Glossary of Merchant Processing Terms
ABA Routing Number:
Also referred to as a Transit Routing Number. Directs electronic ACH deposits to the proper bank institution.
ACH (Automated Clearing House):
The paperless funds transfer system maintained by the Federal Reserve or other entities that have networks to exchange electronic funds transfer items.
The Acquirer is the financial institution that provides a Merchant with a Merchant Account. The acquirer handles acceptance and payment of credit card transactions to the Merchant’s bank account. In a manner, they front the money for the Issuing Banks, deposit the Merchant’s funds prior to these funds actually being transferred via Interchange from the cardholder’s Issuing Bank. An acquirer pays the Issuing Banks and Card Associations fees for transactions processed on behalf of its Merchant account holders.
Same as acquirer.
A debit or credit to a Cardholder or Seller account to correct a transaction error.
American Express One Point®:
American Express program offering small to medium-sized merchants an all-in-one solution for single source for statements, settlement and customer service for all major card brands.
The annual fee can be charged to Merchant by some providers to pay for costs of maintaining the merchant’s account. Sometimes these fees may be quarterly. Sometimes this fee can be used to lower the discount rate.
This is a fee for processing the paperwork and setting up the account paid to the payment gateway providers.
The process followed by the Card Associations to determine whether an Issuer or an Acquirer has ultimate responsibility for a chargeback. Either member initiates this process after the re-presentment process is completed.
Any entity formed to administer and promote credit cards, including but not limited to MasterCard International®, VISA®, U.S.A., or VISA International®, that are licensing and regulatory agencies for credit card activities.
Approval of a bankcard transaction by the card-issuing banks or approved independent service providers, for a specified dollar amount. An authorization indicates only the availability of the card member’s credit limit at the time the authorization is requested.
The authorization fee (actually an authorization request fee) is charged each time a transaction is sent to the card-issuing bank to be authorized. The fee applies whether or not the request is approved. Note this is not the same as transaction fee.
Authorization response code:
A code returned in the authorization response to indicate approval of a transaction. The code is recorded on the transition receipt as proof of Authorization.
Automatic Bill Payment:
An arrangement between a merchant or service provider and a customer that allows recurring automatic charges for a service to an agreed-upon credit or debit account.
The Address Verification System (AVS) is a system used to verify the address of a person claiming to own a 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. The other security features for the credit card include the CVV2 number.
Back End Processors (Settlement Servers):
Back End Processors receive settlement batches from the Front End Processor. Transactions from all Merchants are grouped together by BIN (Bank Identification Number) range and submitted to the appropriate Issuing Bank on a scheduled time frame. The Back-End processor settles the transactions, calculates interchange fees, monitors risk, and provides the merchant and the card associations with processing data.
Any valid card issued by a Card Association or other card-issuing organization that is presented in payment for goods and services or to obtain cash advances.
1/100 of a percentage point. The term is used to describe discount rates, which are the bulk of card processing fees paid by merchants.
A batch is a collection of credit card transactions stored on a merchant’s processing equipment. Usually, they are sent together for processing right before a store closes.
A batch fee (also known as a batch header fee) can be charged to a merchant whenever the merchant “settles” their terminal. Settling a terminal, also known as “batching”, is when a merchant sends their completed transactions for the day to their acquiring bank for payment. Some providers perform this automatically. It is important to close a batch every 24 hours or a higher rate will be assessed by Visa, Discover or MasterCard. The term “batch header” originally came from processing pre-electronic terminal era, when each batch of credit card receipts was turned in to the merchant’s local bank for deposit. The batch header was a mini report summarizing those receipts bundled within.
BIN (Bank Identification Number):
The 6-digit range of numbers assigned by the Federal Bureau of Standards and used by card companies to identify their financial transactions. The Discover® range begins with ‘6’ (6xxxxx), the MasterCard® range begins with ‘5’ (5xxxxx), and the VISA® range begins with ‘4’ (4xxxxx).
Any entity whose members issue credit or debit cards or acquire card payment transactions on behalf of their customers.
