Payment Processing Terms: A Quick Reference Guide
Automated Clearing House (ACH): The primary electronic payment network for transferring funds between financial institutions in the United States.
Acquirer / Acquiring Bank: The bank or financial institution that processes credit or debit card payments on behalf of a merchant.
Authorization: Approval from the credit or debit card issuer, saying the cardholder has sufficient credit or funds to cover the cost of a purchase. This is the first step in payment processing.
Address Verification Service (AVS): System used to verify a cardholder’s billing address by checking the information they provided against the information on file with the issuing bank in an effort to reduce or prevent credit card fraud.
Assessment: Fees imposed by the card networks and paid by merchants as a percentage of monthly sales (not per transaction).
Aggregate Merchant Account: A third-party services provider that provides payment processing services to businesses without providing a merchant ID number. Instead, the payment aggregator has a master account for processing and then groups or “aggregates” sub-merchants under it.
Card Network: Institutions that provide communication systems used by issuing banks and merchants to process credit card transactions. Visa, Mastercard, Discover, and American Express are the four major card networks in the United States.
Card Present (CP) / Card Not Present (CNP): Types of card transactions. Card-present transactions happen in person by swiping, dipping, or tapping a card at a credit card terminal or physical POS system. Card-not-present transactions are processed remotely for things like ecommerce transactions, card-on-file payments, and phone payments.
Cash Discount: When a merchant has a cash price that’s lower than a credit card price to incentivize customers to pay with cash, typically as a way for the business to avoid credit processing fees.
Chargeback: The forced reversal of funds, moving from the merchant back to a cardholder, for a purchase that was previously processed. Unlike a return, chargebacks are initiated by the cardholder when they contact the issuing bank to dispute a charge.
Charge Card: Similar to a credit card, a charge card is a payment tool that lets cardholders purchase goods or services on credit and then pay for the balance to the credit issuer at a later date. However, charge cards have no predefined spending limit and cardholders are required to pay the full balance of the account at the end of each billing cycle.
Debit Card: A type of payment card where the amount processed is directly withdrawn from the cardholder’s bank account. Debit cards can also be used to withdraw cash.
Decline Code: Two-digit error that indicates why a credit card transaction was declined, providing more context for why a payment could not be processed.
Downgrade: An interchange downgrade refers to a card transaction that did not meet the requirements for the lowest possible interchange rate, therefore re-categorizing the transaction to an interchange fee associated with the new category.
Early Termination Fees: Also known as a cancellation fee, an early termination is a contract clause that forces businesses to pay a penalty to a payment processor for terminating a merchant agreement before the contract expires.
eCheck: An electronic check that transfers funds between two bank accounts without passing through credit card networks. In some instances, physical checks can become an eCheck, depending on how the transaction is processed.
EMV Compliance: Global payment technology standards established by EMVco (Europay, Mastercard, and Visa). This organization built chip technology in cards to reduce fraud. For a business to become EMV compliant, it must use hardware and software that supports chip technology and meets EMV standards.
EMV Fallback: If an EMV chip credit or debit card is used on an EMV terminal, but the transaction is processed without the chip, it “falls back” to an alternative (and less secure) processing method.
FedNow: An instant payment system run by the Federal Reserve that allows 24/7/365 transfers of funds between participating financial institutions in the US.
High Risk Processing: A specific type of credit card processing for merchants that pose a “high risk” for processors and require a high risk merchant account. Businesses in certain industries or businesses with a history of chargebacks, a history of processing fraudulent transactions, or a high likelihood to default on payments may be considered a high risk.
Interchange: The credit card processing rate imposed at the card network level, typically based on the card type and transaction environment, as well as other related factors.
Interchange Plus: A type of merchant agreement in which the business pays the interchange rate imposed by the card network “plus” a predetermined markup that’s paid to the payment processor.
Internet Merchant Account: Special type of bank account that allows businesses to accept credit and debit card transactions online. Money gets deposited into the internet merchant account after a transaction is completed, before getting moved into the business bank account.
Issuing Bank: Also known as a card issuing bank, this is the financial institution that issues credit cards on behalf of the card networks. They extend a line of credit to the cardholder and provide all the customer service to the cardholder. In the world of payment processing, the issuing bank is the customer’s bank.
ISV: An acronym for “independent software vendor,” which is an individual or organization that develops, markets, and sells software related to payment processing to merchants.
