In the world of payments and finance lives it’s own lingo, and it can be confusing to understand what means what, and how it’s used in the context of payments. We’ve put together a list of commonly used merchant processing acronyms for the veteran who needs a refresher or newbie just diving in.
Merchant Processing Acronyms A – D
Acquirer/Processor – An entity such as a banking institution that provides merchant accounts, establishes a line of credit, approves and settles debt. They provide a processor which forwards and receives settlement batches within a specific time frame.
Address Verification System (AVS) – AVS is a security feature that requires merchants to supply address information for the cardholder in CNP (card-not-present) transactions, such as those made on a website. The merchant’s system verifies that the address entered matches the one the issuing bank has on file and then confirms whether the information is valid or invalid.
ARB – Automatic Recurring Billing: ARB is when a processor tries to automatically re-bill a customer on a certain date.
Annual Fee – Providers may charge merchants a fee to maintain a merchant’s account, which can be from $79-$399.
Application Program Interface (API) – A set of rules and protocols that tells separate software programs how to communicate with one another. Think of an API as a bridge that connects two different pieces of software.
Authorization – An authorization or better known as “auths”, are the initial request a merchant makes for a customer’s issuing bank to release funds for payment.
Authorization Fee – Unless you’re with American Express, all cards will receive a fee when a transaction takes place. Some are processed separately or bundled together. These charges occur when a card-issuing bank must authorize a transaction.
Batch fee – This is a report that a merchant sends to the acquiring bank for close out payment. The idea is settling their terminal, aka “batching” and it’s when a merchant sends their list of transactions for the day.
Batch header – A summary of the receipts included within the batch fee.
Card Association – Visa, MasterCard, Discover, Amex: A payment card association that is responsible for worldwide payments that clears billions of daily transactions and allows for the settlement of payments.
Chargebacks – A chargeback happens when a customer doesn’t accept a charge or wants a refund and they contact the bank rather than the merchant. They have up to 180 days of the statement notice to refuse a charge. They can be costly to the merchant; some fees are upwards of $250. A merchant is required to respond in a timely manner to avoid any additional fees. You automatically lose the interchange fee and the full sale amount in addition to a chargeback fee.
Credit Card Terminal – An electronic device that allows a merchant to swipe or manually enter a credit card number for a transaction.
Downgrades – A downgrade results when your risk exposure is increased as the result of not meeting your qualifying requirements. Downgrades occur when a merchant’s account shows that a refund settlement wasn’t made within 48 hours. They also occur if there’s corrupted data, and missing or invalid address verification on manually keyed sales transactions.
Discount Rates –
Merchant Processing Acronyms E – H
Early termination fee – This occurs when a merchant decides to end a contract before the end of a contract term. Each term is the duration of 5 years, and requires a one-year notice to terminate them early. The fees may be monthly minimums or a “lost profit” fee based on what could have been made throughout the duration of the full term of the contract.
FED – Federal Reserve System: 12 Federal banks comprise the central banking system for the United States and are a large part of the Federal Reserve System, which implements the policies set forth by the Federal Open Market Committee. Each Fed bank is also responsible for the regulation of the commercial banks within its own particular district.
As most large businesses and issuing banks have accounts in the Fed banks, much of the money that changes hands during the settlement process moves only from one Fed account to another.
FOMC – Federal Open Market Committee consists of twelve members. The committee of the Federal Reserve Board meets regularly to set monetary policy, including the interest rates that are charged to banks. The term “monetary policy” refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.
Firewall – An integrated collection of security measures designed to prevent unauthorized electronic access to a networked computer system. You can think of a firewall like a guarded entrance and exit way.
Fraud – Any illicit method used to access or use another person’s cardholder data.
Friendly Fraud – Friendly fraud, or better referred to as Chargeback fraud, occurs when a consumer makes an online shopping purchase with their own credit card, and then requests a chargeback from the issuing bank after receiving the purchased goods or services.
Gateway – A payment processing solution that protects cardholder data during the payment transaction process. Common Gateways include DigiPay, Authorize.net, Stripe and Paypal.
Gift Cards – Gift Cards can be both physical and Digital. The technical definition is that a gift card is a stored-value payment card for a specific merchant that is usually preloaded with a set monetary value.
