The ABCs of Payments

A glossary of terms

A

ABA routing number: Short for American Banking Association routing number, this unique nine-digit number is used to identify banks. You will need both your routing and account numbers (found at the bottom of all paper checks) when sending a bank wire or ACH payment. The routing number is what directs these transactions to the appropriate bank.

ACH (Automated Clearing House): A form of electronic payment that is transferred from one bank account to another via networks controlled by the Federal Reserve. The system was developed to replace paper checks and can be used as an alternative to paying by credit card.

Acquiring bank: Also known as a merchant bank, an acquiring bank issues merchant accounts to businesses or other legal entities for the acceptance of credit card transactions. Acquiring banks clear transactions and deposit daily sales into merchants’ accounts. (see merchant bank)

Address verification service (AVS): A fraud prevention feature that requires merchants to supply cardholder addresses during card-not-present transactions, such as online purchases. When the transaction is submitted for authorization, the system verifies that the address matches the one on file with the issuing bank and confirms whether it’s valid or not.

Application program interface (API): A set of rules that informs software programs how to communicate and interact with one another.

Authentication: The verification of a merchant’s identity, ensuring that they are entitled to conduct transactions.

Authorization: A process of validating funds that occurs at the time of the transaction, such as when a card is swiped at a point-of-sale terminal. In a matter of seconds, a request is sent on behalf of the merchant and authorizations are approved or declined by the issuing bank. Authorizations ensure that cardholders have sufficient funds/credit limits available to complete the transaction.

Authorization code: In response to an authorization request, an authorization code is sent back from the issuing bank. This number is recorded by the payment terminal or software, and can be used as proof of approval/denial.

Authorization fee: The amount charged to the merchant for each communication between point-of-sale terminals or software and the issuing bank. This fee covers all transactions, including sales, credits, and voids.

Authorization only transaction: A type of transaction that authorizes an amount on a customer’s card, but does not settle until later. This reserves an amount against a cardholder’s available funds or credit. For instance, this might be used if an ordered item is out-of-stock and settled once it becomes available. Another example is when the exact amount to be charged is unknown, such as in the hotel industry. Transactions can be authorized at the time of reservation and settled at check out.

Average ticket size: The average dollar amount of a merchant’s credit card transactions, usually given in daily and monthly volume limits. This number (or an estimation) is necessary when opening a new merchant account.

B

Bankcard: A credit, debit, or gift card issued by a financial institution.

Bank identification number (BIN): The first group of numbers — usually six to eight — on a credit card that identify the issuing bank.

Bank routing number: A nine-digit number printed on the bottom of paper check that identifies the issuing bank.

Basis points: One-hundredth of one percent of a transaction amount, meaning that one percent equals 100 basis points. These points relate to how much a merchant is charged per credit card transaction. Discount rates are often quoted as a percent or fraction.

Batch processing: A batch is a collection of transactions saved for submitting. Batch processing occurs either automatically or manually, settling all transactions in the batch at once. This often occurs at the close of each business day.

C

Capture: The process of acquiring the information required for processing a payment. This happens, for instance, when a credit card is swiped or dipped in a point-of-sale terminal.

Cardholder: The authorized owner and user of a credit card.

Cardholder data: A cardholder’s sensitive information, such as name, address, card number, and verification codes.

Card issuer: A financial institution, bank, credit union, or company that provides credit and debit cards to cardholders.

Card-not-present: A transaction where the cardholder and card are not physically present. This is seen in online, phone, and mail order purchases.

Card-present: A transaction where the cardholder and card are physically present at the time of purchase.

Card verification code (CVC): A unique number encoded in a credit card’s magnetic stripe. This code is used to validate card information.

Card verification value (CVV): A three-digit security number found on the back of credit cards. These codes are used to verify authenticity and reduce fraud.

Chargeback: Occurs when funds paid to a merchant are taken back by the card issuer for a disputed transaction. Merchants are notified when this happens, and then have 10 days to dispute a chargeback.

Check guarantee: A service that guarantees check payment and determines if check presenters have previously written delinquent checks.

Check verification: Also called check authorization, this process confirms that a check presenter is not linked to excessive check returns.

Chip card: New credit cards have an embedded EMV chip, a small semi-conductive square that generates a unique code per transaction. This technology greatly reduces the risk of credit card fraud.

Clearing: The process of financial details being exchanged between an acquirer and an issuer to facilitate the posting of a transaction to a cardholder’s account, along with reconciling an issuing bank’s settlement position.

