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Chargebacks, POS systems, reserves—the terms associated with payment processing can feel never-ending. Whether you’re new to the world of payment processing or simply would benefit from a helpful refresher, our reference guide can help.
You can print it or bookmark it so you’re never far from the key terms you should know about processing payments online and in person. Terms are in alphabetical order.
An acquirer, also known as a merchant acquirer, is a banking or financial partner for businesses. Acquirers accept, process, and deposit credit and debit card payments on behalf of the merchant. In payment processing, to “acquire” means to “accept” payments.
Address verification services (AVS) are one of the most common tools to verify and authorize credit card transactions to detect suspicious charges and prevent credit card fraud. AVS involves verifying a customer’s billing address during a transaction, ensuring the information submitted by the cardholder matches the address on file at the cardholder’s issuing bank.
Authentication is the process of validating (or authenticating) that the payment data is being sent by its claimed source. For instance, when a customer submits a payment, payment processor companies use authentication to verify the transaction as a best practice to curb fraud.
Authorization is a request from the payment processor to the issuing bank to authorize a specific amount of funds from your customer’s credit or debit card.
Batch processing is a method used by the payment processor to process all the day’s transactions at once. The acquiring bank uses this to help drive operational efficiency for your business. In the online world, transactions are usually processed at the same time they’re authorized.
Tip: Make sure you check with your processor regarding settlement—failure to settle transactions daily could result in higher fees.
Card associations or credit card networks are companies, such as MasterCard and Visa, that set the rules and standards for processing transactions.
A card reader is a small accessory that you plug into your mobile device to securely process in-person payments—either with a physical card or electronically. Once you’ve got your system all set up, it comes with other perks for your business, such as enabling your shoppers to find and check in with you on their phones and receive personalized offers.
A chargeback is a transaction reversal. It happens when a customer contacts their debit or credit issuer and requests a refund after a completed transaction.
A contactless payment is a “touch-free” transaction process, in which a customer can complete a purchase without physically handling cash or a credit card. Instead, customers scan and pay via their digital wallet or a QR code.
A discount rate is a percentage of every sale that you pay to your acquiring bank for accepting consumer credit cards (like Visa, MasterCard, etc.). All applicable fees are bundled into a single percentage rate (known as “the discount rate”), which typically includes interchange, assessments, and processor fees. For example, if the discount rate is 2.5% on a sale of $100, the cost will be $2.50.
Tip: Only work with payment service providers that are transparent about their fees. Types of payment structures that commonly exist include flat-fee/flat-rate pricing, percentage rates, and tiered-pricing.
Encryption is the process in which your customer’s personal information and payment processing transactional data are encoded to ensure secure transmission across the Internet.
Tip: Encryption is an important part of what’s known as PCI compliance. And keep in mind that not all payment processors are PCI compliant. This can lead to unexpected fees (and complications) for you, so it’s a good idea to choose one that can help with your PCI compliance needs.
Flat-rate pricing is a highly transparent pricing model where you pay the payment service provider a flat percentage on the transaction volume for all credit and debit cards. (This may be preferred by businesses over other more complicated ways to pay for credit processing.)
An interchange rate is when a customer’s bank card association charges a percentage of the transaction once they have made a credit or debit card purchase. Interchange rates vary based on the card category. With Interchange Plus Pricing, a fixed markup is added by your payment processor on top of that interchange fee. (This is also sometimes called “cost-plus pricing.”)
Issuers (or issuing banks) are any financial institution or company that issues physical cards to cardholders.
A merchant account is a special bank account set up between you and your acquiring (or merchant) bank. The bank is responsible for debiting the funds from your customer and depositing them into your account. If you want to accept credit and debit cards, you need to sign up for a merchant account.
Tip: If you’re seeking a new merchant account, look for accounts with simple, straightforward fee structures (see “flat-rate pricing”). That way, you can eliminate the guesswork in how much it will cost.
