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Credit Card Processing Glossary
ACH (Automated Clearing House)
A method of electronic payment typically used to process a group of transactions that are each for relatively
small amounts. ACH transactions function like "electronic checks" that are settled (paid) within one or two
business days using procedures that are similar to the way that paper checks are settled.
Acquirer:
An Acquirer is a Visa / Master Card Affiliated Bank or Bank/Processor alliance that is in the business of
processing credit card transactions for businesses and is always Acquiring new merchants.
Acquiring Bank
A financial institution that provides credit card processing accounts for merchants. Also referred to as a
merchant bank or an acquirer, the bank receives funds from a cardholder when a credit card transaction is
completed, and then deposits the payment amount, less any fees, into the merchant's business checking
account.
Address Verification Service (AVS):
The process of validating a cardholder's given address against the issuer's records, to determine accuracy
and deter fraud. This service is provided as part of a credit card authorization for mail order/telephone
order transactions. A code is returned with the authorization result that indicates the level of accuracy of
the address match and helps secure the most favorable interchange rates.
Adjustment:
An adjustment is initiated by the acquirer to correct a processing error. The error could be a duplication
of a transaction or the result of a cardholder dispute. The acquirer debits or credits the merchant DDA
account for the dollar amount of the adjustment.
Audio Response Unit (ARU):
This is an electronic authorization and capture product where the merchant uses a touch-tone telephone
to process transactions.
Authorization:
The process of verifying the credit card has sufficient funds (credit) available to cover the amount of the
transaction. An authorization is obtained for every sale. An approval response in the form of a code sent
to a merchant's POS equipment (usually a terminal) from a card issuing financial institution that verifies
availability of credit or funds in the cardholder account to make the purchase. Also see Point-Of-Sale.
Authorization Response:
An issuing financial institution's electronic message reply to an authorization request, which may
include:
Credit Card Processing Glossary
Approval -- transaction was approved
Decline -- transaction was not approved
Call Center -- response pending more information, merchant must call the toll-free authorization phone
number.
Authorization Code:
A code that a credit card issuing bank returns in an electronic message to the merchant's POS equipment
that indicates approval of the transaction. The code serves as proof of authorization.
Auto Close:
A terminal feature that allows an end-of-day batch closing to occur automatically at a specified time,
without having to be initiated by the merchant.
Automated Clearing House (ACH) File:
A file with instructions for the exchange and settlement of electronic payments passed between financial
institutions. It represents debits and credits to be deducted from an account automatically as they occur.
Average Ticket (Average Sale):
The average dollar amount of a merchant's typical sale. The average ticket amount is calculated by
dividing the total sales volume by the total number of sales for the specified time period.
Bankcard:
A credit card issued by a Visa or MasterCard-sponsored financial institution. (American Express,
Discover, Diners Club, JCB, etc., are issued directly from their respective operations, rather than through
banks.)
Batch:
The accumulation of captured credit card transactions in the merchant's terminal or POS awaiting
settlement.
Batch Close
The process by which a merchant gathers all of the credit card transactions that have occurred over a specified
period of time, usually one full day, and submits them to the financial institution acting as the acquiring bank for
settlement.
Capture:
The submission of an electronic credit card transaction for financial settlement. Authorized credit card
sales must be captured and settled in order for a merchant to receive funds for those sales. Also see
Settlement.
Cardholder:
Credit Card Processing Glossary
Any person who holds a payment card account (bankcard or otherwise). Person that uses a credit card to
purchase goods and services.
Card Issuing Bank:
An EFT Network Member-Bank that runs a credit card or debit card "purchasing service" for their
account holders. An example is CitiBank and the CitiBank Visa Card that they issue.
Card Not Present:
A transaction where the card is not present at the time of the transaction (such as mail order or telephone
order). Credit card data is manually entered into the terminal, as opposed to swiping a card's magnetic
stripe through the terminal.
Chargeback:
A credit card transaction that is billed back to the merchant after the sale has been settled. Chargebacks
are initiated by the card issuer on behalf of the cardholder. Typical cardholder disputes involve product
delivery failure or product/service dissatisfaction. Cardholders are urged to try to obtain satisfaction from
the merchant before disputing the bill with the credit card issuer.