Compliance: This refers to merchants meeting regulations set by the Payment Card Industry Security Standards Council (PCI SSC), along with card associations and the government.

Credit association: Organizations that grant credit cards — including MasterCard, Visa, Discover, and American Express — and make rules regarding the acceptance of credit cards.

Credit card: A payment card issued by a bank, authorizing the named individual or entity or make purchases on credit.

Credit card processor: A merchant service provider that handles processing credit card transactions — including verification and initiation of funds transfers — on behalf of merchants, issuing banks, and merchant account providers.

Credit card reader: An electronic device used to read the data stored on a credit card’s magnetic stripe or EMV chip. Readers can be used as a point-of-sale terminal or taken anywhere for on-the-go payments.

Credit card terminal: A standalone electronic device that allows a merchant to swipe, dip, or key in credit card information. Most terminals can also process debit cards, gift cards, and paper checks.

Credit limit: The maximum amount of credit a cardholder has available for spending, often renewing on a monthly basis.

D

Debit: A charge assessed to a bank account.

Debit card: A bankcard that when used to make purchases, funds are immediately withdrawn from the cardholder’s checking account. PIN numbers may be required for offline transactions.

Debit network: The electronic system that enables debit card transactions and ATM withdrawals.

Decline: The denial of an authorization request by the issuing bank.

Delayed capture: A transaction that uses information from an authorization transaction to capture funds, often used by merchants that do not immediately ship goods.

Delayed settlement: The utilization of an authorization transaction and a delayed capture transaction to process orders.

Demand deposit account: A merchant’s checking account into which funds are deposited after transactions are processed.

Deposit: Also known as release, this is the process of the merchant transmitting a batch of transactions to the acquiring bank for settlement.

Discount rate: A percentage of each transaction that the merchant pays to the acquiring bank for credit card processing. This rate is usually based on monthly transaction volume and is quoted as a percentage to the hundredths. (see basis points)

E

eCheck: An electronic version of a paper check, also referred to as ACH. (see ACH)

E-commerce: The process of selling and buying goods or services using the internet.

EDC terminal: Short for electronic data capture terminal, this is a point-of-sale device that reads information stored in a payment card, performs authorization functions, stores transaction data, and transmits data for processing.

Effective rate: The accurate amount a merchant bank charges for processing transactions. It might be more than the quoted discount rate because it calculates and bundles the discount rate, assessments, and any other associated transaction fees.

Electronic benefits transfer (EBT): A national system used to provide benefits to government employees via debit card.

Electronic funds transfer (EFT): An automated, paperless transfer of funds initiated through an electronic terminal or computer network.

Electronic Transactions Association (ETA): The international association for the electronic payments industry, with over 400 member companies. It serves organizations that offer products and services for payment processing.

Electronic wallet (eWallet): Mobile software that securely stores payment information so customers can charge payments without using their card.

EMV: Created by Europay, Mastercard, and Visa in 1999, EMV technology is spreading from Europe and Canada to become a global standard. This smart chip technology offers stronger card-present transaction protection than the traditional magnetic stripe card. (see chip card)

Encryption: The process of encoding or scrambling sensitive data before transmission for security purposes. It can be decrypted or unscrambled only by authorized people or programs with the decryption key.

F

Federal Reserve: A system of 12 federal banks that, together, create the US central banking system. This system implements financial policies and regulates commercial banks.

Federal tax ID number: A nine-digit number assigned by the IRS that is used to track business taxes.

Financial institution: An organization that deals in, invests, or moves financial transactions.

Firewall: A system of security measures designed and integrated to prevent unauthorized access to a computer network.

Floor limit: A preset limit established by an issuer that allows merchants to accept card transactions without authorization. Beyond the limit, authorization is required.

Force transaction: A transaction for which a merchant received a voice authorization, requiring a force in order to be settled.

Fraud: The illicit access or use of someone’s sensitive information, like cardholder data.

Fraudulent transaction: A transaction that is unauthorized by the cardholder, often due to lost or stolen cards.

Funding: The payment of a merchant for settlements.

G

Gateway: A software platform that provides an interface between merchants and acquiring banks.

Grace period: A time period during which a cardholder can pay a bill without penalty or interest.

Guarantor: Somewhat like a co-signer, a guarantor agrees to guarantee any processing losses that result from doing business with a merchant.

H

Hold: A hold can be placed on a portion of a customer’s credit limit or debit balance in instances when the final transaction balance isn’t yet known. Once the total amount is calculated, the transaction can be finalized.

