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A Glossary of Payment Card Charge Processing Terms
Account Number - A unique number assigned to Cardholder accounts that identify the specific financial institution, type of card, cardholder, etc.
ACH - Automated Clearing Houses that enable wire-transfer operations between banks. Often the charge is $25 per transfer.
Acquirer or Acquiring Bank - Also known as the Merchant Bank. The institution or organization that has a business relationship with a merchant who wishes to accept credit cards for payment of goods or services. The Acquirer Bank processes the merchant's transactions and credits payment to the merchant account.
Authentication - Identification of individuals and businesses through the use of digital certificates.
Authorization - The process by which permission to perform a transaction is granted or declined by a card issuer. The process confirms that credit card limits are not exceeded and reserves the specified amount of credit. Successful authorizations reduce the amount of available credit but do not actually charge the customer, nor move money to the seller. Authorizations can be performed via telephone, POS terminal, or via the Internet.
Authorization Only - A feature of a merchant account which enables authorization and settlement to be handled separately. That is, the account it must allow an online purchase to be authorized to process the order, yet not charge the account until the order was shipped for the digital product or service was delivered.
AVS - Address Verification System. The AVS system compares the statement billing address on file with the credit card issuer with a customer's billing address provided with each order. It gives adds greater likelihood that the customer is the legitimate cardholder. Nonetheless, AVS has some limitations when it comes to Internet transactions: AVS only works for addresses in the USA. AVS provides no protection for "soft" goods, such as software to be purchased and downloaded instantly, as all a thief has to do is to obtain a valid address that corresponds to a stolen credit card number. This is certainly not hard to do. It matters not that the address is not the thief's, as nothing will be physically delivered anyway. Thieves can supply a valid address for a stolen credit card as the "bill to" but then request a different "ship to" address.
Bank Identification Number - A 3 to 5 digit code, defined by ISO 8663, that assigns ranges for account number assignments that are explicitly tied to a specific brand or card company.
Batch - A group of card transactions (captures and credits) awaiting settlement processing with the merchant's acquiring financial institution. These accumulate over a period of time, although generally no more than one day. Batches can be submitted for processing throughout the day or continue to grow until their value is sufficiently large enough and worthwhile to process. Synonymous with Batch Settlement File.
Batch Close - The process of sending a batch to the financial institution for settlement.
Browser - A client program that runs on an end user's computer, linking it to the World Wide Web, such as Internet Explorer or Netscape Navigator.
Capture - Converts a previously-authorized transaction amount into a billable sale. Transactions cannot be captured unless they were first authorized, and authorizations cannot be captured until the consumer's goods have shipped or the services were performed. This transaction triggers the movement of funds from the issuer bank to the acquirer bank and then to the merchant's account.
Capture Token - A computerized record that uniquely identifies a captured transaction or captured authorization.
Card Present Account - This type of merchant account requires the consumer and merchant to be physically at the same location during the time of the transaction. For a card present transaction, the credit card is typically swiped through a card reader (or physical point-of-sale terminal), and the consumer signs an authorization slip, or sales receipt. In contrast, see CNP.
Card Processing Service - Also known as Credit card verification services or Charge Processors. Charge Processors are sometimes referred to as Payment Acquirers too. The Card Processing Service services the requests that originate from the terminal set up at the Merchant's physical premises or via the software on the web site server for an Internet transaction. They offer card processing services, billing, MIS reporting, settlement, and other work to banks and card companies. Since operating these systems is rather complex and highly expensive, most banks outsource this work to third-parties who specialize in such services.
Cardholder - The individual or business user of a debit, credit or charge card issued by an Issuer Bank with an account established with the Issuer Bank. A cardholder is eligible to initiate a payment card transaction.
Charge cards - The early charge cards were issued by department stores. In 1951, Diners Club became the first general-use charge card, primarily for use in restaurants (now owned by CitiBank). American Express followed in 1957, with Discover Card coming much later.
Charge cards usually act within "closed loop" systems. That is, the companies issue the cards themselves, and act as the authorizing agent for the merchant as well. Charge cards usually carry no pre-set spending limit, are due in full at the end of the month, are not tied to revolving lines of credit, and do not accumulate interest or finance charges under normal uses.
See also "Credit Cards" to see the differences and similarities.
Charge Processor - See Card Processing Service.
Chargeback - A chargeback occurs when a credit card holder disputes a charge on their monthly credit card statement or the transaction is subsequently found to be "bad" or "refused" because of fraud.. The card processor or bank debits that amount from the merchant's deposit account.