Card Issuing Bank:
See Issuing Bank
Card processing networks, the largest of which are Visa, MasterCard, American Express and Discover, act as an intermediary between an acquirer and an issuer to authorize credit card transactions.
Card not present transactions:
Transactions that are processed without the card or the cardholder being present, e.g., phone or Internet orders.
Card present transactions:
Transactions in which the cardholder and the card are present.
Cardholder Information Security Program (CISP):
Defines a standard of due care and enforcement for protecting cardholder information.
The chargeback is the largest risk that is presented to banks and providers. This is not to be confused with a refund, which is simply a merchant refunding a transaction. In the Visa, Discover, and MasterCard rules, the merchant’s processing bank is 100% responsible for all the transactions that the merchant performs. This can leave the provider open to millions of dollars of potential losses if the merchant operates in an illegal or risky manner and generates many chargebacks. The providers pass this cost on to the merchant, but if the merchant is fraudulent or simply does not have the money, the provider must pay all the costs to make the card holder whole. The chargeback risk is the largest part taken into consideration during the contract application and underwriting process. Some banks are much more stringent than others when assessing a merchant’s chargeback risk.
If a merchant encounters a chargeback they may be assessed a fee by their acquiring bank. A potential chargeback is presented on behalf of the card holder’s bank to the merchant’s credit card processing bank. A reason code is established by the card issuer to properly identify the type of potential chargeback based on the card holder’s complaint. The most common complaint is that the card holder cannot remember the transaction. Usually, these potential chargebacks are corrected when the merchant’s processing bank sends over more details about the transaction. Some providers charge a fee for this service, known as a “Retrieval Request”. A chargeback can also be related to a fraud or similar dispute that the card holder is claiming to the merchant. This fee can be charged by some providers whether the chargeback is successful or not and is not dependent on the amount of the chargeback.
Currently both Visa and MasterCard require all merchants to maintain no more than 1% of dollar volume processed to be chargebacks. If the percentage goes above, there are fines starting at $5000 – $25,000 to the merchant’s processing bank and ultimately passed on to the merchant.
In all cases, a chargeback will cost the merchant the chargeback fee, plus the cost of the transaction and the amount processed.
The transfer of data between Issuers and Acquirers.
Code 10 Authorization:
A voice authorization code that you might initiate when you suspect a card is stolen or fake, or when a customer is acting suspiciously.
See Standard Industry Code/Merchant Category Code (SIC/MCC Code)
Corporate Purchasing Card:
A special issued card that may set spending limits at the supplier, industry, commodity, transaction, and employee levels. You can also select a solution that matches how you prefer to work, including individual Cards, supplier Cards, department Cards, or Accounts Payable Cards.
A plastic card having a magnetic strip, issued by a bank or business authorizing the holder to buy goods or services on credit. Also called charge card. This is different than a purchasing card.
Credit Card or Purchasing Card Processing:
Obtaining immediate authorization of a purchase when ordered online. The card processing company notifies the merchant, and the merchant confirms or denies the order with the customer.
Credit Card Processors:
Merchant services providers that handle the details of processing credit card transactions between merchants, issuing banks, and merchant account providers. Website operators usually must first establish their own merchant account before contracting for credit card processing services.
Customer Service Fee:
The customer service fee (also known as a maintenance fee) can be charged by some providers to pay for the cost of customer service. Also referred to as a “merchant support fee”, “customer support fee”, or simply, “service fee” by some merchant providers.
Security feature for card not present nor CNP transaction. This number is frequently requested for payment card transactions to combat credit card fraud.
The discount rate comprises a number of dues, fees, assessments, network charges and mark-ups merchants are required to pay for accepting credit, debit and purchasing cards, the largest of which by far is the Interchange fee. Each bank or ISO/MSP has real costs in addition to the wholesale interchange fees, and creates profit by adding a mark-up to all the fees mentioned above. There are a number of price models banks and ISOs/MSPs used to bill merchants for the services rendered.