Holdback: A portion of revenue that is held in reserve from a merchant’s credit card transactions to cover possible disputes, chargebacks, or other expenses.

I

Independent sales organization (ISO): A company or other registered sales representative that is sponsored by an acquiring bank to sell merchant processing services.

Integration: A combination of software and/or systems to create something with a larger purpose. For instance, point-of-sale terminals might be connected to a software network across multiple storefront locations.

Interchange: The exchange of transaction data between issuers and acquiring banks for authorization and settlement. These interchange systems are standardized, allowing them to be used worldwide by banks and merchants.

Interchange fee: A fee paid to the issuer by the acquiring bank to cover transaction costs. This fee, which is part of the discount rate, makes up the largest portion of card processing fees.

Issuing bank: A bank or financial institution that issues credit cards. In return for cardholders receiving a line of credit, issuers charge interest and associated fees.

J

Joint credit: When two or more people or entities share credit.

K

Key: A code or password necessary for deciphering encoded or encrypted data.

Keyed: A transaction is keyed in by manually typing card data into a terminal or computer. This process is often used in card-not-present transactions.

L

Late payment fee: A fee imposed when a cardholder fails to make the minimum payment before the deadline.

Loyalty program: A set of incentives used by credit card issuers to maintain and generate new customers.

M

Magnetic stripe: Also called mag-stripe, this refers to the stripe of magnetic information on the back of credit and debit cards. The stripe contains customer and account information that allows transactions to be made.

MATCH list: Short for member alert to control high-risk, it is an alert system that electronically tracks businesses that have had their merchant accounts terminated with cause by an acquiring bank.

Merchant: A business or organization that is authorized to accept credit and debit card payments.

Merchant account: An account established as part of a business arrangement between a merchant and credit card processor, allowing the merchant to accept card payments.

Merchant account provider: An entity that provides a merchant with the necessary services to process payments, acting as an intermediary between merchants, issuing banks, and credit card networks.

Merchant bank: A bank in agreement with a merchant to accept deposits generated by card transactions. (see acquiring bank)

Merchant category code: A code that identifies a merchant’s principle line of business or trade.

Merchant identification number (MID): A unique number assigned to a merchant by the acquiring bank. This ID number identifies the merchant and represents the merchant’s profit center.

Merchant processing agreement: The contract between a merchant and a merchant account provider that lists the details and responsibilities involved in credit card processing.

Monthly processing limit: The amount of money that a merchant is allowed to process each month before incurring additional fees. This is typically denoted in the merchant processing agreement.

Monthly processing volume: The gross monthly processed card sales by a merchant, often used to determine processing fees.

Merchant services provider (MSP): An organization that handles the setup and paperwork required for a merchant account to receive transaction funds. Oftentimes, these are independent organizations with ties to several merchant banks.

N

National Automated Clearing House Association (NACHA): A not-for-profit organization that oversees the ACH network. NACHA represents thousands of financial institutions across the country.

Near-field communication (NFC): Close-range wireless technology that allows customers to make in-person payments with their mobile devices.

Net payment: A payment made to a merchant minus processing fees.

Net revenue: A merchant’s income minus interchange fees.

Net settlement: The settlement of a series of transactions minus transaction fees.

Non-qualified: Describes a transaction that failed to interchange at the best rate. Reasons for this may include manual data entry, slow settlement, or a lack of data.

O

Omnichannel: The use of multiple channels to attract and complete sales, allowing customers to experience a brand however they prefer, wherever they are.

Operator: A facility that settles and distributes ACH transactions electronically. There are four ACH operators in the country, with the Federal Reserve clearing the majority of ACH transactions.

Originator: A financial institution that initiates electronic payments through the ACH network.

Over-limit: When a cardholder’s account has exceeded its credit limit, or when a merchant has exceeded its predetermined processing volume.

P

Payment Application Data Security Standards (PA-DSS): Provides a global standard for software vendors, aimed at preventing payment applications from storing prohibited secure data such as PIN numbers.

Payment Application Qualified Security Assessor (PA-QSA): A company that is qualified to assess an organization’s PCI compliance.

Payment Card Industry audits (PCI audits): Any business or system that stores, processes, or transmits payment data is required by PCI to be annually audited to verify compliance.

Payment Card Industry Data Security Standards (PCI-DSS): Established in 2004 by credit card networks, this is a set of requirements enacted to protect cardholder information and reduce the risk of data breaches and fraud. Meeting these requirements makes an organization PCI compliant.

