Merchant Account Glossary of Terms
Below you will find definitions of common terms you may come across when trying to obtain a merchant account for your business.
ABA Routing Number
This is the nine-digit number that appears on all checks along with the bank account number. (It is also sometimes called the Transit Routing Number.) The number identifies which bank the account is from, as each bank has its own identifying number. When you send a bank wire or ACH transaction, you need both the nine-digit number and your bank account number.
ACH/Automated Clearing House
ACH is short for Automated Clearing House. When you send money from one bank account to another, you can do it through bank wire or ACH. 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 the bank’s ABA (American Bankers Association®) number and the account number(s) to debit, along with the amount(s). This file is submitted for processing nightly and passes through networks controlled by the Federal Reserve. ACH payments are not guaranteed; that is, they must clear, much like a check. ACH is useful as an alternative to accepting a credit card.
An acquiring bank provides credit card merchant accounts. It’s a bank that has a relationship with Visa® and Mastercard®, as well as your bank and is sometimes referred to as the clearing bank. The acquiring bank is responsible for clearing transactions after they are charged to a cardholder. That is, the acquiring bank 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 overwhelming majority of credit and debit cards in the U.S. The Card brands regulate card acceptance rules for member financial institutions.
ATM Debit Card
An ATM (Automated Teller Machine) debit card is similar in size and shape to a credit card and features an account number and magnetic stripe on one side. When swiped through a Point-of-Sale terminal, the cardholder is prompted to enter a PIN number via a PIN pad. This will create an instant debit transaction, with funds drawn from the customer’s bank account. Funds are authorized in real time, and if there are not sufficient funds in the customer’s bank account the transaction will be declined. In addition to purchases, ATM cards can also be used at ATM machines to make cash withdrawals, deposits and balance transfers, and to check account balances.
This is the term given to the process of validating funds available on a credit or debit card. It is done at the time the transaction is entered or swiped through a Point-of-Sale terminal. When you process a credit card transaction, a response comes back from the issuing bank, all in a second or two. An authorization is either approved or declined by the issuing bank.
If the authorization is approved, that means funds are available to be withdrawn from the customer’s account and added to your bank account. When an authorization is approved, a six or seven digit authorization code is provided, along with the Address Verification Service (AVS) response. If no authorization is given, this is a decline, meaning there are either not enough funds in the customer’s bank account (if a debit card) or the customer has most likely reached their limit on their credit card.
The authorization code is the response code from the issuing bank that is returned to you at the time of authorization. This code is usually a six or seven 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, you should record the authorization code for reference, as it serves as proof of authorization.
This is the amount charged to you each time a communication happens between your software or Point-of-Sale terminal and the authorizing network. The communication can occur either over a dial-up telephone line, leased line or the internet. This fee covers all transaction types: sale transactions, post-authorization transactions and refunds.
Authorization Only Transaction
Authorization Only (Auth Only) is a special type of sale transaction. It authorizes an amount on a customer’s card but the item does not settle until a later time, sometime several days or weeks later. The purpose of an authorization-only transaction is to reserve an amount against a cardholder’s available credit limit for a certain period of time. For example, you may perform an authorization only transaction if an item ordered is out of stock. When the item becomes available, you settle the transaction, charging the card at that time.
Another reason you may do an authorization only transaction is when the exact amount to be charged to a card is not yet known. This is common in the hotel industry.
When a guest 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 checkout, when the hotel may include incidentals that were charged to the room. At checkout the hotel enters the final amount, settles the transaction and the card is charged.
One caveat is that if an authorization only transaction is not settled within 24 hours, the transaction can downgrade to a different rate category and you may be surcharged a small fee. However, the benefits of using an authorization only transaction usually outweigh any costs, since the authorization guarantees payment.
An issuing financial institution’s electronic reply to an authorization request, which may include:
Approval – transaction was approved
Decline – transaction was not approved
Call Center – response pending more information; in this case you call the toll-free authorization phone number. This occurs if there is a problem with the cardholder’s card.
Average Ticket Size
Average ticket size refers to the average dollar amount of your credit card transactions. Average ticket size is always asked when you set up a new merchant account. If you don’t yet process credit cards, simply estimate your average credit card sale. (Keep in mind that the average credit card transaction is typically higher than the average cash transaction.) If you already process credit cards, simply divide your total monthly volume by the number of transactions to determine your average ticket size.
Address Verification Service/AVS
AVS stands for Address Verification Service. AVS is required for all card-not-present (keyed) credit card transactions. At the time of the transaction, simply enter the street address and ZIP code along with the card number, expiration date and amount. When the transaction is submitted for authorization, the address and ZIP code are checked against the billing address and ZIP code for the cardholder. The AVS response is provided by the issuing bank and the result is either a match, partial match, no match, or AVS not available/error.
You can use this information for fraud control. For example, if the address and ZIP code do not match, it would be prudent for you to contact the cardholder before shipping expensive merchandise. There is a small cost for AVS, but it is usually incorporated into the transaction fee. You should use AVS if you accept credit card orders via the internet, or anytime a credit card is not present, as it will help reduce the risk of chargebacks.
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. Oftentimes you will hear the term basis points in regards to rates. For example, 75 basis points 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 an 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, you 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 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, you may want to void a transaction, or change the amount of one of the transactions. Changing the amount is common in the restaurant business. In that case, the amount of each transaction is adjusted to include tips before the batch is closed.