Early Termination Fee:
The early termination fee can be charged by some providers if the merchant ends the contract before the end of the contract term. While contract terms of 1–3 years are typical, some providers have terms of up to 5 years with a one year prior notice to cancel or the fee will be assessed. Some providers also assess all statement fees and monthly minimums remaining when the contract is terminated. Some providers may also assess a “lost profit” fee based on an assumption of profits they concluded they would have earned during the full term of the contract.
ecommerce stands for Electronic Commerce. Ecommerce is the process of buying or selling goods or services via the internet. This is most commonly done though a merchant’s or service provider’s website and usually involves an online catalog and shopping cart. Payments are processed with an online payment gateway such as Authorize.Net. eBay is another form of eCommerce.
EMV stands for Europay, MasterCard, Visa and was named after the original card brands that developed the technology used to securely process chip card transactions.
EMV is a global initiative and set of standards for payment acceptance and chip card transaction processing designed to mitigate the risk of counterfeit card fraud.
Floating funds is duplicate money present in the banking system during the time between authorization is given and payment received. This practice is commonly used in next day deposits.
Front End Processors (Authorization Networks):
Front-End Processors handle the up-front authorization of a credit or purchasing card transaction. They have connectivity to all of the Card Associations and route transactions to the appropriate network for authorization. The Front-End Processor is the Merchant’s point of connectivity for authorization and settlement of transactions. When a Merchant settles or submits a batch, it is sent to the Front-End Processor who then routes the batch to its Back-End Processor.
Independent Sales Organization (ISO):
See Merchant Services Provider
The exchange of transactions between clearing members for Visa and MasterCard transactions, according to the associations operating rules and regulations. During this process transactions are routed to the appropriate card issuing bank.
An electronic network maintained by Discover, MasterCard, American Express, or VISA that exchanges data relating to the value of card sales and credits among Issuers and Acquirers.
Interchange Rate or Fee:
The charge on a transaction between the acquiring bank and the issuing bank. The largest component of discount pricing.
Interchange Plus Pricing:
Some providers offer merchant account services priced on an “interchange plus” basis. These accounts are based on the “interchange” tables published by both Visa and MasterCard This type of pricing creates a discount rate by adding interchange rates plus a percentage and authorization fees. This is a common pricing model for very low and very high average tickets.
Interchange: the fee paid to the card issuing bank by the card acquiring bank by way of the card brands. Interchange rates vary widely based on card type, transaction amount, risks and retail sector. Interchange is assessed on all Visa and MasterCard branded purchasing, credit and debit cards.
Internet Merchant Account:
A Merchant Account is a relationship between a retailing company and a Merchant Bank, which allows the retailer to accept credit card payments from customers via the Internet.
Internet or E-Commerce Merchants: “Internet” or, “Ecommerce” merchants conduct all business through a website, so all card information is collected and transactions are processed online, in real-time, using a payment gateway that’s built into their website’s shopping cart. So, once the order/sale is confirmed, the card is charged instantly and the product is shipped for future delivery. (Note: This merchant type does not apply to businesses that only market on the Internet, but do not immediately process payments via their website, upon order confirmation.)
Same as Issuing Bank
Issuing Bank (the bank that issues the credit card):
The financial institution that physically provides a credit or purchasing card. These institutions promote the use of these cards and charge the cardholder interest and fees for the use of the card. The Issuing Bank receives the majority of the Interchange Fee charged by the Card Associations. Most of the power in the credit card industry resides with the Issuing Banks.
Examples of current Issuing Banks include: Fifth Third, Bank of America, Chase bank, Citibank, GE Money Bank, and HSBC.
Keyed Face-to-Face Merchants:
“Keyed Face-to-Face” merchants eventually meet their customers in person to deliver the product or provide the service, but they don’t actually collect card information with the customer or card present. Generally, they take orders over the telephone, via fax, mail, email, or the Internet, and then manually key-enter card information into a terminal, software, payment gateway, or other point-of-sale system.