Close Batch:
The process of sending the batch for settlement.
Code 10 Authorization:
If you suspect a card is fraudulent at the time of the transaction, the merchant can call their voice
authorization phone number and ask for a code 10. The voice operator will instruct the merchant on how
to proceed.
Commercial Cards:
Credit or charge cards issued to businesses to cover expenses such as travel and entertainment and
procurement. Includes the multiple payment card brands of purchasing cards, business cards, corporate
cards and multi-utility fleet cards. Visa and Master Card now have special procedures for passing billing
information back to the card issuing bank so that it can be displayed on card holder statements; this is a
program for promoting the use of credit cards for business purchases by providing purchase tracking to
business users. New regulations require that this billing information be passed back with the transactions,
otherwise a higher pass through fee will be incurred.
Corporate Card:
Charge card designed for business-related expenses, such as travel and entertainment. Please see
Credit Card Processing Glossary
Commercial Card.
Credit (Reversal):
Nullification of an authorized transaction (sale) that has not been settled. If supported by the card issuer,
a reversal will immediately "undo" an authorization and return it to the open-to-buy balance on a
cardholder's account. Some card issuers do not support reversals.
DDA Account:
This is the merchants Demand Deposit Account, otherwise known as the merchant's home town bank
account.
Debit Card:
Payment card whose funds are withdrawn directly from the cardholder's checking account at the time of
sale (online debit on a Debit Network) or after batch settlement (off-line debit on a Credit Card
Network).
Deposit Correction Notice (DCN):
Adjustments (debits or credits) made for an out-of-balance condition due to various problems in the
transmittal. The correction is made by the merchant's acquirer at the time of capture prior to being sent
out for interchange.
Discount Rate:
The percentage of sales amounts that the bankcard acquirer or T&E card issuer charges the merchant for
the settlement of the transactions.
Edit Rejects:
The rejection of a sales draft by Visa or MasterCard before a transaction processes through interchange,
but after it has been paid by the acquirer.
Electronic Cash Register (ECR):
A device used for cash sales. Can also be integrated to accept credit cards.
Electronic Date Capture (EDC):
Process of electronically authorizing, capturing and settling a credit card transaction.
EFT (Electronic Funds Transfer) A method of transferring money from one bank account to another, using any of a wide
Credit Card Processing Glossary
variety of electronic methods currently available.
Fleet cards:
Private label credit cards designed mainly for repairs, maintenance and fueling of business vehicles.
Footer:
Text printed at the bottom of a sales draft. A merchant can customize the footer (i.e., Have a Nice Day,
No Refunds, Thank You for Shopping With Us, etc.).
Holdback
A portion of the revenue generated from a merchant's credit card transactions, which is held in reserve by the acquiring
bank to cover possible future disputed charges, fees and other expenses. After a predetermined time, holdbacks are
released and deposited into the merchant's checking account, usually with no interest accumulated
Independent Sales Organization (ISO):
An ISO is an Independent Sales Organization that represents a Bank or Bank/Processor alliance. The
ISO has an agreement to sell the services of the Bank or Bank/Processor alliance, and is allowed to mark
up the Fees and sign up merchants.
-These entities are classic Middle Men, as they are typically not performing the services sold. They
typically match the banking services they sell with “Front End” solutions for accepting transactions in
order to offer merchants a working system.
-Their Front End Systems can be anything from Verifone or Hypercom POS Terminals to PC based
Dial-Out Credit Card Processing Software, to Shopping Carts paired with a Secure Payment Gateway.
(In all cases, the Front End solution must be compatible with the Processor in order to function.)
Interchange:
The standardized electronic exchange of financial and non-financial data associated with sale and credit
data between merchant acquirers and card issuers on various types of MasterCard and Visa transactions.
Interchange Fee:
A fee paid by an acquirer to an issuer for transactions entered into interchange. The interchange fee is a
percentage applied, according to Visa/MasterCard regulations, to the dollar value of each transaction.
There are multiple categories of interchange, and Visa and MasterCard each have their own criteria for
their own categories. A transaction must meet the specified criteria for a category in order for that
category's rate to be applied. Each transaction is evaluated individually, so various interchange rates may
apply within one batch of merchant transactions.
