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Credit Card Processing
Glossary of Terms
Acceptor:
A
business that has qualified to accept credit or debit cards as
payment.
Acquirer:
An acquirer is an
organization licensed as a member of Visa / MasterCard
as an affiliated bank or bank/processor
alliance that is in the business of processing credit card
transactions for businesses (acceptors) and is always acquiring new merchants.
Acquiring
Financial Institution:
An acquiring financial institution (or "acquirer") contracts with the
bank and merchants to enable credit card transactions. The acquirer
deposits the daily credit card totals and debits the end-of-month
processing fees from the merchants' accounts.
Address Verification
Service (AVS):
The process of validating a cardholder's given address against the
issuer's records, to determine accuracy and deter fraud. This service
is provided as part of a credit card authorization for mail
order/telephone order transactions. A code is returned with the
authorization result that indicates the level of accuracy of the
address match and helps secure the most favorable interchange rates.
Adjustment:
An adjustment is initiated by the acquirer to correct a processing
error. The error could be a duplication of a transaction or the result
of a cardholder dispute. The acquirer debits or credits the merchant
DDA account for the dollar amount of the adjustment.
Associations:
Any entity formed to administer and promote credit and cards. The best
known examples of Associations are MasterCard and Visa.
Audio Response Unit (ARU):
This is an electronic authorization and capture product where the
merchant uses a touch-tone telephone to process transactions.
Authorization:
The process of verifying the credit card has sufficient funds (credit)
available to cover the amount of the transaction. An authorization is
obtained for every sale. An approval response in the form of a code
sent to a merchant's POS equipment (usually a terminal) from a card
issuing financial institution that verifies availability of credit or
funds in the cardholder account to make the purchase. Also see
Point-Of-Sale.
Authorization Response:
An issuing financial institution's electronic message reply to an
authorization request, which may include:
Approval -- transaction
was approved
Decline -- transaction was not approved
Call Center -- response pending more information, merchant must call
the toll-free authorization phone number.
Authorization Code:
A code that a credit card issuing bank returns in an electronic
message to the merchant's POS equipment that indicates approval of the
transaction. The code serves as proof of authorization.
Auto Close:
A terminal feature that allows an end-of-day batch closing to occur
automatically at a specified time, without having to be initiated by
the merchant.
Automated Clearing House
(ACH) File:
A file with instructions for the exchange and settlement of electronic
payments passed between financial institutions. It represents debits
and credits to be deducted from an account automatically as they
occur.
Average Ticket (Average
Sale):
The average dollar amount of a merchant's typical sale. The average
ticket amount is calculated by dividing the total sales volume by the
total number of sales for the specified time period.
Bankcard:
A credit card issued by a Visa or MasterCard-sponsored financial
institution. (American Express, Discover, Diners Club, JCB, etc., are
issued directly from their respective operations, rather than through
banks.)
Batch:
The accumulation of captured credit card transactions in the
merchant's terminal or POS awaiting settlement.
Capture:
The submission of an electronic credit card transaction for financial
settlement. Authorized credit card sales must be captured and settled
in order for a merchant to receive funds for those sales. Also see
Settlement.
Cardholder:
Any person who holds a payment card account (bankcard or otherwise).
Person that uses a credit card to purchase goods and services.
Card Issuing Bank:
An EFT Network Member-Bank that runs a credit card or debit card
"purchasing service" for their account holders. An example is CitiBank
and the CitiBank Visa Card that they issue.
Card Not Present:
A transaction where the card is not present at the time of the
transaction (such as mail order or telephone order). Credit card data
is manually entered into the terminal, as opposed to swiping a card's
magnetic stripe through the terminal.
Chargeback:
A credit card transaction that is billed back to the merchant after
the sale has been settled. Chargebacks are initiated by the card
issuer on behalf of the cardholder. Typical cardholder disputes
involve product delivery failure or product/service dissatisfaction.
Cardholders are urged to try to obtain satisfaction from the merchant
before disputing the bill with the credit card issuer.
Close Batch:
The process of sending the batch for settlement.
Code 10 Authorization:
If you suspect a card is fraudulent at the time of the transaction,
the merchant can call their voice authorization phone number and ask
for a code 10. The voice operator will instruct the merchant on how to
proceed.
Commercial Cards:
Credit or charge cards issued to businesses to cover expenses such as
travel and entertainment and procurement. Includes the multiple
payment card brands of purchasing cards, business cards, corporate
cards and multi-utility fleet cards. Visa and MasterCard now have
special procedures for passing billing information back to the card
issuing bank so that it can be displayed on card holder statements;
this is a program for promoting the use of credit cards for business
purchases by providing purchase tracking to business users. New
regulations require that this billing information be passed back with
the transactions, otherwise a higher pass through fee will be
incurred.