Level 2 or Level 3 Processing of Purchasing Cards:
Visa and MasterCard have created a specialized type of credit card used primarily by government agencies and businesses. Increasingly, corporations and government agencies are relying on this form of payment to compensate their service providers and suppliers. Businesses benefit by receiving their funds quickly and by winning competitive bids and government contracts where purchasing cards are the required form of payment. The downside, however, is the increased costs associated with receiving these payments. These costs will usually be much higher than accepting a standard consumer credit card.
The solution is that some businesses may qualify for ways to process these transactions that allow them to pay lower fees if they can supply additional information, called “level 2 or level 3 data”. For example, if government transactions are over $5,000, businesses can significantly reduce their transaction costs by including “level 2 or level 3 data” about the purchase along with each transaction. Examples of level 2 or level 3 data is a purchase order number associated with the transaction that the credit card will be paying. This data is passed on to the purchaser so that it may be many times easier to reconcile the transaction. If all the required data is not collected and passed on during the transaction, the merchant can have surcharges added to the basic fees or be forced into a non-qualified transaction category.
Magnetic stripe reading:
When the credit card is swiped through the terminal to record the card information. Obtaining a magnetic strip reading proves the card’s presence at the time of a transaction
See customer service fee.
Marketing by Banks:
A bank that has a merchant processing relationship with Visa and MasterCard, also known as a member bank, can issue merchant accounts directly to merchants. To reduce risk, some banks limit approval to merchants in its geographical area, those with a physical retail storefront, or those that have been in business for 2 years or more. Not all banks offer merchant services.
Marketing by Independent Sales Organization (ISO)/MSPs:
To market merchant accounts, an ISO/MSP must be sponsored by a member bank. This sponsorship requires that the bank verify the financial stability and suitability of the company that will be marketing on its behalf. The ISO/MSP must also pay a fee to be registered with Visa and MasterCard and must comply with regulations in how they may market merchant accounts and the use of copyrights of Visa and MasterCard. One way to verify if an ISO/MSP is in compliance is to check a website or any other marketing material for a disclosure “company is a registered ISO/MSP of bank, town, state. FDIC insured”. This disclosure is required by both Visa and MasterCard and will cause a fine of up to $25,000 if it is not clearly visible. In almost all cases, if there is no disclosure, the company is likely to be an uninformed 4th party or worse.
A shared database maintained by the Card Associations that lists all Sellers terminated for cause by Acquirers.
MCC or MCC Codes:
Special numbers assigned by the Card Associations to Seller types for identification and tracking purposes. MasterCard® uses MCC (Seller Category Code), while VISA® uses SIC (Standard Industry Codes).
See Marketing by Banks
Merchant Account Management:
At Evolve Systems this is management of Interchange Rates. As an ISO, we manage statements at 30-60-90 days. A spreadsheet of transactions and fees is provided and reviewed by phone to root out cost savings.
Merchant Account Marketing:
Merchant accounts are marketed to merchants by two basic methods: either directly by the processor or sponsoring bank, or by an authorized agent for the bank and additionally directly registered with both Visa and MasterCard as an ISO/MSP (Independent Selling Organization / Member Service Provider). Marketing details are by card issuers like Visa and MasterCard, and are enforced by various rules and fines. A few of the largest processors also partner with warehouse clubs to promote merchant accounts to their business members.
Merchant Account Provider:
Merchant account providers give businesses the ability to accept purchase, debit and credit cards in payment for goods and services. This can be face-to-face, on the telephone, or over the internet.
A merchant account allows a business to accept credit cards, debit cards, gift cards and other forms of payment or purchasing cards. This is also widely known as payment processing or credit card processing. Or an arrangement with a commercial bank or card issuer that permits a business to accept credit card payments and deposit those payments, less charges, to its bank account.
Merchant Account Fees:
There several kinds of fees that may be assessed by different parties. The fees associated with these accounts are usually in the following categories: monthly, discount rate and transaction. See annual fee, authorization fee, batch fee, discount rate, early termination fee, qualified rates, mid-qualified, non-qualified rates, interchange rate, monthly minimum fees, statement rates and transaction fees as examples of fees.
