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Glossary of Payment Processing Terms

The terms, abbreviations and acronyms used in the payments industry aren’t the easiest to decipher and understand. Knowing this, we created a quick-reference glossary of the most commonly-used payment processing terms – written in simple language. We recommend bookmarking this page and using it as a go-to resource anytime you come across an unfamiliar payment processing term.

 

A

Acquiring Bank — A bank or other financial institution that maintains the bank account for the merchant. Also referred to as a “Merchant Bank”.

Address Verification System (AVS) — A system that verifies the billing address of the credit card provided by the user with the address on file with the credit card company. AVS is a tool provided to merchants to detect suspicious activity and therefore reduce the risk of fraudulent online transactions and chargebacks.

Application Programming Interface (API) — A set of routines, protocols and tools that spells out how separate software components should interact with each other.

Authorization — When a purchase is made by a customer, the merchant requests an authorization from the customer’s card-issuing bank. The actual authorization is provided by the customer’s card-issuing bank to confirm that the credit card account is in good standing and has sufficient funds to complete the purchase.

Authorization Fee — A fee in which the merchant is charged to verify the payment is valid.

Authorization Only — Also referred to as “Auth Only”. Authorization Only is a transaction request to only authorize, or reserve, funds for a purchase. This request for authorization is submitted by the payment gateway to the card-issuing bank, but no further action is taken.

Automated Clearing House (ACH) — A secure payment transfer network used to process electronic payment transactions between financial institutions in the United States. The ACH network is an essential link in the national banking system — acting as the chief clearing center for all electronic funds transfer (EFT) transactions that occur nationwide.

Automated Clearing House (ACH) Payment —  An electronic payment where the customer has given an institution or corporation authorization to debit funds directly from their checking or saving account for the purpose of bill payment.

Average Ticket — The average size of a business’ individual sales by credit card. Typically used in pricing decisions and calculations.

B

Bank Identification Number (BIN) — The first six digits on a credit card that can be used to identify the bank that issued the card.

Batch — A group of authorized transactions that have been gathered over a period of time. The batch is submitted to processing networks for clearing and settlement, typically at the close of each business day. Also see Settlement.

Breach — An incident where sensitive merchant cardholder data has been viewed, accessed or used by an individual unauthorized to do so. Also referred to as a “Data Breach” or “Security Breach”.

C

Card Association — Organizations, such as VISA, American Express and MasterCard, that oversee the use of credit cards and establish guidelines in conjunction with the government.

Card Not Present (CNP) Transaction — A purchase made by a customer without presenting the physical credit or debit card at the time of purchase. CNP transactions typically occur online.

Card Verification Value (CVV) — Codes on credit cards that help ensure the person placing an online order has the actual card in hand. CVVs are a 3-digit number on VISA, MasterCard and Discover and a 4-digit number on American Express.

Channel Partner — A merchant’s software provider who is responsible for linking the merchant’s accounts with the Constellation Payments’ gateway.

Chargeback — A disputed transaction. Occurs when a cardholder contacts their card-issuing bank and asks for a refund on a transaction for a purchase or service made on their card. Merchants are notified by the card-issuing bank when a chargeback occurs. The merchant then needs to validate the purchase by providing necessary information and/or documentation. Also see Retrieval Request.

>> For more on chargebacks, see the article: 7 Ways to Proactively Prevent Credit Card Chargebacks.

Compliance — Merchants that accept credit card transactions must comply with regulations established by local and federal government, the card associations, and the Payment Card Industry Security Standards Council (PCI SSC). Also see Payment Card Industry Security Standards Council (PCI SSC).

Contactless Payments — A method for customers to make purchases using RFID (Radio-frequency identification) technology. Instead of inserting a card into a card reader, customers make purchases by holding their contactless payment device in close proximity to a reader. Contactless smart chip technology comes in many different forms including plastic cards, key fobs, watches and handheld devices like mobile phones.

Counterfeit Credit Card — A card that often appears legitimate but is in fact fake with real account information that has been stolen.

D

Data Encryption — For security purposes, the process of changing sensitive data and processing information to make it unreadable and unusable to anyone.

Decline — A transaction that is not approved by the card-issuing bank.

Demand Deposit Account (DDA) — A type of checking account where deposited funds can be withdrawn at any time without advance notice.

Discount Rate — The fee paid to a merchant bank to handle the deposit of credit card funds into a merchant account.

E

Electronic Funds Transfer (EFT) — Refers to the transferring of money from one account to another in an electronic way. EFT comes into effect when paying with a credit or debit card.

Encryption — For data security purposes, encryption is the process of encoding or scrambling data automatically at the terminal or computer before it is transmitted. The data can only be read by those authorized with a decryption key or password.

Europay, MasterCard, Visa (EMV) — Named after its original developers, EMV is a set of specifications for chip cards, and devices used for authenticating credit and debit transactions, designed to reduce fraud at the point of sale. Unlike magnetic stripe data that doesn’t change and can be skimmed easily, data is never decrypted, and therefore never exposed, with EMV chip cards. In addition to encryption, each EMV chip card transaction is assigned a unique one-time-use token, which is then destroyed once the transaction is completed.

