card processing terminology

Merchant Card Processing: Terminology

Notes

• Sources: Industry Terms by directNIC (Rewritten by Woozle to be clearer or more in line with my understanding; where directNIC is actually quoted, attribution is given.)

Terminology

• Acquirer: the financial institution which receives a financial transaction's electronic data from a Merchant and places that data into an interchange system.
• Authorization: the process by which:
  • it is decided that a transaction is allowable, including confirmation that the transaction does not raise the account holder's debt above the account's credit limit
  • the specified amount of credit is set aside in the cardholder's account
  • transaction risk is also usually assessed to some degree, including (at a minimum) verification that the card in question is not known to have been lost or stolen
• Average Ticket: the average transaction amount (directNIC defines this as "A predetermined dollar amount that the merchant can process on a per-sale basis", which is a little unclear but may be more correct)
• AVS – Address Verification Service: a service wherein the cardholder's address (as known to the card's issuing bank) is compared to an address submitted by the merchant (as received from the customer) and compared to see if the street number and zipcode match. Different codes are returned depending on whether both numbers match, only the zip or the street number match, neither matches, or the service is unavailable (for any of several possible reasons). AVS helps to minimize the number of fraudulent card purchases by giving the merchant additional information to use in deciding whether or not to allow a transaction.
• Batch: a collection of transactions that are processed as a group. Transactions may be batched for authorization or for capture.
• Capture: a transaction sent after the merchant has shipped the goods, in effect taking the funds which have been placed "on hold" in the cardholder's account and initiating their movement to the Acquirer and then (ultimately) the merchant's bank account.
• Cardholder: the customer associated with the primary account number requesting the transaction from the merchant
• Chargeback: a movement of funds from the merchant back to the customer, caused by the customer's denial of a charge on her/his credit or debit card account. This usually happens when a customer calls their credit card company disputing a charge because the products/services were not received, though it can also happen if a card number was used fraudulently. If the merchant cannot prove that the charge was legitimate (i.e. made with the permission of the legal cardholder), the chargeback is made permanent. Merchants who incur too many chargebacks may be charged higher rates or dropped entirely by their card processing service, so merchants generally go to great lengths to prevent this.
• Discount Rate: the per-dollar fee a merchant pays the card processing service (directNIC says this is paid to the merchant's "acquiring bank/merchant bank", which may be more accurate) for processing card transactions.
• Factoring: is when more than one merchant processes transactions through a single merchant account. It is not permitted under Visa, MasterCard and American Express regulations.
• Interchange: "the exchange of information, transaction data and money among banks. Interchange systems are managed by Visa and MasterCard associations and are very standardized so banks and merchants worldwide can use them." – directNIC
• Interchange Fee: "a fee paid by the acquiring bank/merchant bank (Acquirer) to the issuing bank. The fee compensates the issuer for the time after settlement with the acquiring bank/merchant bank and before it recoups the settlement value from the cardholder." – directNIC
• Internet Payment Gateway: a service wherein real-time credit card authorizations may be processed directly from a web site over the Internet, without human intervention; also referred to as "real-time processing".
• Issuer (or Card Issuer or Issuing Institution): the financial institution which issued the credit/debit card to the cardholder
• Merchant: a seller of goods and/or services who accepts credit or debit cards in payment
• Monthly Minimum: the minimum total per month of Discount fees; if the total Discount fees add up to less than the Monthly Minimum in any given month, then the Monthly Minimum is charged instead.
• Monthly Volume: the total dollar value of transactions processed by the merchant in a month, either as an average or in a given month. This figure is often applied as a limit on the sales which the merchant is allowed to process within the scope of a given Card Processing Service agreement.
• Retrieval Request: a request from a cardholder's bank for information about a charge which is being disputed; this is often the first stage of a Chargeback. In many cases, a Chargeback accompanies the Retrieval Request, and is only reversed if the Merchant proves that the charge was legitimate (or if the customer, given better information, admits that the charge is legitimate).
• Reversal: "a transaction from the acquirer to the card issuer informing the card issuer that the previously initiated transaction cannot be processed as instructed, i.e., is undeliverable, unprocessed or cancelled by the receiver." – directNIC
• Real-time: something which is done more or less immediately and without human intervention. Real-time credit card processing means that the validity of a customer's credit card, as well as their available credit limit, is checked and the customer is notified immediately (for practical purposes, within a few seconds) whether or not the transaction has been accepted. This is especially helpful for internet transactions, where the web server can essentially have a quick dialogue with the customer to resolve any problems, rather than requiring a human to contact the customer at a later time (when the customer may no longer be easily reachable). (It is generally assumed to take place in most face-to-face transactions these days, though in pre-modem days smaller merchants would check credit card numbers against lists of invalid credit numbers, printed in a booklet which was issued monthly, before accepting them.)
• Secured Sockets Layer (SSL): is a form of encryption used on web sites, most commonly to protect form data entered by the user (such as credit card numbers) from being intercepted. All popular browsers require SSL-encrypted pages to be signed by a recognized signing authority, and will pop up a warning message if the signing authority is not recognized. See Wikipedia for more information.
• Settlement: in short, this is what the card processing service actually puts into the Merchant's bank account. More technically: "As the sales transaction value moves from the merchant to the acquiring bank, to the issuer, each party buys and sells the sales ticket. Settlement is what occurs when the acquiring bank and the issuer exchange data or funds during that function." – directNIC
• Shopping Cart: in the context of an online store, this is software running on a web server which collects a customer's choices of items to purchase (analogous to a real shopping cart in a walk-in store). The same software usually handles collection of payment and shipping information, and thus the term "shopping cart" is often applied to the whole package.
• Statement Fee: "Charge levied by the merchant bank for monthly reports detailing activity on a merchant account." – directNIC
• Ticket: "another name for the sales slip or its monetary value that results when a credit card purchase is made." – directNIC
• Transaction: any exchange of money between two parties. In the context of Card Processing, transactions are usually purchases or refunds.
• Transaction Fee: a per-transaction processing fee charged by the card processing service