Internet Service Provider (ISP):
Credit Card Processing Glossary
Internet Service Providers (ISPs) are the Web Site Hosting companies that provide a home for
merchant’s web sites.
-They typically resell and/or support the services of a Secure Gateway Provider and/or ISO or Agent or
Bank.
Issuing Financial Institution:
The financial institution that extends credit to a cardholder through bankcard accounts. The financial
institution issues a credit card and bills the cardholder for purchases against the bankcard account. Also
referred to as the cardholder's financial institution.
Manual Close:
A batch close that must be initiated by the merchant on a daily basis, as opposed to an auto close at a
pre-set time.
Merchant: Customer of a processor/acquirer.
Merchant Identification Number (MID):
This number is generated by a processor/acquirer and is specific to each individual merchant location.
This number is used to identify the merchant during processing of daily transactions, rejects,
adjustments, chargebacks, end-of-month processing fees, etc.
Magnetic Stripe:
A strip of magnetic tape affixed to the back of credit cards containing identifying data, such as account
number and cardholder name.
Mail Order/Telephone Order (MOTO):
Credit card transactions initiated via mail, email or telephone. Also known as card-not-present
transactions.
Merchant Services Provider
A bank, an ISO, or any other firm that provides the various services required for the processing of a merchant's credit card
sales.
Monthly Minimum
The minimum amount that will be charged to a merchant by a merchant services provider in any given month. If the
merchant account activity does not generate the monthly minimum, the account holder is automatically charged the
difference.
Network: Company and system used to authorize and capture credit card transactions.
Credit Card Processing Glossary
Non-Qualified Transaction Fees (NON-Qual):
Bankcard sales transactions that do not meet set Visa/MasterCard criteria for that particular merchant and
are processed at a higher interchange rate. An example of this is a merchant that is retail (card present)
that processes a card-not-present transaction (or manually enters card data rather than swiping the
magnetic stripe through the terminal). The merchant will pay the difference between what they should
have paid on retail and what they actually qualified for (card not present). This difference is called
non-qualified interchange fees.
PC Software:
A software program that is designed to perform a specific function on a computer system. Examples
would be accounting systems, manufacturing systems, order entry and fulfillment, ticketing, reservations,
etc. The application is either purchased or built by the merchant, and must be interfaced with a credit
card authorization system in order to provide on-line transaction processing.
Private Label Cards:
Credit, debit or stored-value cards that can be used only within a specific merchant's store. Also referred
to as proprietary cards.
Point Of Sale (POS):
A location where credit card transactions are performed with the cardholder present, such as a retail
store. The card is read magnetically, and the cardholder's signature is obtained as insurance against the
transaction. This is the most secure form of credit card commerce.
POS Terminal:
Equipment used to capture, transmit and store credit card transactions at the point of sale. Examples are
Verifone terminals.
Processor:
A Processor is the company that actually routes an Authorization Request from a Point of Sale device
(such as a Verfone credit card terminal) to Visa or Master Card, and then arranges for Fund Settlement to
the merchant. Such processors are traditionally accessed via direct dial out modems connecting to their
system.
-Processors need to have a Sponsoring Bank in order to gain access to the Visa and Master Card
networks. When a Processor or other entity has made such an arrangement with a Sponsoring Bank to
resell their services, they are called an Agent of that bank.
-Any entity that sells Visa or Master Card must disclose themselves as an Agent of their Sponsoring
Bank. Such sales entities may be a Processor, or an ISO/Agent of the Processor or Processor/Bank
alliance.
Credit Card Processing Glossary
-Many banks are also their own processors, while other banks will use a Third Party Processor to handle
this processing for them (in their own brand name in some cases).
Processing Network (Vendor):
The medium of data transport between the merchant application and the processor. This company
authorizes and captures credit card transactions. Some examples of processing networks are FDR, MAPP
and Envoy.
Procurement/Purchasing Cards:
Charge cards used by businesses to cover purchasing expenses, such as raw materials or office supplies.
