Key Credit Card Processing Terms

Merchant Warehouse |

December 10, 2010

There’s a lot involved in credit card processing for merchants and customers alike nowadays. It pays to know what terms are in regular use among your merchant service provider, customers, banks, credit card issuers and other integral people and organizations that help to support your business and enable you to accept and process credit cards.

Here are is list of some of the terms that will help you understand more about credit card processing.

Acquirer
Also called the acquiring bank, the acquirer is the financial institution that establishes and maintains the business merchant account that receives transactions from the merchant and initiates the interchange through VISA, MasterCard or other major credit card companies. The acquirer must be a licensed member of these credit card companies.

Address Verification Service
Also known as AVS, this is a service that verifies the credit cardholder’s address, used primarily by mail order and telephone order merchants. AVS, however, does not guarantee that the sales transaction is valid.

Batch
A group of accumulated sales transactions that have been captured, though have not been settled, something that generally happens at the end of each business day.

Card Associations
These are payment networks such as VISA, MasterCard and other major credit card brands that act as gateways between acquirers and issuers for authorizing and funding sales transactions.

Cardholder
The cardholder is the owner of the credit or debit card that is being used to make a sales transaction.

Chargeback
A transaction that has been disputed by the credit cardholder or issuer that is sent back through interchange to the acquirer and must be resolved by either the acquirer or the merchant.

Check Conversion
A check protection service by which a merchant scans a check image and converts it into an electronic transaction, similar to PIN-based debit cards, for which the merchant is paid immediately. This conversion process requires a check imaging device.

Check Guarantee
A check protection service by which a merchant guarantees that they will receive payment for a check, even in the event of insufficient funds. This process requires a check imaging device.

Clearing
The exchange of transaction details between an acquirer and an issuer, which posts the transaction to the cardholder’s account and reconciles it for settlement.

CVV2
Card Verification Value 2 or CVV2 is a 3-digit code printed on the back of a Visa credit card that is an important security feature protecting online and telephone transactions from fraud. CVV2 ensures that the credit card number is legitimate and that the card is in the possession of the purchaser. Card verification code 2 or CVC2 is MasterCard’s variation of CVV2.

Discount rate
The amount charged as a percentage of sales to a merchant by the acquirer for processing the daily credit card transactions of the merchant.

Electronic Benefits Transfer
A government-funded cash assistance program that distributes payments such as Food Stamps and Temporary Assistance for Needy Families on cards that can be swiped and used with regular POS terminals.

Imprinter
A manual device used to imprint embossed credit card information onto paper sales receipts as transaction records. An imprinter only captures card information. It cannot authorize a transaction. Imprinters nowadays are primarily used as a backup when the other processing equipment is unable to read data on the credit card magnetic stripe. They are also good for merchants without an electronic printer to prove a card was present during the time of the transaction.

Interchange
The process of authorization and settlement of card transactions through any of the major credit cards. Interchange includes the transmittal of cardholder information, important transaction data and related fees.

Interchange fee
The amount card associations charge acquirers for each card transaction they process. The card associations pay the interchange fee to the issuer as compensation for expenses for providing lines of credit to cardholders. The acquirer’s cost is passed along to the merchants as a part of the discount rate.

Issuer
Also called the issuing bank, this is the financial institution that issues a credit card to a cardholder. The issuer must be a licensed member of the major credit card companies.

Level I processing
Purchases made with personal credit cards issued from U.S. banks qualify as Level I transactions. This means that the only information the merchant must pass to process the transaction is the name of the merchant, transaction total and the date of the transaction.

Level II processing
Level II transactions normally involve corporate credit cards issued from a U.S. bank. Transactions that qualify for Level II processing cost the merchant less than Level I transactions. To qualify for Level II, a transaction must be passed with more information than Level I. These include the merchant name, transaction total, date of transaction, tax amount, customer code, merchant postal code, tax ID, merchant minority code and merchant state code.

Level III processing
Level III provides the lowest transaction processing rate, but to qualify for the lowest rate, Level III transactions must be passed through the processing system with significantly more detailed transaction information than Level I or II transactions. Since so much information must be transmitted, not all terminals are equipped to process Level III transactions. Purchases that qualify as Level III transactions generally are made with corporate cards or government credit cards.

Merchant
A business that has a contract with an acquiring bank for credit card processing services and accepts credit cards as a method of payment for goods or services.

Merchant account
The contract between a merchant and an acquiring bank for providing card processing services.

Message Authentication Code
Also abbreviated as MAC, this is a data security feature that produces a unique code for every digital message, allowing the recipient to verify that data has not been altered since being transmitted by the sender.

Point-Of-Sale Terminal
Also abbreviated as POS, this device is used to record and transmit credit card transactions electronically for authorization and settlement. POS transmits information through traditional telephone lines, broadband connections or wireless signals.

Payment Gateway or Virtual terminal
Also known as a virtual terminal, this is an Internet-based portal used for processing credit card transactions. Retail merchants may use an online payment gateway to process card transactions without a POS terminal or card processing software. Online merchants must have an online payment gateway to enable their business to conduct e-commerce.

Secure Socket Layer
Also abbreviated as SSL, this is a security feature that keeps online communications private and ensures they have not been tampered with.

Settlement
The exchanging of data or funds between the acquirer and the issuer. Settlement includes funding the merchant for the transaction and paying any necessary fees due to the issuer or acquirer for processing the transaction.

Shopping Cart
A software application used for e-commerce and online transaction processing. Shopping cart software collects the items that a cardholder selects for purchase, maintains a running total and later calculate taxes and shipping.