Merchant Account Glossary of Terms

Merchant Account Glossary of Terms

ACH (automated clearinghouse)ACH, the Automated Clearinghouse, is the electronic network that processes large batches of electronic checks and payments with settlements taking 2-3 days. Examples of ACH payments include the direct deposit of your paycheck, cyclical automatic payments of bills to vendors as well as direct debit payments. The organizations that use the ACH network settle and clear through the automated clearinghouse.

Acquiring Bank

An acquiring bank is a financial institution that provides merchant accounts and processes credit and debit card transactions on behalf of a merchant. A merchant account is a certain type of bank account which allows you to accept credit cards. All merchant accounts must be sponsored by an acquiring bank that is a member of the card associations (Visa, MasterCard, American Express, etc…). They are responsible for depositing the funds into your checking account.

Address Verification System

An address verification system is when, during the authorization of a credit card transaction, the issuing bank compares the cardholder’s address on record with the cardholder’s billing address (number, street, zip code).

Approval Code or Authorization Code

The six-digit code sent by the credit card issuing bank to the merchant upon the approval of a transaction.

Authorization & Settlement

Authorization is the process of verifying there is available credit in the card holder’s credit card account. A positive authorization reduces the cardholder’s available credit and reserves the funds for settlement. A negative authorization means there is not sufficient credit. Settlement is the process of deducting the funds from the card holder’s account.

Bank Card

A credit card issued by Visa or MasterCard is called a bank card, because it is issued by a bank through Visa and MasterCard. Credit cards from American Express and Discover are issued directly to the credit card holder.

Batch

An assembly of one day’s worth of transactions. Rather than combining batches throughout the day, terminals and payment processors assemble all the day’s transactions and submit a batch at the end of the day.

Batch ID

Once a batch is complete, it receives a batch ID number. Every transaction in the batch shares this number. If a transaction does not have a batch ID number, the transaction has not been settled.

Capture

Capture occurs when a credit card transaction is submitted for settlement. Authorized credit card transactions must be captured and settled for a merchant to receive his/her funds.

Card Holder

The owner of a credit card during a sale is also known as the card holder.

Chargeback

A demand by the credit card provider for a retailer to make good on the loss in a disputed or fraudulent credit card transaction. Successful chargebacks by consumers results in chargeback fees assessed to the merchant.

Clearing

Clearing is the exchange of financial transaction details between the acquiring bank and the issuing bank to facilitate posting of a cardholder’s account and reconciliation of a customer’s settlement position. Clearing and settlement occur simultaneously.

Credit card

A plastic payment card issued to consumers (card holders) as a way of paying for goods and services. Credit cards come with a predetermined spending limit and expiration date.

Currency conversion

The comparison, or ratio, on which one country’s currency can be exchanged with another country’s. For example, one U.S. dollar would convert to 0.89 Euro. In a transaction, the currency is converted into that of the issuer.

CVC2 (card validation code 2) & CVV2 (card verification value 2)

The CVC2/CVV2 is a three-digit security code that is found on the reverse side of a credit card. It appears in reverse italics above the signature panel at the end. This security program – started by Visa and MasterCard – ensures the cardholder is in possession of the card during a transaction. American Express has a four-digit security code on the front of the card while Discover Card’s three-digit code is similar to that of Visa and MasterCard.

Debit card

The card used to complete a bank account withdrawal directly from a cardholder’s bank account. Unlike credit card purchases, debit card transactions are deducted automatically from the cardholder’s bank account.

Decline Database

A secure database containing bogus credit card numbers: fraudulent, stolen and those involved in chargebacks. When a credit card number has been placed within our ‘declined’ database, they are voided for future use with any Instabill merchant.

Discount Rate

A small percentage an acquiring bank charges a merchant for the right to use their merchant account.

Electronic funds transfer (EFT)

A paperless transmission of funds originating from a terminal, computer or telephone.

In-House Credit Underwriting

When the merchant account provider (ISO/MSP) underwrites and endorses merchant accounts within their own company (in-house).

Integrated Fraud Management

The process of checking card validity by utilizing either of the following tasks:

  • Comparison it to previous purchases
  • Address Verification System Report
  • Internal decline database
  • Fraudulent shopper behavior patterns

Internet Merchant Accounts

A type of bank account that allowing merchants to accept credit card payments online that, unlike traditional merchant accounts, do not require a cardholder’s signature. Because a signature is not necessary, internet merchant account businesses are typically classified as having a higher risk profile.

Internet/MOTO Merchant

A merchant that accepts credit cards online, by telephone or through the mail.

Issuing Bank

The bank that issues the credit card to the customer and transfers funds to the seller’s merchant account when the card is utilized by the customer. The issuing bank then debits the cardholder’s credit card account for the amount of the purchase.

