Common Terms and Definitions
ABA Routing Number:
This is the unique, nine-digit number that appears on all checks. It is also known as the Transit Routing Number and it’s located next to the bank account number. The ABA routing number is used to identify which bank the account is located at. When you send a bank wire or ACH transaction, you need both the nine-digit number and the bank account number to indicate where the money is coming from.
ACH (Automated Clearing House):
Basically, it can be thought of as an electronic payment from one bank account to another. Another way to think of it is that it’s an electronic form of writing a check.
Average Ticket Size:
Refers to the average dollar amount for purchase transactions a business processes. This amount is typically higher than the average dollar amount for cash transactions. One of the data points used in assessing the level of risk associated with a specific account.
Authorization Response:
When a customer swipes/taps/dips their card for a transaction, the financial institution will respond with one of three responses.
- Approved – Transaction approved
- Declined – Transaction not approved
- Call Center – Response pending more information. Normally occurs if there’s a problem with a customer’s card. With this response, you would call the toll free authorization number
AVS (Address Verification Service:
This is required for all card-not-present (keyed) credit card transactions as a defense against fraud. It can also help reduce chargebacks by verifying the credit card information is associated with the correct address. The AVS response is provided by the issuing bank and results in either a match, partial match, no match, or AVS not available/error.
It’s highly recommended that if the credit card information doesn’t match the address information, you seek further information to determine if it is a valid, authorized transaction.
Basis Points:
Basis points are the percentage that you are charged on a credit card transaction. One basis point is equal to 1/100th of 1 percent.
Batch/Batch Processing:
A collection of transactions, usually a single day’s worth. It refers to the closing or settling of an entire batch of transactions at one time. If a batch isn’t closed, it can delay the funds being transferred to the business owner’s account.
Batch processing can either be manual or automatic. If manual, the company would need to initiate the batch process at the end of each day. Before the batch is settled, changes can be made, like adjusting tips in the restaurant business. In automatic batching, no external intervention is required. Instead, the software automatically runs the batch process at a specific time.
Automatic batching is preferred unless the need to modify transactions are common, like with the previous mentioned restaurant example.
Breach Security Coverage:
A value-added service that offers up to $100,000 in coverage to offset the costs of an actual or suspected data breach.
Capture:
The process of acquiring the account information needed for processing a payment, which can be done by swiping, dipping (inserting the card in the chip reader), tapping (bringing the card close enough to the reader to be read wirelessly), or by keying the information in manually.
Card Not Present (CNP):
A payment where the card is physically not present. This transaction type is most frequently done due to things like mail order, mail/telephone orders, or online orders. Can raise the associated risk level of an account.
Card Present:
This refers to when the cardholder and payment card are both physically present.
Chargebacks:
When a credit/debit transaction is disputed by a customer, either due to fraud or dissatisfaction with the remedies the business is offering to address the charge, a chargeback can be initiated by the credit card provider at the request of the customer. The funds are then held until a determination can be made. If they rule in favor of the customer, then the money is returned to the customer. If they rule in favor of the business, the funds are released to the business. Having too many chargebacks on a merchant account can affect what rates a company is charged (reaching a certain threshold can increase the rates a business pays per transaction) or can even cause the merchant account to be canceled outright.
You are given ten (10) days to dispute the chargeback with proof of purchase or delivery. The merchant account provider imposes a chargeback fee as part of the process.
Dual-Pricing:
Dual pricing is a payment method in which a business offers two different prices for the same product or service: one for customers paying with cash and another for customers paying by card.
The card price is usually higher because businesses pay fees to accept card payments. Dual pricing allows the business to recover some of those costs while giving customers a choice in how much they pay.
Example:
A store sells an item and clearly displays both prices:
- Cash price: $20.00
- Card price: $20.60
Customers can see both prices before making their purchase. Someone paying cash pays $20.00, while someone paying by card pays $20.60.
The important part of dual pricing is that both prices are clearly communicated before the sale, rather than surprising the customer with an additional fee at checkout.
Dual pricing must follow applicable laws and card-network rules. Simply calling a payment program “dual pricing” does not automatically make it compliant.
Interchange Plus Pricing:
Interchange-plus pricing is a method that payment processing companies use to determine how much a business pays to accept credit and debit cards.
Instead of charging one set processing rate for every transaction, the business pays the underlying card-processing costs plus an additional amount charged by its payment processor.
These charges generally have three parts:
- Interchange fee: Money paid to the bank that issued the customer’s card. (non-negotiable)
- Card-network fees: Charges from the card network, such as Visa or Mastercard. (non-negotiable)
- Processor markup: The amount the payment processor adds for providing its services. This is the “plus” in interchange-plus.
Example:
A customer pays $100 using a credit card. The business pays the applicable interchange fee, card-network fees, and its processor’s agreed-upon markup.
The total fee can change depending on the type of card used and how the payment is accepted.
Interchange-plus pricing allows businesses to see more clearly where their processing fees are going. However, it is not automatically the least expensive option, and additional account or service fees may apply.
Merchant Account:
A merchant account is what allows a business to accept credit and debit card payments from their customers.
MID (Merchant Identification Number): A unique identifier number that’s created for a merchant when their merchant account is initially set up.
Monthly Minimum:
The amount that a processor charges you if its discount rate, transaction fees, and other account fees do no collectively equal a predetermined amount that’s defined in your merchant processing agreement (MPA).
Monthly Processing Limit: The amount of money a merchant service provider will allow you to process each month before incurring additional fees.
Monthly Processing Volume:
The gross monthly payment card sales the business processes. This figure is specified in the merchant application, along with the average ticket size. This in part is used to help determine processing fees.
Over-Limit Fee: A fee charged by the processor when you exceed your predetermined processing volume.
Payment Aggregator:
A payment aggregator is a company that uses its own MID (Merchant Identification Number) to process credit card charges for others. Examples of payment aggregators would include Stripe®, Square®, and PayPal®. There’s no underwriting involved with getting an account, but there’s also the possibility the payment aggregator can hold funds or outright cancel the account without any prior warning. They also tend to charge a higher rate for transaction fees since they make money from the difference between their rates and the rates they charge the end user. They normally don’t assess monthly minimum processing fees.
Payment Gateway:
Software on a third-party provider’s server that handles the transmission between you and your processor that are required to complete an electronic transaction.
PCI-DSS:
PCI-DSS stands for Payment Card Industry Data Security Standards, a set of requirements established by the credit card networks to protect cardholder information and reduce the risk of data theft. The standards apply to you, merchant account providers, issuing banks, and the credit card networks. Meeting these requirements is known as being PCI compliant.
PCI Non-Validation Fee:
A fee charged to the business if you fail to return a PCI Compliance Validation Certificate, which can be obtained by completing and passing an annual Self-Assessment Questionnaire and/or Quarterly Network Scan.
Surcharging:
Surcharging is when a business adds an extra fee to a purchase because the customer chooses to pay with a credit card. Businesses typically use surcharging to help cover the fees they pay to accept credit cards.
Example:
A customer makes a $50.00 purchase. If the business applies an allowed 2% credit card surcharge:
- Original purchase: $50.00
- Credit card surcharge: $1.00
- Total: $51.00 before sales tax
Unlike dual pricing, which focuses on displaying separate cash and card prices, surcharging specifically refers to an additional charge for using a credit card.
There are important rules governing surcharging. Visa and Mastercard generally prohibit surcharges on debit and prepaid cards, even when a debit card is processed as credit. State laws also affect surcharging. For example, New York requires businesses to clearly display the complete credit card price before the customer makes a purchase. Simply posting a sign saying that an extra percentage will be added is not enough.