Merchant Account Glossary of Terms
ABA Routing Number
This is a nine digit number that appears on all checks along with the bank account number. ABA actually stands for American Banker’s Association. It is also sometimes called the Transit Routing Number. The ABA number identifies which banks the account is from. Each bank is issues its own ABA number. When you send a bank wire or an ACH transaction from one bank to another, you need both the ABA number and the bank account number.
ACH/Automated Clearing House
ACH is short for Automated Clearing House. When you send and receive money from one bank account to another, you can do it through bank wire, which happens very quickly the same day, or ACH, which takes a couple days. Think of ACH as an electronic payment from one bank account to another. The transaction is initiated by a business to debit an account by submitting an ACH file. This file contains all the ABA numbers and account numbers to debit, along with the amounts. This file is submitted for processing nightly and passes through networks controlled by the Federal Reserve. ACH payments are not guaranteed, that is, they may bounce and they must clear much like a check does. ACH is useful as an alternative or in addition to accepting credit cards.
An acquiring bank provides credit card merchant accounts. The acquiring bank is a bank that has a relationship with Visa® and MasterCard® and the merchant’s personal or business bank. It is sometimes referred to as the clearing bank, where credit card transactions are cleared through. The acquiring bank is responsible to clear transactions between the time they are charged to a cardholder and then deposited into the merchant’s bank account. The acquiring bank is the banking entity that actually makes the deposits into a bank account when credit cards are processed.
These terms all refer to Visa, MasterCard, American Express® and Discover®, whose familiar logos appear on the majority of credit and debit cards in the U.S. The associations regulate card acceptance rules and interchange for their member financial institutions.
ATM Debit Card
An ATM (Automated Teller Machine) debit card is a card similar in size and shape to a credit card with an account number and magnetic stripe on one side. When swiped through a point-of-sale terminal, the card holder is prompted to enter a PIN number via a pinpad. This will create an instant debit transaction to the customer’s bank account. Funds are authorized in real time, and if there are not sufficient funds in the customer’s bank account to cover the amount of the debt, the transaction will be declined. In addition to purchases, ATM cards can also be used at ATM machine along with a PIN to make cash withdrawals, deposits, balance transfers, and check on current balances.
This is the term given to the process of validating funds available on a credit card or debit card. It is done at the time the transaction is entered or swiped through a point-of-sale terminal. When a merchant enters a credit card transaction, a response comes back from the issuing bank to the acquirer and back to the merchant, all in a second or so. This is the authorization. An authorization may be either approved or declined by the issuing bank. If the authorization is approved, that means funds are available to be withdrawn from the customers account and put into the merchant’s bank account. When an authorization is approved, a six or seven digit authorization code is given with the transaction, along with the AVS response. If no authorization is given, this is a decline and means there is either not enough funds in the customers bank account (if a debit card) or they perhaps have reached their limit on their credit card (if a credit card). There are other reasons for declines but these are the most common reasons.
Authorization code is the response code from the issuing bank returned to the merchant at the time of authorization. This code is usually 6 or 7 digit number and is recorded either by the point-of-sale terminal or software, as well as printed on any receipt or sales draft. If doing a phone or voice authorization, the merchant should record the authorization code for reference. The code serves as proof of authorization.
This is also called a transaction fee. This is the amount charged to a merchant account each time a communication happens between the software or point-of-sale terminal and the authorizing network. The communication can occur either over a dial up telephone line, leased line, or an Internet IP line. In all cases, each time the merchant communicates with the authorizing network, an authorization fee will be charged for each transaction. And this covers all transaction types — a normal sale transaction, a force post authorization transaction, or a refund.
Authorization Only Transaction
Authorization Only (Auth Only) is a special type of sale transaction. It authorizes an amount on a customers card but the item does not settle until a later time, sometime several days or weeks. The purpose of an authorization only transaction is to reserve an amount against a card holder’s available credit limit for a certain period of time. For example, a merchant may perform an authorize only transaction if an item ordered is out of stock. Then when the item is in stock, the merchant will then settle the transaction, essentially charge the card at that time. Another reason a merchant may do an authorization only transaction is when the exact amount to be charged to a card is not know. This is often used in the hotel industry. When a patron checks in to a hotel, their card is authorized for an amount greater than the length of their stay. However, the transaction is not settled until check out, where the hotel may include any incidentals you may want to charge to your room. At checkout the hotel enters the actual final amount and then settles the transaction and the card is charged. One caveat is that if an authorization only transaction is not settled within 24 hours, then the transaction can downgrade to a different rate category and the merchant may be surcharged a small fee. However, the benefits of using an authorization only transaction by a merchant usually outweigh any additional costs involved, since by doing the authorization the merchant is still guaranteed payment.