Grace Period – The time during which a cardholder is allowed to pay his credit card bill without any interest or late fees assessed.
Hard Credit Pull – A hard credit pull usually occurs when a consumer has applied for or is seeking some form of credit or loan (e.g., a credit card application).
Hold – A hold is placed on a portion of the customer’s credit limit or debit balance if the final transaction balance is unavailable or unknown, such as during a hotel stay. For example, at a hotel, after calculating how many drinks the customer took from the mini bar or room service charges, the merchant can finalize the transaction for the total amount.
IF – Interchange Fees: A flat rate cost per transaction. There’s several things it’s based on; the issuing banks card type, and the merchant account standing. Fees cover the costs associated with a merchant bank after receiving the funds and billing information. The only credit card association who doesn’t charge interchange fees is American Express.
ISO – Independent Sales Organization: A third-party provider such as a credit card processing company. They are the people with relationships with the banks.
Issuing Bank – Chase, CitiBank, Capital One: Banks who establish their own line of credit rather than another financial institution such as well-recognized credit card brands Visa and MasterCard. They are responsible for driving card usage and developing rewards programs.
Key – The generic term for a password or table needed to decipher encoded data. It’s usually used in the data storage and encryption process that takes place during credit card authorization.
Knuckle-Buster – A machine that makes an impression of a credit card on a carbon receipt. Not often used today, many merchants still have them as a backup. Those who have been in the payments industry for a long time may refer to these devices as “zip-zap machines.”
Loyalty Program – Used by many credit card issuers to maintain and generate new customers, loyalty programs offer incentives for the use of a specific card.
Merchant Processing Acronyms M – P
Magnetic Stripe – A type of card, sometimes called a mag stripe, capable of storing data by modifying the magnetism of tiny iron-based magnetic particles on a band of magnetic material on the card.
MCC – Merchant Category Code: An MCC is the abbreviation for the merchant category code, or better known as the category in which the merchant is classified under.
Merchant – A Merchant is an entity that is authorized to accept a credit card as payment for goods and services.
Merchant Account – A merchant account is a specific line of credit that enables merchants to accept credit card transactions for goods and services. This enables the merchant bank to pay for authorized credit requests prior to receiving funds from the issuing bank. There are a few different types of merchant accounts, described below.
Card-Present Merchant Accounts:
• Retail – The most common type of merchant account. Retail merchant accounts are used for businesses that provide goods and services in a face-to-face environment. If a merchant will be relying on magnetic stripe data and does not qualify for any of the other card-present categories, then this is the merchant account type of account normally used.
• Restaurant – Restaurant merchants follow all of the same rules and requirements as retail merchants. However, “tip” and “clerk” are two additional fields that are required by the card associations in order for a transaction to be eligible for the quoted discount rate for a restaurant merchant account.
• Hospitality – Hospitality merchants have more information to handle than any other merchant type. Things like check-in date, number of nights stayed, incremental authorizations, etc., make it difficult (but not impossible) for hospitality merchants to qualify for their quoted discount rate. In the case of resorts and large, full-service hotels, it’s not uncommon for there to be multiple merchant accounts identifiers (MIDs) of varying types on the same property.
• Auto Rental – Auto rental merchant accounts are used solely by organizations that rent vehicles. Auto rental merchants must provide a variety of additional information specific to the auto rental agreement along with their transaction data. The majority of these transactions will be carried out face-to-face and a card swipe will occur.
Card-Not-Present Merchant Accounts:
• Mail Order/Telephone Order (MO/TO) – MO/TO is used when the merchant’s primary mode of sales is not conducted face-to-face with the cardholder. There is a higher risk of fraudulent activities, and, as a result, MO/TO accounts carry higher discount rates than the previously mentioned account types. Additional security checks must be handled as well, such as Address Verification System (AVS) and Cardholder Verification Value (CVV2).
• e-Commerce – e-Commerce merchant accounts carry the highest quoted discount rates. There are two different types of e-commerce accounts: physical and digital. A physical account represents a Web merchant that is shipping or providing some form of tangible product to the cardholder, whereas a digital merchant provides a service or a downloadable (digital) good.
Merchant Agreement – An arrangement from a credit card and a merchant that involves the negotiation or understanding of fees during processing.
