Merchant Account Glossary Terms
Accounts Payable
Debts owed to your business’s creditors.
Accounts Receivable
Debts other individuals or businesses owe to your business.
Acquiring bank
A bank that provides credit card merchant accounts and is responsible for submitting credit card purchase information to the credit card associations.
Address Verification Service (AVS)
A chargeback and fraud-reduction service, which verifies the billing address provided by the cardholder with the credit card company before approving a transaction.
Audit
An inspection of financial accounts, records, and accounting procedures, which can be performed either internally, or by an independent auditing organization.
Authorization
Approval from the credit card issuer which allows you to process a transaction for the specified amount.
Authorization Code
This code verifies that you have received authorization from the credit card issuer to process a specific transaction. This number should be recorded and saved for future reference.
Automatic Bill Payment
Recurring, automatic charges to a credit or debit account for a specified service. Automatic payments must be arranged and authorized by the customer.
Automatic Check Handling (ACH)
A form of electronic payment, designed to be a sort of e-check or electronic check payment. ACH is usually used to process higher volumes or small-dollar payments for settlement issues within 1 to 2 business days. These transactions are handled much the same way that written checks are handled. The clearinghouse divides all ACH files received from member banks for the day and divides them according to originating bank and paying bank, totals the accounts, and credits or debits all accounts accordingly. ACH can also mean Automatic Clearinghouse.
Bank card
A plastic card encoded with customer account information that is accepted by merchants and used to credit accounts for processing sales transactions. Credit cards are the most common type of bank card.
Batch
A single day’s series of credit card transactions. Some terminals and real-time processors collect all of the transactions and then do a batch at the end of day. Others processors batch them throughout the day. Some processors will batch your transactions automatically for you, others may not offer this service.
Batch close
The process of submitting a batch of credit card transaction information to a financial institution for settlement. Sometimes also called “batching out”.
Batching out
Batching out is an industry term for the exchange of transaction data between the merchant and cardholder’s banks, which results in the deposit of funds into the merchant’s account. This usually takes place at the end of each business day.
Better Business Bureau
A non-profit, member-funded organization of thousands of US businesses dedicated to building fair and honest relationships between businesses and consumers. The BBB uses news alerts, databases, and other methods to maintain an ethical business environment. This can be a great source of information when “checking up” on a company you’re considering doing business with. You’ll also want to maintain a positive standing with the BBB in your own business.
Biometrics
The use of measurable living traits (such as fingerprints) as a way to control access to secured information, locations, etc. Generally used in place of, or in addition to passwords or other ID verification systems.
Cancellation Code
A code provided by lodging or car rental merchants to confirm that the cardholder has cancelled a reservation.
Capture
When a card transaction is submitted to the merchant account holder for processing and to verify the availability of funds on a credit card. A capture is merely a verification of funds, and does not actually withdraw funds from the cardholder’s account. This will not occur until the transaction is batched (see Batch).
Card Verification Code (CVC2)
A numeric security code printed on the back of MasterCard credit cards. By requiring this number on online order checkouts, in addition to using AVS protection, merchants can reduce credit card fraud and chargeback instances significantly.
Card Verification Value (CVV2)
A three-digit security number printed on the back of most Visa credit cards. By requesting this number on online order checkouts, in addition to using AVS protection, a merchant can reduce credit card fraud and chargeback instances significantly.
Card-Not-Present (CNP) Transactions
Any credit or debit card transaction processed without the card in hand, such as mail, phone or online purchases.
Cardholder
Any individual or business with an established credit or debit card account. Cardholders are eligible to make payment card transactions.
Cardholder Information Security Program (CISP)
A defined standard of procedure and enforcement intended to protect cardholder information.
Cash Flow
Incoming cash vs. outgoing cash.
Certificate Authority (CA)
A service provided by banks which digitally signs public keys sent by a web browser or by a merchant’s server software. The bank issues and validates digital certificates associated with SET transactions.
Charge Back
A credit card charge that has been challenged or refused by the credit card holder. The credit card issuer manages the charge back process, and will require evidence from the business that charged the card that the transaction was authorized and that the product or service was delivered as agreed. If a business cannot provide sufficient evidence, the money will be taken from your account, often with a sizeable fee. Charge backs can be especially difficult to refute when doing card-not-present transactions (see Card-not-present above), where businesses do not have a customer signature to support the charge and may not be able prove that products or services were received. An excessive number of charge backs may result in higher merchant account fees, and in extreme cases, the cancellation of merchant accounts.