Merchant Services Provider (MSP) / Independent Sales Organization (ISO):
Merchant Services Provider (MSP) is also called an Independent Sales Organization (ISO). They will quote the Merchant the rates and setup account information with both the Front-End and Back-End Processors to handle the Merchant’s credit card transactions. The Merchant Services Provider is responsible for all communications and relationships between the Merchant, Card Associations, processors and Merchant Banks.
A type of business bank account that allows a business to accept and process purchase, debit and credit card transactions. Merchant accounts are necessary accounts for many businesses, and are essential for online businesses. There are different types of merchant accounts to choose from for businesses. For instance, some merchant accounts are designed specifically to handle online sales.
A merchant account is an agreement made between the business/seller, the bank where the merchant account is held and the payment processor to settle all transactions made by purchase, debit and credit cards.
Merchant Discount Rate:
See Discount Rate
Mid-qualified Rate (or second tier):
Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a merchant will be charged whenever they accept a credit card that does not qualify for the lowest rate (the qualified rate). This may happen for several reasons such as:
A consumer credit card is keyed into a credit card terminal instead of being swiped
A special kind of credit card is used like a rewards card or business card
A mid-qualified rate is higher than a qualified rate. Some of the transactions that are usually grouped into the Mid-Qualified Tier can cost the provider more in interchange costs, so the merchant account providers do make a markup on these rates.
The use of “rewards cards” can be as high as 40% of transactions.
It is important that the financial impact of this fee be understood.
Monthly Minimum Fee:
The monthly minimum fee is a way to ensure that merchants pay a minimum amount in fees each month to cover costs from the provider to maintain the account. If a merchant’s fees do not equal or exceed the monthly minimum they will be charged the difference up to the monthly minimum.
Sometimes there are fees that are charged that are not a part of the monthly minimum, such as statement fees. It is industry standard to charge a monthly minimum, though not all acquirers charge this, nor do all that do, charge it for every agreement.
These merchants collect orders and card information over the telephone, by mail, fax, or via the Internet, and manually key-enter transactions through a terminal, software, payment gateway, or point-of-sale system. Then, once payment for an order is confirmed, the product is shipped for future delivery.
Non-qualified Rate (third tier):
The non-qualified rate is usually the highest percentage rate a merchant will be charged whenever they accept a credit card. In most cases all transactions that are not qualified or mid-qualified will fall to this rate. This may happen for several reasons such as:
A consumer credit card is keyed into a credit card terminal instead of being swiped and address verification is not performed
A special kind of credit card is used like a business card and all required fields are not entered
A merchant does not settle their daily batch within the allotted time frame, usually past 48 hours from time of authorization.
A non-qualified rate can be significantly higher than a qualified rate and can cost the provider much more in interchange costs, so the merchant account providers do make a markup on these rates. The bulk of these transactions are done with corporate cards.
Payment Gateway Providers:
Payment Gateways connect the Merchant to the processor that is acting as the front-end connection to the Card Associations. They are called gateways because they take many inputs from a variety of different applications and route that input to the appropriate processor. Gateways communicate with the processor using dial-up connections, Internet-based connections, IVR lines, and/or privately held leased line connectivity. Gateway accounts are also considered virtual terminals
Besides offering simple data transportation, gateways can offer additional value added services such as advanced reporting, auditing and fraud control and if programmed correctly can upload directly into a variety of accounting programs.. Gateways support different point-of-sale systems, processors and merchant types.
A company that provides the processing of credit card transactions. Payment Processors are to be distinguished from issuing banks which act as the recipient of the transaction proceeds.
The credit card processing guidelines that every merchant and acquirer must comply with to ensure the safety of cardholders’ data when completing a credit card transaction. PCI stands for Payment Card Industry, and the PCI Standards Council is a joint effort of Visa, American Express, MasterCard, and Discover.
Government agencies or corporations may issue their employees Purchase Cards. A Purchase Card is a credit card, but unlike a regular credit card it can only be used at certain types of merchant locations.