Real-Time Processing
Real-Time Processing means that when a web site's customer conducts an online purchase, that the check
or credit card information is conveyed to the Processor at that exact time so that an authorization can be
requested and received at that moment. Real-Time Processing always implies that a Secure Payment
Gateway is being utilized, whether proprietary or third party. Please see Secure Payment Gateways and
Real Versus Non-Real Time Processing.
Reserve Account
One method that ACH Processor's use to mitigate risk, is to require that merchants maintain a Reserve
Account at the Processor's Sponsoring Bank. This allows the Processor to issue a Hold on funds in this
account when fraud has been detected or an excessively large number of returns is received. Merchants
with good credit and history can usually meet the expectations of ACH Processors for covering returns
and so are not always required to keep a reserve account. In cases where a reserve is required, the
minimum-reserve-balance in the account is set at about 20% of the anticipated processing volume. New
merchants are usually allowed to build up their reserve by sending in transactions which are not
withdrawn until the minimum reserve balance is achieved; after that, the merchant is allowed to
withdraw the excess funds for transfer to their home town bank.
Sales Draft (Ticket):
A form showing an obligation on the cardholder's part to pay money (i.e., the sales amount) to the card
issuer. This is the piece of paper that is signed when making the purchase. Sales draft data can be
captured electronically and sent to be processed over the phone lines. Also see Electronic Data Capture.
Secure Payment Gateway:
Secure Payment Gateway companies help other Processors conduct secure business on the internet using
Secure Socket Layer (SSL) technology.
Credit Card Processing Glossary
-They provide a system that passes credit card data, authorization requests, and authorization responses
over the internet using encryption technology.
-The transaction information is sent by the Payment Gateway secure server via leased line to the credit
card network where the validity of the card is checked and the availability of funds on that account is
verified. An authorization code is returned via leased line to the Payment Gateway; the authorization is
encrypted by the Payment Gateway and transmitted in encrypted form to the web server of the merchant,
which triggers fulfillment of the order.
-Rather than try and create their own Secure Web System, many Banks and Bank/Processor alliances will
use a Secure Payment Gateway Provider to perform this task for them.
Secure Payment Software/Software Module/Payment Module:
-In order to conduct secure business on the web, the Secure Gateway Provider runs a Secure Host
System, and sells/licenses software modules that allow Shopping Carts and other applications to request
and receive Credit Card Authorizations via their system using encrypted communications. (This is called
Real Time Authorization.)
-The other features of this licensed software are the functions provided to merchants online when they
connect to the Secure Payment Gateway host; merchant can access their own account information, use a
“Virtual Terminal” to conduct transactions, handle administrative tasks, etc. (These features all “live” on
the provider’s Host computer system.)
Settlement:
The process of sending a merchant's batch to the network for processing and payment. For
non-bankcards, the issuer pays the merchant directly (less applicable fees) and then bills the cardholder.
For bankcards, the acquirer pays the merchant (less applicable fees) with funds from Visa/MasterCard.
The bankcard issuer then bills the cardholder for the amount of the sale. Also see Capture.
Shopping Cart Software:
-These applications typically provide a means of capturing a client’s Credit Card information, but they
rely on the Software Module of the Secure Gateway Provider, in conjunction with the Secure Payment
Gateway, in order to conduct secure Credit Card transactions online.
-Any given shopping cart can work with any given Secure Gateway Provider, the only requirement being
that some computer code be written or provided to communicate with the Secure Gateway of choice, and
that this code be integrated into the Shopping Cart Application.
Shopping Cart Software Providers:
Shopping Cart Software Providers are software companies that either produce, utilize or resell Shopping
Cart Applications (programs) that display merchandise and/or services, and take orders for merchants.
Credit Card Processing Glossary
Signature Capture
Electronic capturing of the cardholder's signature is becoming a powerful tool for charge back defense.
At the point of sale, the customer is asked to sign the invoice, folio, or charge slip over a special digital
device that turns the signature into a manageable set of digital events so that a program can reproduce the
signature faithfully. A capture of the swipe and an electronic signature at the point of sale virtually
assures that the customer and card were physically there and an authorization was obtained for the
purchase of goods and/or services. A database maintains the signature in an encrypted form to be
reproduced when requested for retrieval requests.
Smart card: A credit-type card that electronically stores account information in the card itself.