Code 10 Authorization
A voice authorization code which can be used when a transaction is suspected to be fraudulent, such as a suspected stolen card, or suspicious customer.
Collateral
Property provided to secure credit or a loan, which may be subject to seizure if the loan goes into default.
Commercial Credit
Short-term credit arrangement provided by a business enabling a customer to pay for a service or product.
Costs
Merchant account costs will vary depending on the bank or merchant account provider you choose, the number of middlemen involved, the type of business you run, as well as the services you require. Setup costs, transaction fees, equipment costs, and other expenses can vary greatly. Look at several options before you apply. And depending on your needs, remember that the least expensive option may not be the best.
Credit Bureau
Companies that gather information about consumer credit histories, including personal information such as identity, payment habits, and public records. These credit reports are then sold to creditors (banks, finance companies, retailers, etc.) who use the credit reports to determine the creditworthiness of a potential customer. Experian, Equifax, and TransUnion are the three major US credit bureaus.
Credit card
A type of bank card widely used as a form of payment. The credit card holder makes a purchase on credit, then reimburses the credit card company for the amount of the purchase plus any interest that may apply.
Credit Card Fee (Discount Rate)
A percentage-based transaction fee charged to merchants by the credit card company. Fees can range from about 1.99% to 2.54%, with an average around 2.40%. American Express has an independent rate, usually around 3%. Fees for card-not-present transactions are typically higher than those for traditional businesses, especially online transactions which are considered high-risk by most banks. The discount rate fee is always taken off the top along with any transaction fees before any money is deposited into your account.
Credit Card Processing Clearinghouse
The actual “processing” of the credit card transaction is usually handled by a Clearinghouse, not by your merchant bank. The Clearinghouse authorizes and validates the card, and ensures that sufficient funds are available.
Credit Rating
A system used by creditors to help determine your creditworthiness, or how likely it is that you will repay a loan. This system utilizes information collected from your credit application and your credit report.
Digital cash
An encrypted form of cash which can be sent to merchants as payment in online transacitons. Digital cash can be either “digital coinage” downloaded to a user’s PC from a participating bank or a digital money account with a bank.
Digital certificate
Online identification used to authenticate a customer, merchant and a financial institution. Digital certificates are used to encrypt the information exchanged in SET transactions. Certificates are public keys digitally signed by some trusted authority, such as a financial institution, to identify the user of the public key.
Digital money
Similar to digital cash, but also includes the use of software-based secure credit card transactions.
Digital signatures
An electronic signature that cannot be forged. A digital signature is generated from a computed digest of the text encrypted and sent with the text message. When the recipient receives the text, the signature is decrypted and the digest is retrieved. If the digests match, the message is proven to be from the sender.
Digital wallet
A digital wallet holds digital money, purchased and used similar to travelers’ checks. A digital wallet may also contain your credit card information and a digital certificate identifying you as the cardholder. Also called an e-wallet.
Discount rate
A percentage of the dollar amount of each transaction charged by the processing company to the merchant. Put simply, this is the processor’s fee for handling the transaction for you.
Draft/Sales Draft
Documentation verifying that a product or service was purchased.
Ecommerce
Sales, transactions, refunds, or any other business performed online.
Electronic Data Capture (EDC)
The use of a Point of Sale (POS) terminal to submit credit card transaction information to a merchant account provider.
Electronic Data Interchange (EDI)
Any electronic communication of business transactions. For instance, orders, confirmations and invoices.
Electronic Funds Transfer (EFT)
A money transfer initiated through an ATM, electronic terminal, computer, telephone, or magnetic tape. EFTs include credit card and automated bill payments.
Electronic Wallet (E-Wallet)
Software, which like a real wallet, stores credit card information and shipping details. The e-wallet resides as a plug-in in the Web browser and makes it possible for a credit card holder to conduct online transactions, manage payment receipts, and store digital certificates. The e-wallet initiates the data encryption in a SET transaction.
Employer Identification Number (EID)
A government-issued ID used on all business tax forms and other significant documents. Also called a Tax ID or Tax Number.
Encryption
A security measure which scrambles electronic information so that only the sender and receiver can read the message.
Equity
The current market value of your business, less your business debts.
Expense Account
An account used for business-related travel and entertainment costs.
Factoring
In terms of e-commerce, factoring is the practice of allowing other companies to process credit card transactions through one company’s merchant account rather than requiring them to purchase a merchant account of their own, in exchange for a percentage of the transaction. This is also known as credit card laundering, and is illegal practice that can result in heavy fines.