F

Financial Institution — An establishment that conducts financial transactions such as investing or lending money. Financial institutions include commercial banks, federal and state savings banks and credit unions.

Firewall — A system designed to prevent unauthorized access to a computer network.

Fraud — In the payments industry, a term typically referring to credit card or payment card fraud, which is the fraudulent use of a credit card account.

>> To learn more about credit card fraud, see the articles: What is Card Present Fraud? and Help! What Can I Do to Prevent Card Not Present Fraud?

G

Gateway — A secure portal that connects to a merchant’s point of sale software, online shopping cart, and/or terminal. The gateway transmits customer payment information to the payment processor for authorization and settlement. The payment gateway is responsible for receiving the payment data from the front-end system, encrypting it, sending it to the bank for processing, receiving the bank’s authorization, and then communicating the authorization information back to the front-end.

>> To learn more about payment gateways, see the article: Help! What’s a Payment Gateway?

Gift Card — A prepaid stored-value payment card typically issued by a retailer or bank to be used as an alternative to cash for purchases within a specific store or business.

H

Hard Decline — A declined authorization attempt that is unlikely to succeed if retried. Typical reasons for hard declines are lost and stolen cards and constant payment failures.

Hologram — A three-dimensional image that is difficult to duplicate. Used on payment cards as a deterrent to theft.

I

Interchange — The process where all participants involved in credit card transactions (acquirers, issuers, processors, etc.) manage the processing, clearing, settlement and deposit of funds into a merchant’s account. This process also includes the evaluation, collection and distribution of fees between all entities involved.

Interchange Fee — Fees that the acquiring bank (merchant bank) pays to the issuing bank (cardholder’s bank) as compensation for transaction-related costs.

Internet Service Provider (ISP) — An organization that provides Internet services to businesses and consumers.

Issuing Bank — A bank or other financial institution that issues credit cards to consumers. Issuance is done on behalf of the card associations. Issuing banks charge cardholders interest and fees associated with the use of various branded cards. Also referred to as an “Issuer”.

M

Magnetic Stripe — The black stripe on the back of a credit card, debit card, or store-valued cards (i.e., gift card, rewards card) that holds the cardholder’s account or payment information. Also referred to as “Magstripe”.

Magnetic Stripe Reader
— A point of sale hardware device that “reads” the information encoded in the magnetic stripe when the card is swiped through the reader.

Merchant — A person or business that sells products and/or services. In the payments industry, a merchant is the individual or business that is also authorized to take credit cards as a form of payment for products and/or services.

Merchant Account — A bank account, or an account with a financial institution, used by the merchant to accept credit card transactions for products and/or services. The merchant account enables the bank or financial institution to pay for authorized credit requests prior to receiving funds from the issuing (cardholder’s) bank.

There are Card Present (CP) Merchant Accounts for merchants that receive payments in-person — where a physical card is presented to the merchant by the cardholder at the time of the transaction. There are also Card Not Present (CNP) Merchant Accounts used by merchants that receive payments electronically — such as an ecommerce business that does not receive payments face-to-face.

Merchant Bank — See Acquiring Bank.

Merchant Identification Number (MID) — An identification number assigned to the merchant by the merchant bank in order to process and track credit card transactions associated with the merchant.

Method of Payment (MOP) — The method by which a merchant chooses to accept payment for products and/or services. Examples of methods include VISA, MasterCard, Discover and American Express.

N

Near Field Communication (NFC) — Most commonly referred to as NFC in the payments industry, near field communication is a set of communication protocols that enable two devices to establish communication. NFC is used to accept mobile, contactless payments. Instead of inserting a card into a card reader, customers make purchases by holding their contactless payment device in close proximity to a reader to make a payment.

Network
— In the payments industry, a network is a system of hardware and software used to accept, transmit and process payment transaction information electronically.

O

Offline Transaction — A payment method that uses a debit card to transfer funds from a checking account to a merchant by use of a credit card processing network.

Online Transaction — A payment method that authorizes the transfer of funds electronically over an electronic funds transfer (EFT). See Electronic Funds Transfer.

P

Payment Card Industry Audits (PCI Audits) — Any system that stores, processes and/or transmits cardholder data is required to undergo an annual review, otherwise known as audit, to ensure compliance with the Payment Card Industry Data Security Standard (PCI DSS). See Payment Card Industry Data Security Standard (PCI DSS).

Payment Card Industry Data Security Standard (PCI DSS) — A set of requirements created to keep customer payment card data secure. All companies that process, store and/or transmit credit card information are required to comply with PCI DSS. These requirements were development by the Payment Card Industry Security Standards Council (PCI SSC). See Payment Card Industry Security Standards Council (PCI SSC).

