you to process is in all reality a 6 month loan to you (customers have 6 months to issue a chargeback, i.e., its a 6 month signature loan or liability for them), they are thus covering 1/12th to 1/6th of their total liability against a worst case scenario, which unfortunately does occur more often than you would expect.
- Upfront Reserve: In this situation, the processor will ask for a reserve upfront, usually based on a % of your applied for monthly volume, and they will require this amount either paid upfront via 1) an ACH from your checking account or 2) withholding 100% of your sales volume until the reserve has been met. As an example, a merchant may apply for $20,000/month in sales, and a 10% reserve which is $2,000 may be requested, which would be held back 100% from your initial sales or debited from your checking account.
Retrieval Request: When the cardholder’s bank requests retrieval of information to verify a transaction. This can be the first step towards a chargeback, so it is important to respond quickly and appropriately to the request. Usually there is a fee from your processor to cover their time in handling the retrieval request.
SSL: All websites that host electronic payments should use a SSL (secure socket layer) certificate. Typically 128 bit is the customary level of security used. Note: There are two types of gateway integration methods: (1) Secure buy page, SIM, or “hosted” integration, where the gateway hosts the transaction on its server for security. The customer is temporarily transferred to the gateway’s server to complete the transaction. A SSL is *not* required for this type of integration. (2) API or AIM integration, where the merchants website hosts the entire transaction. A SSL *is* required for this type of integration.
Shopping Cart: As used on the Internet, a shopping cart is analogous to choosing items in a grocery store and placing them in a shopping cart for eventual purchase. Chosen items are grouped into a single purchase (Shopping Cart) so that only one electronic purchase is completed. There are dozens of popular shopping carts available to merchants. View our list of supported shopping carts on our Merchant Login page.
SIC or MCC: Standard Industry Code/Merchant Category Code: A four digit, numerical identifier of a merchants business type as classified by Visa & MC. There are hundreds of these codes. You are not allowed to process for two different SIC codes on one merchant account.
Swipe: The action of physically sliding a credit card through a terminal or magnetic stripe reader that “reads” the magnetic strip on the back of all credit and debit cards. This is a card present transaction, and is qualifies for the lowest rates as it tells Visa/MC that the card is physically present, and that the merchant is able to verify the identity of the customer by verifying the signature and/or drivers license.
TMF (Terminated MATCH File): A “black-listing” of merchants that have had a merchant account terminated for violating a merchant agreement. The problem with this is, once you are on the TMF list, you will most likely *not* be able to get approved for another merchant account, and it is very difficult to be removed from the TMF list.
Trade Reference: A trade reference is anyone that knows you and your business. Usually your first trade reference will be your bank for deposits. Other references can be your landlord, utilities provider (web host, ISP, phone company), vendors, suppliers, distributors or partners (web programmer etc).
Transaction Fee: A per item fee charged for each transaction for checks or credit cards. Online gateways will charge their own transaction fee, in addition to the processor’s transaction fee.
Travel and Entertainment (T&E): Properly used, this phrase refers to American Express (AmEx) and Diners Club cards where a cardholder normally pays off the card each month. This is to differentiate these programs from pure credit cards. Discover is commonly lumped in with the other T&E card types, although it is not actually a T&E card type.