Qualified Rate – (or first tier):
A qualified rate is the percentage rate a merchant will be charged whenever they accept a regular consumer credit card and process it in a manner defined as “standard” by their merchant account provider using an approved credit card processing solution.
The qualified rate is created based on the way a merchant will be accepting a majority of their credit cards. For example, for an internet merchant, the internet interchange categories will be defined as Qualified, while for a physical retailer only transactions swiped through or read by their terminal in an ordinary manner will be defined as Qualified.
This is usually the lowest rate a merchant will incur when accepting a credit card. The qualified rate is also the rate commonly quoted to a merchant when they inquire about pricing.
Rates and Fees:
A Merchant Account has a variety of fees, some periodic, others charged on a per-item or percentage basis. Some fees are set by the merchant account provider, but the majority of the per-item and percentage fees are passed through the merchant account provider to the credit card issuing bank according to a schedule of rates called interchange fees, which are set by Visa, Discover, and MasterCard. Interchange fees vary depending on card type and the circumstances of the transaction. For example, if a transaction is made by swiping a card through a credit card terminal it will be in a different category than if it were keyed in manually.
The re-submission by an Acquirer of a previously charged back sale in an attempt to re-charge the Cardholder. Chargebacks requires some form of additional documentation confirming the validity of the charge and disputing the chargeback reason.
‘Retail’ merchants typically conduct business in a storefront or office where they interact with their customers face-to-face and physically swipe cards through a terminal or Point-of-Sale system.
The merchant’s limitations and/or requirements on accepting returned merchandise.
Secure Payment Page:
A secure payment page assures customers that their payment information is encrypted for privacy and data integrity before it’s sent over the Internet. This page is typically identified by the “s” in https:// (instead of http://). Payment gateway providers make this necessary e-commerce link possible by hosting the payment gateway software and individual secure payment pages on their own servers.
The process of transferring funds for sales and credits between Acquirers and Issuers, including the final debiting of a Cardholder’s account and crediting a Merchant’s account.
An initial fee paid to the Merchant Service Provider for establishment of an account and for processing and reporting tools.
SIC or Standard Industry Codes:
Special numbers assigned by the Card Associations to Seller types for identification and tracking purposes. MasterCard uses MCC (Seller Category Code), while VISA uses SIC (Standard Industry Codes).
Sponsoring Bank (the bank that moves the money):
The sponsoring bank provides access to the card associations, sets up the ACH payments for the Back-End processor, and moves the appropriate funds to the merchants’ bank based on the BIN.
Responsible for paying the Associations and the issuing bank their share of the Interchange fees.
Standard Merchant Account:
This type of account generally refers to a Retail Account.
Standard Industry Code/Merchant Category Code (SIC/MCC Code):
These are four-digit, numeric codes that identify merchant business types. There are thousands of SIC codes and all of them are defined by VISA International in the Visa USA Merchant Data Manual.
The statement fee is a monthly fee associated with the monthly statement that is sent to the merchant at the end of each monthly processing cycle. This statement shows how much processing was done by the merchant during the month and what fees were incurred as a result.
Many times, the statement fee is not directly linked to “paper” statements but rather general overhead. This means that a provider would not waive this fee if a merchant chose to have a “paperless” statement.
The 3-Tier Pricing is a popular pricing method and the simplest system for most merchants to understand, if not the most transparent. The newer 6-Tier Pricing, including additional tiers covering debit, business, or international cards is gaining in popularity. In 3-Tier Pricing, the merchant account provider groups the transactions into 3 groups (tiers) and assigns a rate to each tier based on a criterion established for each tier. A possible drawback from the merchant’s perspective, is that these “tiers” or “buckets” are variable from one processor to the next prohibiting any direct comparison from a Tier 1 provided by one provider from a Tier 1 provided by another. Tiers are typically named Qualified, Mid-Qualified and Non-Qualified.
The Transaction fee is charged when you accept your authorization. This fee only applies to an authorization that is accepted without error.
Any sale for which a Cardholder does not provide his/her specific authorization (This should not be confused with the failure to receive an authorization response from the Issuer.)