Payment Card Industry Security Standards Council (PCI-SSC): A global forum established in 2006 that is responsible for the development and management of the PCI Security Standards.

Payment gateway: The third-party software that facilitates transmissions between merchants and payment processors. A payment gateway is required to complete electronic transactions.

Payment processor: A company that processes a merchant’s credit card transactions and settles funds. (see third-party processor)

PCI non-validation fee: A fee incurred by a merchant that fails to return a PCI Compliance Validation Certificate, which is granted upon completion of an annual Self-Assessment Questionnaire (SAQ) and/or a quarterly network scan.

Peer-to-peer payment: A transfer of funds between two individuals, often using a specialized mobile app. This is common for paying friends and family back for meals, movie tickets, and more.

Personal identification number (PIN): A digital code used by debit cardholders as authentication during debit or ATM transactions.

Per transaction fee: A fee that a merchant pays to a payment processor or acquiring bank on a per transaction basis.

Point-of-sale (POS): The location and time of a transaction, including physical and virtual terminals.
 
Point-of-sale (POS) terminal: A device that captures, transmits, and receives the necessary information to complete card transactions.

Posting: The recording of credits and debits.

Prior authorization: An authorization conducted before a transaction occurs.

Q

Qualification: The level at which a transaction interchanges.

Qualified discount rate: A discount given to a merchant when retail transactions are batched out under optimum conditions.

Qualifying ratio: The ratio used by lenders to determine an applicant’s ability to meet debt responsibilities.

R

Receipt: A description of a transaction, either given in a hard copy or sent digitally.

Receiver: A business or individual that authorizes an ACH transaction as a debit or credit to an account.

Receiving depository financial institution (RDFI): A financial institution that receives an ACH transaction from an operator and debits or credits the appropriate accounts.

Reconciliation: An accounting process that compares two different records to ensure the figures are aligned and accurate.

Recurring billing/recurring transaction: A transaction charged to a cardholder with permission on a regular basis (weekly, monthly, annually, etc.) as payment for goods or services. This is commonly seen with memberships and subscriptions.

Refund: A credit to a cardholder account, most often due to a product return.

Retrieval request: The first step in the chargeback process, when the issuing bank requests a copy of the sales ticket from the merchant as proof of the disputed transaction.

Reversal: The cancellation of a transaction that has been sent through interchange in error.

S

Settlement: The process of merchants sending authorized transactions to the processor and routing payments to the merchant’s acquiring bank for deposit.

Shopping cart: A virtual shopping cart that groups a customer’s chosen items into one transaction in order to complete a purchase.

Signature capture (SigCap): The electronic capture of a cardholder’s signature during a transaction. This can be used in the event of chargebacks or other disputes.

Statement: Monthly documentation that lists all transactions for an account, including withdrawals, deposits, fees, and interest.

Suspended batch: An instance when a batch of transactions is not released to interchange. This requires human intervention in order to address the issue and settle the batch.

Swipe: The act of sliding a card through a card reader or terminal. The machine reads the card’s magnetic stripe in order to complete a transaction. EMV chip cards are dipped into a payment terminal rather than swiped.

T

Tender type: The payment method used in a transaction, such as credit card, ACH, or gift card.

Terminal identification number (TID): An ID number that represents a specific payment terminal or register. This number tells banks which transactions came from which merchants, and where authorizations should be sent.

Third-party processor: A company that processes transactions under card issuers or acquirers. (see payment processor)

Tokenization: The process of replacing cardholder data with an unrelated code, called a token. This token represents data, but cannot be used to interpret it. Along with encryption, tokenization is used in the payments industry to protect sensitive data.

Transaction: The action between a cardholder and a merchant, resulting in financial activity between the two parties.

Transaction ID: A unique number assigned to every transaction for auditing purposes.

U

Underwriter: An intermediary between buyers and sellers that evaluates risk and assigns appropriate classifications to proposed business relationships.

Unsettled transaction: A transaction that is not yet settled, which means money cannot yet change hands.Transactions are typically settled at the end of each business day.

User authentication: A process that identifies and validates an authorized cardholder.

V

Voice authorization: A processing solution that requires a merchant to call an authorization center to receive authorization and process a transaction. This is a low-tech solution most often used by low-volume merchants.

Void: The cancellation of an authorized transaction that has not yet been settled.

W

None

X

None

Y

None

Z

None

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