Floor Limit
A specific dollar limit which designates that certain transactions must be authorized. For instance, if your floor limit is $1,500, authorization is required for any transaction over that amount.
Gateway Processor
Essential to online credit card transactions, a Gateway Processor acts as the interface between the merchant and the Credit Card Processing Clearinghouse (see above). The Gateway is used to submit payment information to the Clearinghouse and securely sends and receives payment transaction messages. Some merchant providers provider their own Gateway service, but most small merchant providers are resellers for larger Processors.
Holdback
A merchant account provider may retain a portion of a merchant’s revenue to cover any unplanned future expenses such as charge backs, late charges and other expenses. Not all merchant providers require a holdback.
Imprint
A physical impression of a customer’s card which proves that the card was present when the sale was made. Imprints may be created electronically using a magnetic-stripe-reading terminal including a correct point-of-sale (POS) entry code.
Incubators
Organizations offering a variety of resources, including mentoring, financing advice, technological training, business space, and research facilities to entrepreneurs that otherwise lack these resources.
Independent Sales Organization (ISO)
An organization that processes merchants’ online credit card transactions in exchange for a percentage of the sales or for transaction fees.
Internet commerce
Any commercial transaction performed via the Internet.
Issuing Bank
A bank that issues credit cards to customers. The issuing bank funds the merchant’s account when a charge is made to one of their customer’s cards, and later bills the customer for that charge.
Laundering
The illegal process of using another company’s merchant account to process your own company’s credit card transactions. Laundering may lead to heavy fines or other penalties.
Leverage
Using credit or borrowed funds to expand the potential gains of a company, while assuming a risk of greater losses.
Lien
The legal right of a creditor to hold or sell the property of a debtor to secure or pay off a defaulted debt or duty.
Line of Credit
A commitment from a financial institution, such as a bank or other creditor, to lend a specified amount of money, during a certain period of time, to another company or business.
M – Commerce
E-commerce transactions performed over wireless devices, such as cell phones, pocket PCs, PDAs, etc.
Mail/Telephone/Internet Discount Rate
The discount rate (or Credit Card Fee) for internet/mail/telephone transactions is typically higher than the rate for traditional types of businesses. This is due to the increased risk of fraud in card-not-present transactions.
Merchant
Any person or persons selling goods or services online.
Merchant Account
An account set up by a bank which allows a business to accept credit cards and deposits collected funds into the business checking account. Merchant providers assume a risk by allowing other businesses to accept credit cards under their name, and rely on those businesses to deliver the products or services to the customer as agreed.
Merchant Account Provider
A company that can help a business establish a merchant account relationship with a bank, suitable to their credit history and processing needs. Also called Independent Sales Organizations, these companies make money through either an upfront fee, application fee, or a per transaction fee. The bank will handle the charging and depositing of funds, and unless the Merchant Account Provider manages its own Gateway, they probably resell another company’s system and will play little or no part in the actual processing of the credit card transactions.
Merchant Bank
Any financial institution that works with businesses to enable them to process and accept credit card payments. This service is provided in exchange for processing fees. Ideally, you want to apply for a merchant account with the bank that handles your business checking account, but this is not mandatory. If you have reasonably good credit, you shouldn’t have much trouble finding a bank to carry your merchant account, but many new or at-home companies may have trouble getting approved. Some merchant banks allow other businesses (Merchant Providers) to resell their merchant accounts, and then handle the transaction processes for those businesses.
Merchant Identification Number
The ID number assigned to your business by your financial institution.
Merchant service provider (MSP)
A bank or other institution that offers credit card processing services, and usually also provides merchant accounts to merchants and retailers.
Micropayment
Merchants who sell products, services, or information for very small amounts, from a few cents to a few dollars, use a payment acceptance method called micropayments, because it is generally not profitable to use a traditional merchant account for processing such small payments.
MO/TO
An abbreviation for mail order (MO) or telephone order (TO) transactions.
Monthly Minimum
The minimum monthly fee charged by most merchant providers, usually around $30. This fee is only imposed when your Discount Rate charges do not meet the monthly minimum amount.
Offline Processing
This method of credit card processing allows a business to collect a customer’s credit card information, and then process the charge at a later time.
Overhead
The costs of operating a business, such as rent, utilities, taxes, etc., which are not directly connected to the services or products the businesses provides.