An issuing financial institution’s electronic message reply to an authorization request, which may include:
• Approval – transaction was approved
• Decline – transaction was not approved
• Call Center – response pending more information, merchant must call the toll-free authorization phone number. This occurs if there is a problem with the card holders card.
Average Ticket Size
Average ticket size is referring to the average dollar amount of each credit card transaction. Average ticket size is always asked when you setup a new merchant account. If you don’t process credit cards, simply make an estimate of what you believe the amount of the average credit card sale will be. Keep in mind that credit cards sale transactions are typically higher than for cash transactions. If you already processes credit cards, simply divide your total monthly MasterCard and Visa volume by the number of transactions to arrive at the average ticket size. Sometimes the average amount will be printed on your monthly merchant account statement.
AVS/Address Verification Service
AVS stands for the Address Verification Service. AVS is a service that is required to be used on all card-not-present (keyed) credit card transactions. AVS works by the merchant entering the street address and ZIP code at the time of transaction, along with the card number, expiration date and amount. When a transaction is submitted for authorization, the address and ZIP code entered are checked against the actual billing address and ZIP code for the card holder. The AVS response is actually provided by the issuing bank. The result is either a match, partial match, no match, or AVS not available or error. Depending on the AVS response, the merchant can use the information for fraud control. For example, if shipping an expensive electronic item the address and ZIP code do not match, it would be prudent for the merchant to not ship the item without contacting the card holder. This will save and or reduce a potential chargeback. There is a small cost for the AVS service, but it is usually incorporated into the transaction fee. AVS is a great tool and should be used by all merchants accepting Internet credit card orders or anytime the card is not present, as it will help reduce the risk of a transaction going bad.
Basis points are the percentage that you are charged on a credit card transaction. One basis point is equal to 1/100th of 1 percent. Thus a rate of 2.33% is equivalent to 233 basis points. Often times in merchant processing you will hear the term basis points in regards to rates. You may hear this in terms of surcharge rates, also called mid qualified and non qualified. For example, the mid qualified surcharge rate may be 75 basis points. This is the same as saying 0.75%.
Batch or Batch Processing
A batch is a collection of transactions, usually a single day’s worth. Batch processing refers to closing or settling the entire batch of transactions at one time. The point-of-sale terminal or credit card processing software can be set on manual batch close or automatic batch close. If on manual batch close, the merchant will need to batch out at the end of each day. This sends a command to the processor to settle all transactions that have been entered. Once a batch is settled, a report is usually printed showing the transaction totals in the batch. Before a batch is settled, changes can be made to existing transactions in the batch. For example, one may want to void a transaction, or change an amount of one of the transactions. Changing the amount is typically done for a merchant that enters tips, such as a restaurant. In the case of tips, the amount of the transaction is adjusted to include the tip before the batch is closed. In automatic batch close, no manual intervention is needed by the merchant. Instead the terminal or software will automatically close the batch (settle the transactions) at a certain time each day, or in some case the processor will settle the batch at the processor level (this type of settlement is called host batch close). It is advisable for most businesses to be setup on automatic batch close unless for some reason a tip edit function is required, in which case manual batch close would be the better option. Many processors will charge a small fee, usually equal to a single transaction fee, at the time when the batch is closed.
The business type is another question that is typically asked on a new merchant application. Your business type should fit in to one of the following categories: Retail, Restaurant, Hotel, Mail Order / Telephone Order, Internet. A description of each follows:
Retail – This business type refers to merchants in a face-to-face environment that sell tangible goods, where card is present, and where the card is swiped through a point-of-sale terminal or similar card reader device. Retail merchants may also take a manual imprint of the transaction since they are face to face with the customer.
Restaurant – A business that serves food, is in a face-to-face environment, and use point-of-sale terminals to swipe credit cards. The key difference with straight retail, however, is that the product is consumable (less risk for chargebacks) and tips are usually entered as part of the transaction.