A payment gateway is a software that connects your website (or cash register) to the processing networks. When you process a credit card (or another form of electronic payment), the payment gateway securely authorizes cards and electronic payments by encrypting and protecting the customer’s sensitive information—like credit card numbers and other account information.
A payment processor is responsible for moving the transaction from point A to point B and back again. They handle the authorization and settlement, figure out how much to charge you for each transaction, and transfer the money from your customer’s bank to your merchant bank. You may not know who your payment processor is, unless you work with a provider like PayPal, as the processor’s relationship is often with your acquiring bank, not you directly.
A POS (point of sale) system is a platform that businesses use to process and complete customer payments. Comprised of hardware and software, POS systems are used when customers make a purchase online or in-store.
Payment Card Industry (PCI) compliance is mandated by all card brands to protect and encrypt card information during and after a financial transaction. If you want to take credit or any other electronic payment, all organizations or businesses, regardless of size or number of transactions, are required to follow the rules to be PCI compliant.
Tip: Some payment providers offer built-in features within their payment solutions that can help you reduce your PCI compliance workload—and make your life a lot easier. Be sure to ask your provider for details.
A QR code (or quick response code) is a checkerboard-like scannable square that stores information.
A payment reserve is a percentage of the transaction or a flat amount that many payment processors hold back to ensure you can meet liabilities that may incur from a chargeback, claim, or bank reversal. It’s important to note that this is not a fee— it’s still your money. However, you cannot access it for a certain amount of time. Reserves are a common industry practice and are used to create a safer shopping experience.
Tip: The reserve limit is often set based on processing history or if the business/industry is deemed higher risk. So, it’s a good idea to talk with your payment processor and ask them to review the reserve limit on your business—in some cases they can lower or eliminate it.
Tiered pricing is a rate structure for fees you pay the payment processor for every card or electronic payment transaction. Rate structure criteria are based on a system of qualification.
There are generally three tiers (also called buckets), including:
A qualified rate, sometimes called a card-swiped rate, is usually applied to a transaction where businesses swipe the credit card through a terminal. Since businesses can easily verify that the shopper is the owner of the credit card, the incidence of fraud is quite low—so, the rate is the lowest.
A mid-qualified rate is usually applied when businesses key-enter a customer’s credit card (in phone or mail order sales, for example). Since there is no physical credit card present, the risk may be higher—and so the rate is also higher.
A non-qualified rate is the most expensive fee that occurs when transactions are processed without supplying the customer’s billing address. E-commerce transactions fall into this category. Rewards cards and commercial card transactions do, too.
Beware: Most payment processors with tiered pricing may offer low “show rates” (aka “teaser rates”) to entice businesses. Also, since the rules for qualification vary from processor to processor, it’s virtually impossible to decipher which processor will give you the best overall rates. Perhaps the wisest approach is to research the tiered-rate relationship, Fixed-Rate, and Interchange Plus pricing plan.
A transaction fee (or authorization fee) is a flat service fee (e.g., $0.30 per transaction) that you pay the payment processor every time you send a customer’s card details to your payment gateway, regardless of the outcome. For example, a customer tries to buy something from you, but their card is declined. You, the business owner, still pay a transaction fee to cover the cost of the processor handling that transaction.
Tip: There are almost as many transaction fees out there as there are transactions. When shopping around, be sure to look for payment providers that offer completely transparent fees and no hidden charges.
A virtual terminal is an online way to accept in-person payments. It’s the electronic equivalent of a physical POS terminal that retailers use to swipe cards. Instead, you manually enter the card information. Virtual terminals let you take your business on the road—all you need is an Internet connection.
Tip: Virtual terminal processing usually comes with its own set of pricing. Be sure to check with your merchant service provider. Also, if you want to swipe credit cards using your mobile phone or tablet—and take advantage of lower, card-swiped rates—you can download an app and get a credit card reader (or dongle).
For more insights and trending information, visit our Payments page.
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