Payment gateway
The code that transmits customer orders to and from a merchant bank’s transaction authorizing agent.
Personal Identification Number (PIN)
An alphanumeric or numeric code used to identify a person using a credit or other payment card.
Point of Sale Terminal (POS)
The credit card processing device which reads the magnetic strip on the back of the card. After sliding or “swiping” the card, the terminal contacts the credit card clearinghouse to authorize the charge, displays an authorization code, and usually prints a card transaction slip which is then signed by the customer. Most retail stores use this method of card processing because it is simple to use, fast, and accurate. Also called a Credit Card Terminal, or Card Swipe Machine.
Processing bank
Once a credit card number is entered, the processing bank is the bank that processes the actual transaction.
Real-Time Processing
This method of credit card processing authorizes and validates a customer’s charge at the time of purchase. This is made possible using a Real-time processing gateway which connects your website to a Clearinghouse through a separate modem channel, allowing you to check credit card status in real-time. This is the most common and capable method of processing for online companies.
Real-time processing
Real-time processing allows merchants to process their credit card transactions as soon as a purchase is made, allowing them to capture funds and get the purchase approved immediately.
Recurring fees
Charges billed on a regular schedule, usually monthly.
Secure Electronic Transactions (SET)
MasterCard and Visa developed this secure payment protocol to offer greater security for online bank card transactions. Using this protocol, credit card details are secured between the shopper and the bank; the merchant does not have access to the credit card information.
Secure Socket Layer (SSL)
SSL is a security standard web protocol used by many merchants to protect customer payment data as it travels over the Internet. SSL uses 128 bit encryption or higher, creating an encrypted channel between the browser and Web server, to secure personal information so that only the intended parties can read certain information.
Settlement
Settlement is the point at which the acquiring bank credits the merchant account for the amount of a credit card purchase, and the bankcard association credits the acquiring bank and debits the shoppers card issuer for the transaction.
Setup fees
Many merchant services providers charge set up fees for the initial opening and establishment of a merchant account.
Shopping basket
A “virtual” shopping basket allows you to select multiple items for purchase from a merchant’s website. In actuality, the shopping basket is simply a list of the items you have selected and the details for the purchase. A shopping basket allows you to review and modify your selected items as you shop.
Shopping cart
Software used to help simplify the shopping process for an online customer when purchasing multiple products or services from a merchant’s website.
Small Business Administration (SBA)
A government agency created to aid, counsel, assist and protect the interests of small businesses, offering a variety of programs and services to help those businesses succeed.
Smart card
A credit card equipped with a small microprocessor which stores information about the card owner.
Sole Proprietorship
A business under the complete control of a single individual.
Statement Fee
A fee, usually between $10-15/month, charged by Merchant Providers to generate and mail a monthly statement outlining a businesses transactions.
Swipe Discount Rate
The discount rate for retail stores using a POS terminal is usually around 1.65% – much lower than mail, telephone, or internet rates. A card-present transaction is considered much less risky and more secure than a card-not-present transaction.
T-Commerce
A new concept being tested in Europe which allows shoppers to order certain products or services directly from their televisions.
Terminated Merchant File (TMF)
If a merchant receives excessive chargebacks, they may be stripped of their merchant account and placed in the Terminated Merchant File. All Merchant Service Providers have access to this list and may decline merchant account services to any merchant on the list for several years.
Transaction
Any action between a credit cardholder and a merchant which results in activity on the account, like authorization and settlement. Captures and credits are types of transactions conducted by merchants and financial institutions.
Transaction Fee
A fee charged by a credit card processor or merchant provider for each transaction processed, usually ranging from $.20-.50. This fee is different from the credit card fee or discount rate, and covers the costs of the computers and network required to process the transaction.
Turn-key
In terms of e-commerce a turn-key solution refers to a fully e-commerce enabled web site which is offered to potential merchants as a complete online business solution, complete with shopping cart, web design, hosting, and a merchant account.
U-Commerce
“Universal Commerce” enables secure commerce anywhere, anytime, and with any type of device.
Venture Capital
Money available for investment in new enterprises, in which the risk of loss and the potential for profit may be considerable. Also called risk capital.
Visa Payment Authentication Service (PAS)
In an attempt to secure merchant databases from hackers and to protect credit card numbers stored in merchant databases, Visa has developed a Payment Authentication Service which requires cardholders to verify their identity using a password whenever they make a purchase online.
Wire transfer
An electronic payment system designed to handle high-dollar, time-crucial payments, typically between large banks.