Hotel – This refers to merchants in a face-to-face environment that sell lodging and hospitality services. These merchants also usually use conventional point-of-sale terminals swipe the transactions.
Mail Order/Telephone Order (MOTO) – This refers to any business that is not face-to-face with the customer, and the transactions are keyed into the terminal and are not swiped. The term mail order/telephone order comes from the fact that the credit card number is received either over the phone or through the mail, but it encompasses all transactions that are keyed no matter how they are received.
Internet – A business type is Internet if credit card information is collected over the Internet via a web page. The transaction may or may not be processed in real time, but if the customer is entering their credit card information on a website, the business is considered an Internet business. Note that a business may have a web page but might not be an Internet business type. Only businesses that actually that gather the credit card order over the Internet are considered this business type.
The process of acquiring account information from a payment card required for processing. This occurs at the point of sale either by swiping the card through a card reader or by manually entering the information.
Card Not Present (CNP)
A payment card transaction where the cardholder/card are not physically present — for example, in an online or mail/telephone order sale.
A payment card transaction where the cardholder and payment card are both present. Sometimes referred to as a face-to-face transaction.
Occurs when a cardholder disputes a transaction with the card issuer. The issuer initiates a retrieval request against the merchant account and the disputed amount is withdrawn from the account until the matter is settled. The merchant is given 10 days to dispute the chargeback with proof of purchase or delivery. The merchant account provider imposes a chargeback fee on the merchant to handle the process.
A payment card that is issued to an individual by a bank and can be used to purchase merchandise or services on credit.
Credit Card Imprinter
A very basic device used to create a receipt for a credit card transaction. Sometimes referred to as a “knucklebuster”, these flatbed imprinters have fallen out of favor in recent years and have been largely replaced by printers linked to a credit card terminal.
Credit Card Processing
The complex electronic process of transacting and verifying a credit card transaction. Once authorized, the process initiates an ACH transfer of funds from the issuing bank to the credit card processor, who then deposits the transaction proceeds into the merchant’s account.
Credit Card Processor
An entity that handles the electronic verification and initiation of Electronic Funds Transfers (EFT) in to the ACH system on behalf of clients. The term is used interchangeably with merchant services provider, merchant account provider or merchant acquirer.
Credit Card Reader
A credit card reader, sometimes called a credit card swiper, is an electronic device used to read data stored on the magnetic stripe of a credit card. When the credit card is swiped through the credit card reader at the point of sale, the information pertinent to processing a credit card transaction is read and processed by the credit card reader. Typically this magnetic stripe data includes the card holder’s name, credit card account number and expiration date, and also the Card Security Code (CSC), also known as the Card Verification Value (CVV).
Credit Card Swiper
A credit card swiper, also known as a credit card reader, is an electronic device used to read data stored on the magnetic stripe of a credit card. The credit card swiper collects all of the information needed to process a credit card transaction at the point of sale. Magnetic stripe data typically includes the card holder’s name and account number, credit card expiration date and the Card Security Code (CSC), also called the Card Verification Value (CVV).
Debit cards behave and act just like a credit card, except that the funds are immediately withdrawn from the cardholder’s bank account. A credit card on the other hand is billed to you each month, and may contain interest charges. You do not have to pay off credit cards each month, while with debit cards there is no balance to pay off, as the money comes directly out of your bank account There are two types of debit transactions, one is called offline debit (Signature), and the other is called online debit (PIN). With offline debit, the customer signs a receipt and does not enter a PIN. The transaction travels through the Visa/MasterCard Network. With online PIN debit, the customer must enter their PIN number and the transaction is authorized over a debit network directly. Online debit requires additional equipment (i.e., a pinpad), and can only be used in a card present environment where the card is swiped. Offline debit however can be used in both swiped and card not present situations (i.e., Internet ecommerce websites) since no PIN is entered. All standard merchant accounts allow offline debit transactions to run through the account as if it was a standard credit card.
Fees charged by a merchant account provider to its clients for processing services, plus interchange and assessments paid directly to the credit card associations and issuing banks.
Electronic Benefits Transfer, an electronic system in the U.S. used by state governments to provide financial and material benefits (including unemployment and food benefits) via a plastic debit card.
Electronic Funds Transfer (EFT)
An automated transfer of funds using an electronic medium.