>> To learn more about PCI DSS, the benefits of compliance, and the processes by which to become PCI-compliant, see the article: Quick Guide to PCI Compliance.

Payment Card Industry Security Standards Council (PCI SSC) — Founded by global payment brands — American Express, Discover Financial Services, JCB, MasterCard Worldwide and VISA International — the council is responsible for the development, management and education of the Payment Card Industry Data Security Standard (PCI DSS). See Payment Card Industry Data Security Standard (PCI DSS).

Payment Gateway — See Gateway.

Personal Identification Number (PIN)
— A unique identification number issued by the bank, financial institution or service provider to the individual or business that uses the payment card. The purpose is that of security to verify user identity and prevent unauthorized use. A PIN is typically required to verify a purchase made with a debit card. Smart cards, also referred to as chip and PIN cards, EMV cards, and chip cards, may also require a PIN to verify a card present purchase.

Point of Sale (POS) — In the payments industry, point of sale refers to the location where a payment card transaction takes place.

Point of Sale Terminal (POS Terminal) — A combination of software and hardware that enables merchants to accept and process card payments electronically. In the U.S., in October 2015, liability for fraudulent charges shifted from payment card issuers to merchants if the POS terminal the merchant is using isn’t chip-enabled for in-store transactions when a chip card is presented. It’s strongly advised that all merchants have EMV-compatible terminals in place to accept new chip cards and to protect their businesses from risk and fraud.

>> For more on EMV-compatible terminals available for rental and purchase through Constellation Payments, see the article: Help! Which EMV Payment Terminal Should I Use in My Business?

Processing Fees — In the payments industry, the fees charged to process credit card transactions.

Processor — A company, typically a third party, that is responsible for processing credit card transactions. The processor can be operated by an acquiring bank (merchant bank) or act on the behalf of the acquiring bank. Processors are usually paid per transaction. Examples of processors include Elavon, Vantiv and EziDebit.

R

Reason Code — A two-digit code used to denote the reason for a chargeback.

Re-Authorization — A request made for an additional amount to be authorized on an existing transaction. Also referred to as “Re-Auth”.

Recurring Transaction — A transaction charged to a cardholder’s account on a recurring or periodic basis. Typically used for ongoing billing for recurring goods and services such as subscriptions and health club memberships.

Constellation Payments offers a robust Recurring Billing Solution for software companies, franchise organizations, recurring goods providers and other companies in need of a solid, secure platform for recurring billing transactions and a delinquency management support system to optimize recurring revenue. See our Recurring Billing page for more information.

Referral — When a payment card is run through, the response on a terminal can come back as: approved, declined, referral, pick up or no match. A referral means that the merchant should call the authorization center because more information is needed regarding the cardholder.

Refund — The process where the merchant returns all, or a portion, of an original transaction amount to the cardholder.

Retrieval Request — A request from the card-issuing bank asking that the merchant verify a transaction has taken place. A retrieval request is related to chargebacks.

>> For more on chargebacks, see the article: 7 Ways to Proactively Prevent Credit Card Chargebacks.

Reversal — Also known as a reversed chargeback, a reversal is when the funds are returned to the merchant as a result of the merchant successfully disputing a chargeback.

S

Settlement — The process where merchants transmit batches of transactions to their acquiring bank. Settlement can also refer to the completion of transaction processing between all involved entities and successful deposit of funds into the merchant’s bank account.

Settlement Currency — The currency in which funds will be deposited into the merchant’s bank account.

Smart Card — A plastic card that contains an embedded microprocessor chip. Typically used for electronic financial transactions. Also referred to as a “Chip Card”. Smart cards can be either contact or contactless smart cards. See Contactless Payments.

Soft Decline — A declined authorization attempt that can be attempted again a day or two later to gain valid authorization. Soft decline reasons may include referrals, when more information regarding the cardholder is needed, or instances where the cardholder is over his/her limit.

Software Development Kit (SDK) — A set of software development tools created to help developers incorporate their software into another program or system.

For example, one of Constellation Payments most recent SDKs is designed to aid developers with the integration of their software with EMV-compatible, integrated payment terminals.

Standard Industrial Classification (SIC) Code — A four-digit code used to categorize a merchant’s industry type.

T



Terminal Capture System (TCS) — Where transactions are stored in the terminal until the batch is settled.

Terminal Identification Number (TID) — An identification number assigned to each point of sale device. The number provides information about the device, its configuration and functionality.

Tokenization — The process of taking a customer’s credit card number, storing it in a highly-secure encryption appliance and then replacing it with a surrogate value known as a “token”. The payment system can then use this token value when processing payments as a way to retrieve the customer’s credit card number. The token itself is not a sensitive piece of data and can be stored in an external system and used in future transactions in lieu of the credit card number.

>> For more, see the article: Credit Card Tokenization: Data Thieves Can’t Steal What Isn’t Theirs.

Transaction — An action between a cardholder and a merchant that results in activity on the account, such as a purchase.

V

Voice Authorization — Transactions that are authorized by a voice operator.

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