Merchant Bank – A bank where merchants hold their account(s). The bank provides merchants with the money from a transaction before the actual funds have been processed via interchange from the various cardholders’ issuing banks. The charge for this service is the discount rate, but the merchant bank also shares in the interchange fee charged by the card associations.
MID – Merchant Identification Number: An identification number that, to the merchant bank, represents a single merchant’s profit center or revenue center for the purpose of processing and tracking credit card transactions. This is the way banking institutions and credit card issuers recognize your business in order to process transactions.
MLS – Merchant Level Salespeople –
Mobile Wallet – Alternative form of payment for customers and merchants.
Monthly Minimum Fee – This fee does not include chargebacks, or processing costs. Not all acquirers require one, but it is industry standard to anticipate this in an agreement.
MSP – Merchant Service Provider: This organization handles the setup of the front-end and back-end processors and the paperwork required in order for a merchant account to be able to receive transaction funds. A merchant services provider (MSP) can work directly for a merchant bank, but is usually an independent sales organization with ties to many merchant banks. In some rare cases, merchant services providers and independent sales organizations are agents for American Express and/or Discover who can enable the acceptance of those cards.
NFC – Near Field Communication Transmitter: Allows for the process of mobile payments between a customer’s phone and the vendor’s point of sale. NFC is a set of close-range wireless technologies that enable a connection for processing mobile payments.
Omnichannel – A multi-channel approach to sales, enabling consumers to experience a brand wherever they are, mostly with reference to online channels. With Shift4, merchants can add an e-commerce outlet to their business without increasing their breach profile. DOLLARS ON THE NET offers industry-leading security features, supporting mobile, contactless (NFC), and EMV (Chip and PIN) payments for merchants of all sizes – whether you’re a small boutique retailer or have hundreds of stores with online sales. Also see EMV and NFC.
Over-Limit – Being over-limit refers to a cardholder’s account that has exceeded its credit limit.
Payment Gateway – A front-end processor of the connections between the issuing banks and the merchants. They are a gateway that support most banks, point-of-sales systems, e-commerce software, and shopping-carts. I.E – Authorize.net, USA ePay.
Processor – An entity (typically a third party) that handles credit card transactions for merchant banks and is usually paid per transaction. They are usually broken down into two types: front-end and back-end. However, there is a gray area.
To explain it the easiest, front-end processors tell merchants if the card is authorized and back-end processors settle the charge and move the money.
• Front-end processors have connections to various card associations and they supply authorization and settlement services to merchant accounts.
• Back-end processors accept settlements from front-end processors and, via the Federal Reserve Bank (Fed), move the money from the issuing bank to the merchant bank.
In some cases, the merchant bank gets the settlement information from front-end processors and in other cases, from the back-end processors. This is the gray area. The situation becomes even less clear when you consider that some third-party processors are both front-end and back-end processors; some merchant banks are their own front-end processors, back-end processors, or both.
Merchant Processing Acronyms Q – T
Rates – The primary cost that’s paid due to transactions that are processed during a payment into the preferred bank account. There are several ways a payment is processed: in person, online, or by telephone and the rates vary for each. A merchant is qualified for the lowest rate when a transaction is made in person.
• Qualified rate: A merchant receives the lowest rate when a transaction occurs in person because a verification process is more likely, which helps to prevents fraud activity.
• Mid-qualified rate: Rewards, business, and manually entered card numbers increase the likeliness of fraud risk, which results in elevated fees due to a lack of a better qualification process.
• Non-qualified rate: The absence of a cardholder such as through an online purchase creates the highest risk for fraud. The card isn’t being swiped and a card holder’s address isn’t being verified, which leads to a higher fee than the mid-qualified rate as a result.
RFID – Radio Frequency Identification: An invisible wave of electronic connectivity between a device and a receiver.
Statement Fee – This fee goes toward a provider’s overhead which means even if a merchant decides to go paperless, the fee won’t be waived.
Transaction Fee – The fee is applied when an authorization is accepted without error.
About The Author: Sandy Travers
Payment technology executive Sandra Travers is Co-Founder & Co-CEO of DigiPay Solutions, Inc.. Her years of experience in early-stage technology ventures brings a unique perspective to payments. Sandra manages operations and risk in addition to new product development.
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