In automatic batch close, no manual intervention is required. Instead the terminal or software will automatically close the batch (settle the transactions) at a certain time each day. In some cases the processor will settle the batch at the processor level (host batch close). Most businesses are set up on automatic batch close, unless a tip edit function is useful, in which case manual batch close is typically the better option. Many processors charge a fee each time a batch is closed.
Breach Security Coverage
A value-added service that offers up to $100,000 in coverage to offset the costs of an actual or suspected data breach.
This question is commonly asked on new merchant applications. Your business type should fit into one of the following categories: Retail, Restaurant, Hotel, Mail Order / Telephone Order or internet. A description of each follows:
Retail – This applies to you if you are in a face-to-face environment and sell tangible goods, where cards are swiped or inserted into a terminal or other card reader device.
Restaurant – A restaurant is defined as a business that serves food, is in a face-to-face environment, and uses terminals to swipe or otherwise accept credit cards. The key difference between restaurants and retail is that the product is consumable (hence a lower risk of 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 typically utilize conventional terminals where cards are swiped or inserted.
Mail Order/Telephone Order (MOTO) – This refers to any business that is not face-to-face with the customer, thus the transactions are keyed into a terminal. 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 – This refers to a business where the credit card information is collected over the internet via a web page.
The process of acquiring the account information required for processing a payment. This occurs by swiping a credit or debit card through a card reader, inserting the card into a reader or by manually keying in the information.
Card Not Present (CNP)
A payment card transaction where the cardholder/card are not physically present. For example, an online or mail/telephone order.
A 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 you and the disputed amount is withdrawn from your account until the matter is settled. You are given 10 days to dispute the chargeback with proof of purchase or delivery. The merchant account provider imposes a chargeback fee as part of the process.
A payment card that is issued by a bank and used by an individual to purchase merchandise or services on credit.
Credit Card Imprinter
A device used to create a receipt for a credit card transaction. These flatbed imprinters have largely been replaced by printers linked to a credit card terminal.
Credit Card Processing
The 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 proceeds into your account.
Credit Card Processor
An entity that handles the electronic verification and initiation of Electronic Funds Transfers (EFT) into the ACH system on behalf of clients. The term is used interchangeably with merchant services provider, merchant account provider and 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 (or inserted) at the point of sale, the information pertinent to processing the card transaction is read and processed. Typically this magnetic stripe data includes the cardholder’s name, credit card account number and expiration date, and also the Card Security Code (CSC), also known as the Card Verification Value (CVV).
Debit cards are similar to credit cards, except that the funds are immediately withdrawn from the cardholder’s bank account. Credit card charges, on the other hand, are billed to the cardholder each month, and interest charges may be added. Also, a credit card holder need not pay the entire balance due each month, while with debit cards there is no balance to pay off, as the money comes directly out of the cardholder’s bank account.
There are two types of debit transactions; one is offline debit (Signature), and the other is online debit (PIN). With offline debit, the customer signs a receipt and does not enter a PIN and 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. Online debit requires additional equipment (i.e., a PIN pad), and can only be used in a card present environment. Offline debit, however, can be used in both card-present and card-not-present situations (i.e., 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.
A percentage fee charged by a merchant account provider to its clients for processing services, plus interchange and assessments paid directly to the credit card brands and issuing banks.
EBT stands for Electronic Benefits Transfer, an electronic system used by state governments in the U.S. to provide financial and material benefits (including unemployment and food benefits) via 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 payment information and works in conjunction with software on your 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 brands and paid to their member banks. Interchange is charged to credit card processors, who pass the cost along to you 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 you and a credit card processor that allows you to accept payment cards from customers.
Merchant Account Provider/Merchant Services Provider/Merchant Acquirer
The entity that provides you with the products and services needed to process payment cards. The provider also acts as an intermediary between you and the issuing banks and credit card networks and is responsible for depositing proceeds into your bank account.
Merchant Processing Agreement (MPA)
The contract between you and your 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 you if its discount rate, transaction fees and other account fees do not collectively equal a pre-determined amount that’s defined in your merchant processing agreement(MPA).
Monthly Processing Limit
The amount of money that a merchant service provider will allow you to process each month before incurring additional fees, as outlined in your merchant processing agreement.
Monthly Processing Volume
The gross monthly payment card sales that you process. This figure is specified in your 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 your processor when you exceed your 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 you and your processor that are required to complete an electronic transaction.
PCI-DSS stands for Payment Card Industry Data Security Standards, a set of requirements established by the credit card networks to protect cardholder information and reduce the risk of data theft. The standards apply to you, merchant account providers, issuing banks and the credit card networks. Meeting these requirements is known as being PCI compliant.
PCI Non-Validation Fee
A fee charged to you if you fail to return a PCI Compliance Validation Certificate, which can be obtained by completing and passing an annual Self-Assessment Questionnaire (SAQ) and/or Quarterly Network Scan (if you electronically store cardholder information or your application systems are connected to the internet).
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 Point-of-Sale. Also called a keypad.
Abbreviation for Point-of-Sale, which 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 on a designated periodic basis (weekly, monthly, annually) as 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.
Retrieval is the first step in the chargeback process. In a disputed transaction, the issuing bank requests a copy of the physical sales ticket for the transaction in question.
SSL stands for 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 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 customers complete their purchase with a payment card.
A low-tech processing solution (typically used by low-volume merchants) which requires you to call an authorization center to process a transaction and receive authorization.