Charge back Fees - These are fees incurred from chargebacks.
Chargeback ratio - Chargeback ratios are defined as the number of chargebacks divided by the number of sales in any given month. The maximum chargeback ratio allowed for VISA or Master Card is 2.50%. Beyond that, fines are assessed from $25.00 to $50.00 per transaction with significant increases if the situation continues, including added review and administration fees that can go as high as $250 and $500 respectively.
Clearing - The process to exchange transaction details between the Merchant Bank and the Issuer Bank. Clearing posts charges to Cardholder accounts and reconciles the Merchant's settlement position.
CNP - Cardholder not present transactions, such as mail order, telephone sales and Internet sales. See also MOTO.
Credit - A transaction that transfers money from the merchant to the cardholder's account.
Credit Cards - Cards issued by Issuing Banks to customers with which to charge for the purchase of products and services. The first general use credit cards emerged in 1958, with the BankAmericard, from the Bank of America. The BankAmericard was later renamed the VISA card. Meanwhile, the MasterCharge card appeared, itself also later renamed the MasterCard.
Both of these cards are actually owned by franchising associations (VISA International and MasterCard International, Inc.), which rely on member or "issuer" banks to establish lines of credit and set the terms for customer credit to the cardholders within their own portfolios. The credit card associations do not issue the cards themselves, as do the charge card companies. Further, the associations rely on the member banks to offer the merchant services by way of "merchant accounts" to the merchants to enable the merchants to accept the cards as forms of payment. The VISA and MasterCard "brand" associations establish and maintain the bylaws that govern the use of their logos and the agreements with the member banks, with each claiming to have over 20,000 member banks throughout the world. VISA claims to have over 600 million card holders that can be used at over 14 million locations. American Express has added its revolving credit card called the "Optima card" to the list as well. Credit cards usually carry a pre-set spending limit established by the issuing bank based upon the "revolving" line of credit obtained at the time the card was issued. Some of these lines of credit are secured, others are "signature" lines of credit. The outstanding balance does not have to be paid in full at the end of each month. Carryover balances incur finance charges and are set on some repayment schedule. The Annual Percentage Rate charged may be fixed or tied to some variable rate. These are the cards you are offered in the mail, sometimes three or four a day, often at "teaser" low introductory rates on new purchases and transfers from other cards. Because the cards are not issued by the card associations themselves, they operate in an "open loop" system. The card holding consumer usually got the card from an issuing bank that is different from the bank with whom the merchant has his merchant account. The coordination amongst the banks must be performed by a third party, rather than the card issuer as is the case for charge cards. See also "Charge Cards" to see the differences and similarities.
Data Encryption - The scrambling of information sent over the Internet. Data encryption ensures that only the intended recipient has the ability to read and understand the information.
Debit Cards - these are your "Instant Cash and Check" cards that you use in the cash machines, that you can also use to purchase items at participating merchants. The amount of the purchase is deducted straight out of your checking or savings account.
Digital Certificate - Online identification that authenticates a consumer, merchant and financial institution. Digital certificates are used during SET transactions.
Discount Rate - Merchant fees are determined through the discount rate set by the Merchant Bank as a privilege fee for using their account services. Fees are based on the value of each transactions, and typically range from 1% up to 5%, depending on a number of factors, including charge volumes, risk models, size of the business, methods of submission, bank policies, etc.
Electronic Wallet - Software that enables a cardholder to conduct online transactions, manage payment receipts and store digital certificates.
Encryption - See Data Encryption
Gateway - An application that accepts transactions from online merchant storefronts and routes them to a financial institution's processing system.
Internet - A global information system formed by combining thousands of smaller networks to create a single larger network.
Interchange - The banker's interchange exists to exchange information, data, and money between the banks connected to it. The interchange systems are managed by VISA and MasterCard to standardize its use across the globe.
Interchange fee - An amount charged to a Merchant Bank by an Issuer Bank to compensate them for the time the Issuer Bank needs to wait for payment between settlement time and actual receipt of bill payment from their customer.
Issuer Bank - The banks, financial institutions or other organizations that extend credit to their customers (Cardholders) through payment cards, such as credit or debit cards. These banks enter into contractual agreements with VISA or MasterCard to issue their respective products. The issuer bank sets the card or account holder's credit limit. The issuer bank subsequently bills the cardholder for repayment of the credit extended.
Merchant - Any business operation that accepts payment cards for goods or services. Merchants establish the privilege of accepting payment cards through relationships with Acquiring (Merchant) Banks and card companies.
