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Chargebacks, POS systems, reserves and other payment processing terms can feel endless. Whether you’re new to the world of payment processing or could simply benefit from a helpful refresher, our reference guide can help.
You can print these payment processing terms or bookmark this page so you’re never far from the definitions you should know about processing payments online and in person. We have placed them in alphabetical order.
An acquirer, also known as a merchant acquirer, is a banking or financial partner for businesses. Acquirers allow you to accept, process, and deposit both credit and debit card payments as the merchant in the transaction. In payment processing, to “acquire” means to “accept” payments. The acquirer makes it possible for you to settle any transaction involving a credit or debit card.
Address verification services (AVS) are one of the most common tools to verify and authorize credit card transactions to detect suspicious charges and stop credit card fraud. When a customer tries to use a credit card, AVS will compare a customer’s billing address with the address on file at the cardholder’s issuing bank. It’s why it is so common to require at least the customer’s zip code when running their credit card information if not the full address associated with the card.
Another payment processing term is authentication, which is the process of validating (or authenticating) that the payment data is being sent by its claimed source. Companies need to know a customer is who they say they are and that their card is legitimate. For instance, when a customer submits a payment, payment processor companies use authentication to verify the transaction as a best practice to curb fraud. This may mean asking them to confirm the card verification value number (CVV) on the back of their card (that 3-digit code) or using address verification services.
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. It’s the payment processing term for the customer’s bank saying, “yep, there are enough funds for this purchase."
Batch payment 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. When multiple transactions are lumped together in batch payment processing, it can potentially lower payment processing fees, especially if it’s done during off-peak hours. In the online world, transactions are usually processed at the same time they’re authorized which is why online payment processing fees can be higher than in-store purchases.1
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 mobile card reader is a small accessory that you plug into your mobile device to securely process in-person payments — either electronically or with a physical card. You should be able to allow a customer to insert their card for a chip to be read or tap their card or mobile device to accept payment as well.
When your entire system is all set up, a mobile card reader may offer other perks for your business, such as enabling your shoppers to find and check in with you on their phones and receive personalized offers.
The payment processing term for a transaction reversal is called a chargeback. This happens when a customer contacts their debit or credit issuer and requests a refund after a completed transaction. A customer could dispute a transaction if they feel that they didn’t get the right product, if it came damaged, or if the transaction just seems like a fraudulent charge. Businesses are often allowed to approve or dispute the chargeback. If you win, you keep the funds. If the chargeback goes through, the funds are returned to the customer.
Contactless payment options are part of a “touch-free” transaction process, in which a customer can use tap-to-pay to complete a purchase. They could use a chip in their credit card to tap your credit card reader or use their phone to pay from a digital wallet. You could also allow customers to pay with a QR code giving them a direct link to send you money.
A discount rate is the payment processing term for the percentage of every sale that you pay to your acquiring bank for accepting consumer credit cards (like Visa, MasterCard, etc.). All payment processing 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 based on the total amount of the sale, and tiered-pricing.
Encryption is the process by which your customer’s personal information and payment processing transactional data are encoded to ensure secure transmission across the Internet. Whenever a credit or debit card is a part of the transaction, data encryption is used for both in-person and online payments to keep a customer’s information safe.
Tip: Data encryption is an important part of what’s known as PCI compliance. And keep in mind that not all providers are PCI-compliant payment processors. If they are not, you could face unexpected fees and complications, so it’s a good idea to choose one that also provides help with your PCI compliance needs.
Another payment processing term you should know is flat-rate pricing. This 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. In arrangements where flat-rate pricing is not present, there could be different rates charged for different brand credit cards, or there could be rate discrepancies when customers use credit or debit cards.
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 an interchange plus pricing model, 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 the payment processing term for 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.
Bear in mind that merchant accounts and business accounts are very different things. The merchant account is what you set up with your bank or payment processor to let customers pay with credit or debit cards. Your business account is a bank account that you open to keep all your business finances in one place. It may be a good idea to keep your business expenses separate from your personal expenses.
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 connects your website (or cash register) to the processing networks so you can process a payment. 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, and sends that to the payment processor. It’s what links the customer, their payment information, and your merchant account.
Online payment processing is when a payment processing company moves 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. They get the payment request from the payment gateway, check with the customer’s banks, and if approved, send the funds back to the merchant’s account.
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, and not you directly.
A POS (point of sale) system is the payment processing term for a platform that businesses use to process and complete customer payments. POS systems involve both POS hardware and POS software and are used when customers make a purchase online or in-store. In other words, it is where the transaction happens. It can include a cash register, credit card readers, and bar code scanners. POS is also the back-end technology that encrypts customer data for safety and runs data through the payment gateway and payment processor to ensure you get paid.
Payment Card Industry (PCI) compliance is a payment processing term that refers to mandates 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. You will generally use a QR code to give customers a direct link to a payment portal to make it easier for them to pay you with a credit or debit card quickly. You may also use QR codes to drive them to a web link where they can get more information about almost anything. The most common things might be information about a product, or service, or a restaurant menu.
A payment reserve limit is a percentage of the transaction or a flat amount that many payment processors hold back to ensure you can meet liabilities that the payment processing provider 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 payment reserve limit is often set based on the processing history of your business or if your industry is deemed a 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 advance — in some cases they may lower or eliminate it.
A tiered pricing structure is the payment processing term for the rate you pay the payment processor for every card or electronic payment transaction. Rate structure criteria are based on a qualification system.
There are generally three tiers (also called buckets), usually labeled qualified, mid-qualified, and non-qualified:
A qualified rate, sometimes called a card-swiped rate, is usually applied to a transaction where businesses swipe, insert, or tap the credit card at a terminal. Since businesses can easily verify that the shopper is the owner of the credit card because the card is present at the point of sale, the incidence of fraud is quite low — so, the tiered pricing rate is the lowest of these three tiers.
A mid-qualified rate is usually applied when businesses key in a customer’s credit card number (over the phone or for mail order sales, for example). Since there is no physical credit card present, the risk is somewhat higher — and so the rate is accordingly higher than a qualified rate.
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 can fall into this category. Rewards cards and commercial card transactions will be subject to the non-qualified rate as well.
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 payment 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.
You should also consider the price point of your goods if you will face payment transaction fees with your service provider. If you’re selling $5 cups of coffee, that $0.30 costs you 6% on every transaction.
Tip: There are almost as many payment 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 as these can add up.
A virtual terminal is a way to accept in-person payments by going online. It’s the electronic equivalent of a physical POS terminal that retailers use to swipe cards. Instead, you manually enter the card information. You may enter the information through an app or widget on a computer, or some other device that you get from your payment provider. 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 pricing. Be sure to check with your merchant service provider. Also, if you want to swipe or tap credit cards using your mobile phone or tablet to take advantage of lower, card-in-person rates, you can download an app and get a credit card reader from your payment processor.
There are a lot of payment processing terms to contend with when you open your business to the world of credit and debit payments. But the benefits far outweigh any of those challenges. It’s important for you to allow customers to pay however they want. This will help you close more sales, giving your business its best opportunity for success.
For more insights and trending information, visit our Payments page.
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