Also known as an e-wallet, it allows the user to charge payment for goods and services to their card without using the card. Software on the user’s mobile device securely stores credit card account and payment information and works in conjunction with complimentary software on the merchant’s end.
The process of translating data into secret code (encoding) to ensure secure transmission. An effective way to help ensure data security, it is also referred to as end-to-end encryption (E2EE).
A fee that is set by the credit card associations and paid to their member banks. Interchange is charged to credit card processors, who pass it along to merchants as part of the discount fee. It makes up the largest portion of credit card processing fees.
A bank or financial institution that is a licensed member of a credit card network. It provides cardholders with a line of credit for purchases or cash advances, and is responsible for reimbursing an acquirer for purchases made by the cardholder. The issuing bank then bills the cardholder.
The business arrangement between a merchant and a credit card processor that allows the merchant to accept payment cards from customers.
Merchant Account Provider/Merchant Services Provider/Merchant Acquirer
The entity that provides merchants with the products and services needed to process payment cards. The provider also acts as an intermediary between the merchants and the issuing banks and credit card networks throughout the process and is responsible for depositing the transaction proceeds into the merchant’s designated bank account.
Merchant Processing Agreement (MPA)
A contract between a merchant and their merchant account provider that outlines the responsibilities and warranties of all parties involved in credit card processing.
Mobile Credit Card Processing
Processing payment card transactions from a mobile device or smartphone.
The amount that a processor charges a merchant if their discount rate, transaction fees and other account fees do not collectively equal a pre-determined amount that’s stated in the MPA.
Monthly Processing Limit
The amount of money that a merchant service provider will allow a merchant to process each month, as outlined in their MPA.
Monthly Processing Volume
Gross monthly payment card sales (in dollars) that a merchant processes. This figure is specified in the merchant application for card processing along with the average ticket size. Both are used to help determine processing fees.
Abbreviation for mail order/telephone order.
A fee charged by the processor when a merchant exceeds their pre-determined processing volume.
A collective term for credit, debit, prepaid and EBT cards.
Software on a third-party provider’s server that handles the transmissions between a merchant and their processor required to complete an electronic transaction.
Stands for Payment Card Industry Data Security Standards, a set of requirements established by the credit card networks to protect cardholder information and reduce data theft. The standards apply to merchants, merchant account providers, issuing banks and the networks. Meeting these requirements is known as being PCI compliant.
PCI non-validation fee
A fee charged to merchants who do not return a PCI Compliance Validation Certificate, which can be obtained by completing and passing on an annual basis a Self-Assessment Questionnaire (SAQ) and/or Quarterly Network Scan (for merchants that electronically store cardholder information or whose application systems are connected to the Internet) according to the applicable business level as defined by PCI Security Standards Council.
The Personal Identification Number is the digital code that PIN-based debit cardholders enter at the terminal when making a purchase.
Hardware a PIN debit cardholder uses to enter their PIN at the POS. Also called a keypad.
Abbreviation for point of sale, this is the place where a customer makes payment. While POS once referred specifically to credit card terminals at the cash register, technology has expanded its application to include mobile, wireless and virtual terminals.
The electronic equipment used to capture, transmit and receive the information necessary for electronic payment card transactions.
A transaction charged to a cardholder by a merchant or service provider on a designated periodic basis (weekly, monthly, annually) in payment for products or services. Two examples of recurring billing are club memberships and subscriptions.
The ability to approve or decline a payment card transaction in seconds while the customer waits.
The first step in the chargeback process. In a disputed transaction, the issuing bank requests a copy of the physical sales ticket of the transaction in question from the merchant.
Secure Socket Layer, a system for encrypting payment card data sent over the Internet.
Terminated Merchant File
Also called MATCH, this database is maintained by all third-party processors, banks and other financial institutions. It lists the names of merchants whose privileges to process credit cards and other electronic transactions have been terminated by an acquirer for violation of a merchant processing agreement.
Virtual Shopping Cart
A program that is integrated into a website and makes it possible for shoppers to keep a running tally of products and services they plan to purchase. At checkout, the shopping cart connects to a secure payment page where they can complete their purchase with a payment card.
A low-tech processing solution typically used by low-volume merchants that requires them to phone an authorization center to process a transaction and receive authorization