Corporate Card:
Charge card designed for business-related expenses, such as travel and
entertainment. Please see Commercial Card.
Credit (Reversal):
Nullification of an authorized transaction (sale) that has not been
settled. If supported by the card issuer, a reversal will immediately
"undo" an authorization and return it to the open-to-buy balance on a
cardholder's account. Some card issuers do not support reversals.
DDA Account:
This is the merchants Demand Deposit Account, otherwise known as the
merchant's home town bank account.
Debit Card:
Payment card whose funds are withdrawn directly from the cardholder's
checking account at the time of sale (online debit on a Debit Network)
or after batch settlement (off-line debit on a Credit Card Network).
Deposit Correction Notice (DCN):
Adjustments (debits or credits) made for an out-of-balance condition
due to various problems in the transmittal. The correction is made by
the merchant's acquirer at the time of capture prior to being sent out
for interchange.
Discount Rate:
The percentage of sales amounts that the bankcard acquirer or T&E card
issuer charges the merchant for the settlement of the transactions.
Edit Rejects:
The rejection of a sales draft by Visa or MasterCard before a
transaction processes through interchange, but after it has been paid
by the acquirer.
Electronic Cash Register (ECR):
A device used for cash sales. Can also be integrated to accept credit
cards.
Electronic Date Capture (EDC):
Process of electronically authorizing, capturing and settling a credit
card transaction.
Fleet cards:
Private label credit cards designed mainly for repairs, maintenance
and fueling of business vehicles.
Footer:
Text printed at the bottom of a sales draft. A merchant can customize
the footer (i.e., Have a Nice Day, No Refunds, Thank You for Shopping
With Us, etc.).
Independent Sales
Organization (ISO):
An ISO is an Independent Sales Organization that represents a Bank or
Bank/Processor alliance. The ISO has an agreement to sell the services
of the Bank or Bank/Processor alliance, and is allowed to mark up the
Fees and sign up merchants.
-These
entities are classic Middle Men, as they are typically not performing
the services sold. They typically match the banking services they sell
with “Front End” solutions for accepting transactions in order to
offer merchants a working system.
-Their Front
End Systems can be anything from Verifone or Hypercom POS Terminals to
PC based Dial-Out Credit Card Processing Software, to Shopping Carts
paired with a Secure Payment Gateway. (In all cases, the Front End
solution must be compatible with the Processor in order to function.)
Interchange:
The standardized electronic exchange of financial and non-financial
data associated with sale and credit data between merchant acquirers
and card issuers on various types of MasterCard and Visa transactions.
Interchange Fee:
A fee paid by an acquirer to an issuer for transactions entered into
interchange. The interchange fee is a percentage applied, according to
Visa/MasterCard regulations, to the dollar value of each transaction.
There are multiple categories of interchange, and Visa and MasterCard
each have their own criteria for their own categories. A transaction
must meet the specified criteria for a category in order for that
category's rate to be applied. Each transaction is evaluated
individually, so various interchange rates may apply within one batch
of merchant transactions.
Internet
Service Provider (ISP):
Internet Service Providers (ISPs) are the Web Site Hosting
companies that provide a home for merchant’s web sites.
-They
typically resell and/or support the services of a Secure Gateway
Provider and/or ISO or Agent or Bank.
Issuing Financial
Institution:
The bank or other financial institution that extends credit to a cardholder through
bankcard accounts. The financial institution issues a credit card and
bills the cardholder for purchases against the bankcard account. Also
referred to as the cardholder's financial institution.
Simply
put the Issuer is a bank or other institution that issues a credit
card or debit card to an individual.
Manual Close:
A batch close that must be initiated by the merchant on a daily basis,
as opposed to an auto close at a pre-set time.
Merchant: Customer of a
processor/acquirer.
Merchant Identification
Number (MID):
This number is generated by a processor/acquirer and is specific to
each individual merchant location. This number is used to identify the
merchant during processing of daily transactions, rejects,
adjustments, chargebacks, end-of-month processing fees, etc.
Magnetic Stripe:
A strip of magnetic tape affixed to the back of credit cards
containing identifying data, such as account number and cardholder
name.
Mail Order/Telephone Order
(MOTO):
Credit card transactions initiated via mail, email or telephone. Also
known as card-not-present transactions.