Mail Order/Telephone Order (MO/TO)

Transactions initiated by a consumer using the telephone or postal service instead of retail terminals or online.

Merchant

A retailer, company or corporation that accepts credit cards as payment.

Merchant Account

A type of bank account used to receive the proceeds of credit card transactions. The merchant’s bank is responsible for taking payment from the consumer and depositing them into the merchant account.

Merchant Bank

The bank that provides merchant accounts to businesses and merchants, thereby giving them the ability to accept credit cards. The merchant bank is the same or similar to an acquiring bank.

Merchant Provider

Often referred to as a payment service provider, a merchant provider is third-party company providing merchant accounts to merchants. Merchant providers, such as Instabill, usually have partnerships with different banks that operate merchant accounts.

Merchant providers either have their own system of validating and processing transactions, or they serve as third-party resellers of processing systems.

MID

MID is an acronym for merchant identification number, a number assigned to a merchant to identify the merchant to the ISO, payment processor and acquirer.

Monthly Minimum

Monthly minimums refer to the minimum monthly amount a merchant must pay in discount rate fees. If the merchant’s monthly sales result in his paying discount rate fees greater than or equal to the agreed-upon minimum monthly amount, no further fee is required.

If the merchant’s monthly sales result in his paying discount rate fees less than the agreed minimum monthly amount, the merchant is responsible for making up for the deficiency.

Payment Processor

A company, such as Instabill, that performs the actual processing of a payment – a credit card, ACH or MOTO transaction – separate from the merchant account or acquiring bank which merely acts as the recipient of the transaction proceeds.

PCI Compliance

The Payment Card Industry Data Security Standard (PCIDSS), formed in 2006 by MasterCard, Visa, American Express and Discover, oversees the Payment Card Industry. PCI compliance is a series of requirements to which merchants must adhere to earn the distinction ‘PCI compliant.’ PCI compliance protects consumer information during the processing, transmission and storage of cardholder data.

PIN (personal identification number)

A private code, usually four digits, that allows the credit card issuer to authenticate the cardholder in a credit card transaction. The cardholder enters the PIN into a PIN pad. The PIN is required to complete an ATM/Debit card transaction.

Point of Sale Terminal (POS)

The physical machine that enables a merchant to swipe or insert a credit card to facilitate a transaction. POS machines are mostly common in retail stores and environments.

Prior Authorized Sale

A transaction for which authorization was received at a prior time.

Processing Gateway

The gateway which automatically collects the details of a transaction and transmits them to your acquiring bank. The processing gateway allows for automated real-time processing. Examples of such include Cybercash and Authorize.net

Processing Solution

A payment solution – whether it be a POS terminal, software or virtual product — which enables the merchant to transact with his merchant account and payment processor, for the purpose of verifying and approving payment transactions.

Real-Time Processing

Credit card processing performed in real time and online while the consumer is still viewing the website.

Recurring Transactions

A repeated transaction – used in subscription services – in which the cardholder has given a merchant permission to periodically charge the cardholder’s account. An example of such could be Netflix, a magazine subscription or a predetermined, recurring bill payment.

Referral

An alert message displayed on a point-of-sale (POS) terminal when electronic authorization is denied and must be authorized by calling a voice authentication center.

Reserve

A percentage of a merchant’s funds in a merchant account held by the merchant account provider as security for future contingencies, usually chargebacks and returns. Reserves are usually required only from certain high-risk merchants.

Secure Socket Layer (SSL)

A secure internet standard practice which ensures cardholder information is safe during the online payment process.

Settlement

The process by which authorized transactions are sent to the processor for payment to the merchant.

Smart Card

A plastic card, similar to a gift card or prepaid card, with a computer chip that can contains a dollar amount available for all purchases.

TID (terminal ID)

The unique number given to a credit card transaction device (such as a POS terminal), identifying the merchant’s equipment to the processor and bankcard data transmission networks. A TID is also used to identify other software applications such as payment gateways.

Transaction Fee

A per-transaction charge – such as $1 or as low as $0.25 – that a payment processor imposes on merchants for each processed transaction.

Travel and Entertainment Card

Credit cards that prohibit consumers from carrying a balance, that usually require payment in full each month. Examples include American Express, Discover Card, Diners Club International, etc.

Virtual Terminal Processing (VT)

A telephone or mail-order transaction after which the credit card processing is completed online by the merchant. The consumer gives his credit card details with the merchant, who processes the orders manually at a later time.

Void

When a transaction is authorized, but later reversed before settlement. Settled transactions require processing of a credit in order to be reversed. A void does not remove any hold on the customer’s open-to-buy.