Liquidated Damages: A type of early termination fee in payment processing with a contract clause that entitles the processor to be compensated for how much money they’re expected to earn over the remaining time left on the merchant agreement if the merchant cancels the contract early.
Merchant Account: Type of business bank account that allows merchants to accept credit card payments. Money moves through a merchant account when it goes from the cardholder’s bank to the business’s bank.
Merchant ID: Also known as a merchant number, merchant identification number, or just MID, this is a unique number that identifies a business for credit card processing. Merchant IDs are only assigned to businesses with a merchant account.
Merchant Services Provider (MSP): A company that provides the hardware, software, and infrastructure that businesses need to accept credit cards, debit cards, and electronic transactions.
Merchant Category Codes / MCC Codes: Four-digit number that identifies the primary purpose of a business based on industry, products sold, or services offered to consumers.
Merchant Consultant: Individual or company that works with businesses to help reduce credit card processing fees for the merchant, without the need for the business to switch processors or change equipment. Consultants don’t sell processing solutions or payment technology. Instead, they work on the merchant’s behalf, often negotiating rates directly with the merchant’s processor.
Merchant Discount Rate: Also abbreviated as MDR or just “discount rate,” this refers to the amount a merchant pays to accept each credit, debit, and digital transaction. Contrary to the name, the MDR is not actually a discount.
NFC: Near field communication (NFC) is a technology that transmits data between two devices in close proximity to each other, which can be used in payment processing for mobile wallets and tap-to-pay cards.
OptBlue: OptBlue is a credit card processing program through American Express that allows merchants to process Amex cards through a payment processor, as opposed to having a direct agreement with American Express. Only merchants that process less than $1 million in Amex cards annually are eligible for the OptBlue program.
Payment Service Provider (PSP): Also known as an aggregator or third-party processor, this is an organization that gives merchants the ability to accept electronic payments, like credit cards, debit cards, and digital wallets, both in-person and online. Unlike a traditional merchant services provider, PSPs allow merchants to process card payments without a merchant account.
Payment Gateway: Technology that connects a merchant payment portal (such as a website) to an acquiring bank or front-end payment processor. This is required to accept payments online.
Payment Processing: All activities that involve non-cash transactions that are run through a payment processor or merchant services provider to facilitate the acceptance of credit cards, debit cards, and other digital payments.
PCI Compliance: Rules set forth by the Payment Card Industry Data Security Standard, also known as PCI DSS, that anyone accepting card payments must follow to remain compliant and prevent fraud.
PIN Debit: A type of debit card transaction that requires the cardholder to enter a PIN number to process the transaction, which can only occur for in-person payments. These transactions are run through a separate network than credit cards and signature debit transactions.
Qualified Rate: The lowest processing rate of three different qualification tiers for merchant agreements using a tiered or bundled pricing structure. The other two (more expensive) rates are mid-qualified and non-qualified.
Reason Code: An alpha, numerical, or alphanumeric code that identifies the reason for a chargeback. Each card network has its own set of reason codes.
Rolling Reserve: The withholding of a percentage of a merchant’s gross credit card sales in a non-interest-bearing account for a predetermined amount of time until the processor releases the money to the merchant. Rolling reserves tend to be 5-10% of gross sales and are usually held for 180 days.
Refund: The repayment, either partial or in full, from a merchant to a customer. In some instances, the refund could also involve the customer returning an item for the funds to be released, but that’s not always the case. A refund is different from a chargeback in the sense that a refund is willingly released by the merchant, whereas a chargeback is a forced reversal of funds for a disputed transaction.
Surcharge: An additional fee that’s added to a credit card transaction, paid by the cardholder to the merchant, to cover the costs associated with accepting that card.
Signature Debit: Debit card transactions that are processed through the same network as a credit card transaction, and sometimes require the cardholder’s signature on a receipt. These transactions are assessed by the debit interchange fees imposed by the card network rather than PIN debit network fees.
Secure Remote Commerce (SRC): A payments solution that’s intended to add more security to ecommerce transactions and remote checkouts.
TMF/MATCH List: A database of Terminated Merchant Files consisting of businesses that have previously had a merchant account suspended by a processor or a bank. It’s used by financial institutions to track merchants who have violated rules of payment processing and accepting payments.
Virtual Terminal: Web-based interface that allows merchants to process credit card payments without a physical processor or terminal.
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