Network: Company and
system used to authorize and capture credit card transactions.
Non-Qualified
Transaction Fees (NON-Qual):
Bankcard sales transactions that do not meet set Visa/MasterCard
criteria for that particular merchant and are processed at a higher
interchange rate. An example of this is a merchant that is retail
(card present) that processes a card-not-present transaction (or
manually enters card data rather than swiping the magnetic stripe
through the terminal). The merchant will pay the difference between
what they should have paid on retail and what they actually qualified
for (card not present). This difference is called non-qualified
interchange fees.
PC Software:
A software program that is designed to perform a specific function on
a computer system. Examples would be accounting systems, manufacturing
systems, order entry and fulfillment, ticketing, reservations, etc.
The application is either purchased or built by the merchant, and must
be interfaced with a credit card authorization system in order to
provide on-line transaction processing.
Private Label Cards:
Credit, debit or stored-value cards that can be used only within a
specific merchant's store. Also referred to as proprietary cards.
Point Of Sale (POS):
A location where credit card transactions are performed with the
cardholder present, such as a retail store. The card is read
magnetically, and the cardholder's signature is obtained as insurance
against the transaction. This is the most secure form of credit card
commerce.
POS
Terminal:
Equipment used to capture, transmit and store credit card transactions
at the point of sale. Examples are Verifone terminals.
Processor:
A Processor is the company that actually routes an Authorization
Request from a Point of Sale device (such as a Verifone credit card
terminal) to Visa or MasterCard, and then arranges for Fund
Settlement to the merchant. Such processors are traditionally accessed
via direct dial out modems connecting to their system.
-Processors
need to have a Sponsoring Bank in order to gain access to the Visa and
MasterCard networks. When a Processor or other entity has made such
an arrangement with a Sponsoring Bank to resell their services, they
are called an Agent of that bank.
-Any entity
that sells Visa or MasterCard must disclose themselves as an Agent of
their Sponsoring Bank. Such sales entities may be a Processor, or an
ISO/Agent of the Processor or Processor/Bank alliance.
-Many banks
are also their own processors, while other banks will use a Third
Party Processor to handle this processing for them (in their own brand
name in some cases).
Processing Network (Vendor):
The medium of data transport between the merchant application and the
processor. This company authorizes and captures credit card
transactions. Some examples of processing networks are FDR, MAPP and
Envoy.
Procurement/Purchasing
Cards:
Charge cards used by businesses to cover purchasing expenses, such as
raw materials or office supplies.
Real-Time Processing
Real-Time Processing means that when a web site's customer
conducts an online purchase, that the check or credit card information
is conveyed to the Processor at that exact time so that an
authorization can be requested and received at that moment. Real-Time
Processing always implies that a Secure Payment Gateway is being
utilized, whether proprietary or third party. Please see Secure
Payment Gateways and Real Versus Non-Real Time Processing.
Reserve Account
One method that ACH Processor's use to mitigate risk, is to require
that merchants maintain a Reserve Account at the Processor's
Sponsoring Bank. This allows the Processor to issue a Hold on funds in
this account when fraud has been detected or an excessively large
number of returns is received. Merchants with good credit and history
can usually meet the expectations of ACH Processors for covering
returns and so are not always required to keep a reserve account. In
cases where a reserve is required, the minimum-reserve-balance in the
account is set at about 20% of the anticipated processing volume. New
merchants are usually allowed to build up their reserve by sending in
transactions which are not withdrawn until the minimum reserve balance
is achieved; after that, the merchant is allowed to withdraw the
excess funds for transfer to their home town bank.
Sales Draft (Ticket):
A form showing an obligation on the cardholder's part to pay money
(i.e., the sales amount) to the card issuer. This is the piece of
paper that is signed when making the purchase. Sales draft data can be
captured electronically and sent to be processed over the phone lines.
Also see Electronic Data Capture.
Secure
Payment Gateway:
Secure Payment Gateway companies help other Processors conduct secure
business on the internet using Secure Socket Layer (SSL) technology.
-They provide
a system that passes credit card data, authorization requests, and
authorization responses over the internet using encryption technology.
-The
transaction information is sent by the Payment Gateway secure server
via leased line to the credit card network where the validity of the
card is checked and the availability of funds on that account is
verified. An authorization code is returned via leased line to the
Payment Gateway; the authorization is encrypted by the Payment Gateway
and transmitted in encrypted form to the web server of the merchant,
which triggers fulfillment of the order.
-Rather than
try and create their own Secure Web System, many Banks and
Bank/Processor alliances will use a Secure Payment Gateway Provider to
perform this task for them.