Merchant Account - The bank account the merchant establishes with the Merchant Bank (aka as the Acquirer Bank) into which the amounts of the credit card charges made at the Merchants business are deposited. A merchant account is essentially a line of credit extended to the merchant by a bank. The amounts charged by the merchant's customers are credited to the merchant's account upon "settlement". There is the possibility of some returns, however, and other chargebacks, caused by insolvent or unsatisfied customers or fraudulent transactions. The money however has already been advanced to the merchant. So there is some risk to the merchant bank. The merchant bank has some security because presumably there will be more credits coming each day to cover the amounts charged back, but that may not always be the case with unscrupulous merchants. Thus the creditworthiness of the merchant is an important factor in getting a merchant account.
Merchant Bank - See Acquiring Bank.
MOTO - Mail order/telephone order credit card transactions. In a MOTO transaction, the merchant and shopper are not in the same physical location, and there is no card swiped or signature received. This method of payment was originally adopted for mail order and catalog businesses. All Internet transactions are treated as MOTO transactions and require a MOTO merchant account. See also CNP, and for contrast Card Present Account.
Open-to-buy - A piece of information on every credit card account that indicates the difference between the line of credit amount and the balance currently owed by the Cardholder.
Online Storefront - A commerce-enabled Web site available on a public network, such as the Internet, that offers goods and services for sale. An online storefront is the equivalent of a store or place of business that a customer would visit to purchase goods and services.
PAN - Primary Account Number. The encoded number that identifies the cardholder and the account number to which transactions are to be charged.
POS - Point of Sale. The point at which a product is paid for and delivered. On the Internet, point-of-sale software allows merchants to accept transactions on their online storefronts and conduct follow-on transactions with their financial institution.
Processing fees - Fees that are charged to Acquirer Banks and Merchants for the privileges of using the interchange network or for using Merchant Account services. Typically, processing fees are built-in to the Discount Rates.
Receipt - A hard-copy document that represents the fact that a transaction took place at some point in time. In the typical convenience store transaction, it is the credit card slip you sign the white copy the merchant keeps and the yellow copy that you get.
Server - The system that carries out activities initiated by an end user's computer.
SET - Secure Electronic Transaction. A protocol developed by MasterCard and VISA, in conjunction with VeriFone and other leading technology developers, that is designed to increase the security of transactions made over the Internet, by authenticating all parties to a transaction. SET uses digital certificates to validate the identities of all parties involved in a purchase and encrypts credit card information before sending it across the Internet.
SET Mark - Logo assuring that the software being used has been certified for facilitation of SET transactions.
Settlement - A clearing process that occurs when the Acquiring Bank credits the merchant account with the dollar amount of a credit card purchase, and the bankcard association (such as VISA and MasterCard) credits the acquirer and debits the card issuer for the transaction.
SSL - Secure Sockets Layer. SSL is a commonly used protocol for transmitting payment and other sensitive information between a merchant and a cardholder on the Internet. The SSL protocol, which was developed by Netscape, sends data back and forth between the cardholder's Web browser software (such as Netscape Communicator or Microsoft Explorer) and the merchant's Web server software (such as Netscape's Enterprise Server or Microsoft's Commerce Server), within a secure environment. The secure environment for SSL is created through the use of public key cryptography, which consists of the encryption (scrambling) and decryption (unscrambling) of information. Public key cryptography allows anyone to send an encrypted message to a designated recipient, using what is known as a public key. The recipient then uses a private key to decrypt the message. Therefore, only the designated recipient has the ability to read the message. The SSL protocol is a powerful tool for the secure distribution of information, but does not address all of the risks associated with sending and accepting transactions over the Internet. For example, SSL establishes a secure session between a browser and a server. During the period when the browser is logged onto an SSL server, authentication between the browser and the server takes place. However, SSL does not authenticate the parties who are using that software. Thus, while cardholders using SSL can submit payment information free from the prying eyes of a third party, there is no way of verifying the identity of the online storefront that they are visiting or conversely, that the customer is who he or she says they are.
Third-party processor - Companies that enter into contractual agreements with Issuer and Acquirer Banks to process authorizations and settlement operations on their behalf.
Transaction - Any action between a cardholder and a merchant that results in activity on the account, such as an authorization and settlement. Merchants and financial institutions also conduct follow-on transactions such as capture and credit, that affect the cardholder account.
Web Hosting - A service that provides an entry point to the Internet for a business Web site provided by an Internet Access Provider.
Web Server - Software that allows a business to manage and publish its Web site.
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