Setup Fees
The initial costs that are incurred by a merchant in the process of establishing a merchant account with an acquiring bank
or other merchant services provider, including application fees, software licensing fees and equipment purchases.
Swipe Discount Rate
The lower discount rate that is charged by an acquiring bank or merchant services provider for any transactions
that occur during which both the credit card and the cardholder's signature are available for visual inspection by
the merchant.
Terminal: Equipment used to capture, transmit and store credit card transactions.
Terminal Software:
Programming that determines the characteristics and features of the terminal.
Smart card:
A payment card that electronically stores account information utilizing chip technology rather than a
magnetic stripe.
Software: A POS Terminal Application or PC or Internet Application that runs transactions and
associated administration.
Sponsoring Bank:
A Sponsoring Bank is a Chartered Bank or S & L that has obtained membership in Visa or Master Card
in order to allow a Processor access to the Visa and Master Card networks ( in order to process these
types of transactions).
-Since only a Bank may join Visa or Master Card, many Processors make deals with a Sponsoring Bank
in order to gain access to the Visa and Master Card networks.
Credit Card Processing Glossary
-Because these Sponsoring agreements are usually like a partnership, the line between the Sponsoring
Banks and their Processors is not always clear; sometimes the partnership is referred to by the name of
the bank, while other times they are referred to by the name of the Processor.
T & E cards:
Credit or charge card used by businesses for travel and entertainment expenses. Examples of these cards
are American Express, Diners Club, Carte Blanche and JCB. Also see Corporate Cards.
Terminal:
Equipment used to capture, transmit and store credit card transactions.
Terminal Identification Number (TID):
A unique number assigned to each POS terminal.
Third-Party Processor:
A Third Party Processor is an independent processor that is contracted with by a Bank or Processor to
conduct some part of the transaction processing process.
-Some of these Third Party Processors specialize in running and hosting networks of Point Of Sale (POS)
terminals connected to their Host via dial out modem; they produce the software in the POS terminals as
well as in their host, and route authorization requests to Visa or Master Card as needed (MAPP, MDI,
FDR, for example).
-Other Third Party Processors specialize in the Settlement of credit card transactions with Visa and
Master Card so that merchants can be paid (FDR for example).
-In the world of Internet Credit Card Processing, the Secure Payment Gateway Provider is another type
of Third Party Processor.
Third Party Secure Payment Gateway:
In this model, the Third Party Secure Payment Gateway's server-computers have to provide a connection
between the merchant's web site and the Visa/MC (or Check) Merchant Processor. This is done via
telephone (or leased land line). The Merchant Processor will receive the transaction through it's
non-internet modem bank, and then send the transaction through it's direct connection to the Card
Network (like Visa) for approval., The Merchant Processor returns a response via land line to the Secure
Payment Gateway, which encrypts the message and transmits it over the web back to the originating
secure web site host. The Third Party Secure Payment Gateway is a different company than the
Merchant Processor, and has it's own fees that are separate from any Merchant Processing fees.
Examples of these are Cybercash and Authorize.net.
-Rather than try and create their own Secure Web System, many Banks and Bank/Processor alliances will
Credit Card Processing Glossary
use a Secure Payment Gateway Provider to perform this task for them.
Transaction Fee
The pre-determined and customary charge that is incurred for each individual credit card transaction a merchant processes,
and collected by the merchant account provider or the ISO.
Value Added Reseller (VAR):
Third-party vendor that enhances or modifies existing hardware or software, adding value to the services provided by the
processor or acquirer.
AVS (Address Verification System)
A fraud prevention feature built into most credit card transaction processing equipment that runs an automatic check in
order to verify that the billing address given by the customer matches the billing address for the credit card that is
presented for payment.
Bankcard
A piece of plastic with a magnetic strip, more commonly known as a "credit card", that is used by the holder to leverage a
pre-established line of credit with a bank, and is widely accepted as payment for goods and services by merchants
operating under a standard set of rules for the authorization of its use and for the settlement of all transactions.
Batch
A merchant's collection of credit card transactions over a period of time, usually one full day, that are saved for submission
to the acquiring bank all at once, usually at the end of each day. Batch fees are charged by acquiring banks as a way of
encouraging merchants to submit transactions in a group, rather than one at a time throughout the day.