Secure
Payment Software/Software Module/Payment Module:
-In order to conduct secure business on the web, the Secure Gateway
Provider runs a Secure Host System, and sells/licenses software
modules that allow Shopping Carts and other applications to request
and receive Credit Card Authorizations via their system using
encrypted communications. (This is called Real Time Authorization.)
-The other
features of this licensed software are the functions provided to
merchants online when they connect to the Secure Payment Gateway host;
merchant can access their own account information, use a “Virtual
Terminal” to conduct transactions, handle administrative tasks, etc.
(These features all “live” on the provider’s Host computer system.)
Settlement:
The process of sending a merchant's batch to the network for
processing and payment. For non-bankcards, the issuer pays the
merchant directly (less applicable fees) and then bills the
cardholder. For bankcards, the acquirer pays the merchant (less
applicable fees) with funds from Visa/MasterCard. The bankcard issuer
then bills the cardholder for the amount of the sale. Also see
Capture.
Shopping
Cart Software:
-These applications typically provide a means of capturing a client’s
Credit Card information, but they rely on the Software Module of the
Secure Gateway Provider, in conjunction with the Secure Payment
Gateway, in order to conduct secure Credit Card transactions online.
-Any given
shopping cart can work with any given Secure Gateway Provider, the
only requirement being that some computer code be written or provided
to communicate with the Secure Gateway of choice, and that this code
be integrated into the Shopping Cart Application.
Shopping
Cart Software Providers:
Shopping Cart Software Providers are software companies that either
produce, utilize or resell Shopping Cart Applications (programs) that
display merchandise and/or services, and take orders for merchants.
Smart
card: A
credit-type card that electronically stores account information in the
card itself.
Terminal: Equipment
used to capture, transmit and store credit card transactions.
Terminal Software:
Programming that determines the characteristics and features of the
terminal.
Software: A POS
Terminal Application or PC or Internet Application that runs
transactions and associated administration.
Sponsoring
Bank:
A Sponsoring Bank is a Chartered Bank or S & L that has obtained
membership in Visa or MasterCard in order to allow a Processor access
to the Visa and MasterCard networks ( in order to process these types
of transactions).
-Since only
a Bank may join Visa or MasterCard, many Processors make deals with a
Sponsoring Bank in order to gain access to the Visa and MasterCard
networks.
-Because
these Sponsoring agreements are usually like a partnership, the line
between the Sponsoring Banks and their Processors is not always clear;
sometimes the partnership is referred to by the name of the bank,
while other times they are referred to by the name of the Processor.
T & E cards:
Credit or charge card used by businesses for travel and entertainment
expenses. Examples of these cards are American Express, Diners Club,
Carte Blanche and JCB. Also see Corporate Cards.
Terminal Identification
Number (TID):
A unique number assigned to each POS terminal.
Third-Party Processor:
A Third Party Processor is an independent processor that is contracted
with by a Bank or Processor to conduct some part of the transaction
processing process.
-Some of
these Third Party Processors specialize in running and hosting
networks of Point Of Sale (POS) terminals connected to their Host via
dial out modem; they produce the software in the POS terminals as well
as in their host, and route authorization requests to Visa or
MasterCard as needed (MAPP, MDI, FDR, for example).
-Other Third
Party Processors specialize in the Settlement of credit card
transactions with Visa and MasterCard so that merchants can be paid
(FDR for example).
-In the
world of Internet Credit Card Processing, the Secure Payment Gateway
Provider is another type of Third Party Processor.
Third Party Secure
Payment Gateway:
In this model, the Third Party Secure Payment Gateway's
server-computers have to provide a connection between the merchant's
web site and the Visa/MC (or Check) Merchant Processor. This is done
via telephone (or leased land line). The Merchant Processor will
receive the transaction through it's non-internet modem bank, and then
send the transaction through it's direct connection to the Card
Network (like Visa) for approval., The Merchant Processor returns a
response via land line to the Secure Payment Gateway, which encrypts
the message and transmits it over the web back to the originating
secure web site host. The Third Party Secure Payment
Gateway is a different company than the Merchant Processor, and has
it's own fees that are separate from any Merchant Processing fees.
Examples of these are Cybercash and Authorize.net.
-Rather than try and create
their own Secure Web System, many Banks and Bank/Processor alliances
will use a Secure Payment Gateway Provider to perform this task for
them.
Value Added Reseller (VAR):
Third-party vendor that enhances or modifies existing hardware or
software, adding value to the services provided by the processor or
acquirer.
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