Capture
The submission of a customer's credit card transaction information to the merchant account provider or the credit card
processor, through the use of a POS (point of sale) device or by way of real-time transaction processing software, for
settlement.
Cardholder
The person or company with an active credit card account that enables them to leverage a pre-established line of credit
with a bank, and by which transactions for purchases can be processed.
Card Issuer
The financial institution that establishes a line of credit with a cardholder and issues the credit card that is used for the
purchase of good and services.
Chargeback
An amount that is charged by the acquiring bank and deducted from a merchant account for any transactions that are
successfully disputed by a credit card holder as being unauthorized or fraudulent.
Credit
More commonly referred to as a "refund", this is a transaction initiated by the acquiring bank that transfers money out of
the merchant account and back into the credit card holder's account.
Debit Card
A financial instrument that resembles a credit card in appearance, but is used by consumers in place of cash. Unlike a
credit card, all debit card purchases are deducted automatically from the cardholder's bank account, much like a check.
Discount Rate
A percentage-based fee, usually falling somewhere between two and ten percent, that is paid to the acquiring bank or ISO
for the time and expense involved in the handling of any electronic transaction.
EDC (Electronic Data Capture)
The use of a POS terminal for submitting credit card transactions to an acquiring bank or to any other credit card
processor. For online credit card processing or for orders that are phoned in, proprietary software takes the place of the
POS terminal.
Credit Card Processing Glossary
Gateway
A computer-based application that takes the transactions from online merchant storefronts and then routes them to a
financial institution's processing system.
ISO (Independent Sales Organization)
A firm or an organization that enables a merchant to process online payments or other credit card transactions, usually in
exchange for transaction fees or for a percentage of the total sales.
Issuing bank
The bank that maintains the consumer's credit card account and must pay out to the merchant's account in a credit card
purchase. The issuing bank then bills the customer for the debt.
Merchant Account
A specialized bank account established between a merchant and a financial institution in order to process credit card
purchases. By establishing a merchant account, the financial institution agrees to pay the merchant for valid credit card
purchases in exchange for the right to collect on the debt owed by the consumer.
Merchant Bank
A financial institution that provides credit card processing accounts for merchants. Also referred to as an acquiring bank or
an acquirer, the bank receives funds from a cardholder when a credit card transaction is completed, and then deposits the
payment amount, less any fees, into the merchant's business checking account.
MO/TO
Mail order and telephone order. A high risk type of merchant account with a unique set of rules that are much more
restrictive than the rules that govern retail merchants, because this type of account allows a merchant to accept credit card
payment without the cardholder's signature.
POS (Point of Sale) Terminal
An electronic device used for verifying and processing credit card transactions. If the credit card is available, the merchant
can swipe the card through the terminal, or the card numbers can be manually keyed in.
Recurring Fees
Regular, most often monthly, charges that are incurred when maintaining an active merchant account. Recurring fees
include the discount rate, transaction fees, statement fees, and the monthly minimum.
Real-Time Authorization
The authorization or approval of a credit card transaction at the same time that the customer is making the purchase, with
no delays for the processing of data.
Real-time Processing
The immediate verification and processing of a credit card transaction following a purchase made by the customer, usually
taking less than five minutes before the purchase is finalized.
Reserve Account
A portion of the revenue generated from a merchant's credit card transactions, which is held in reserve by the acquiring
bank to cover possible future disputed charges, fees and other expenses. After a predetermined time, reserves are released
from these accounts and deposited into the merchant's checking account, usually with no interest accumulated.
Representment
A follow-up transaction originated by the merchant in order to recover funds that were previously charged back to the
merchant, by the card holder and/or the card issuer, as being unauthorized or fraudulent.
SET (Secure Electronic Transaction)
A standardized global security protocol, being developed by the credit card companies and several major banks for online
credit card purchases, that combines 1,024-bit encryption with digital certificates.
Settlement
The process of completing all necessary funds transfers so that the merchant involved in a credit card transaction is paid
Credit Card Processing Glossary
for their goods or services.
Ticket Size
The actual monetary value of the goods or services purchased in a single credit card transaction.
Credit Card Processing Glossary