Guide To Payment Processing Terms
Perplexed by the occasional exotic payment processing term? Don't feel bad; there's no reason first-time online business proprietors would have previously come across concepts like "PCI compliance" or "interchange plus pricing." But now that you've stepped into the game, it's time to learn. Below you'll find easy-to-understand definitions for two dozen common payment processing terms.
Once you’ve got the language down, you’ll gain a better understanding of the flow of payments - how the funds go from your customer’s account to yours - and how you can get the right payment processing for your business’ needs.
Acquirer or Merchant Acquirer
In this sense, to “acquire” means to “accept” payments. So, an Acquirer is a banking partner for businesses. They take the risk that you’re going to be a trustworthy merchant (aka underwriting). Learn about payment processors.
When a customer submits a payment, the payment processor needs to validate (aka “authenticate”) that the payment data is being sent by its claimed source. Payment processor companies use this process as a best practice to curb fraud.
The first half of transaction processing, authorization is a request from the payment processor to the issuing bank to authorize a specific amount of funds from your customer’s credit or debit card.
A method used by the payment processor to process all the day’s transactions at once. The acquiring bank uses this to help drive operational efficiency for your business. In the online world, transactions are usually processed at the same time they’re authorized. Learn about how payments work.
Tip: Make sure you check with your processor regarding settlement - failure to settle transactions on a daily basis could result in higher fees.
Card Association or Credit Card Network
Companies, such as MasterCard® and Visa®, that set the rules and standards for processing transactions. See PCI Compliance.
This is a percentage of every sale that you pay to your acquiring bank for accepting consumer credit cards (like Visa®, MasterCard®, etc.). All applicable fees are bundled into a single percentage rate (aka “the discount rate”), which typically includes interchange, assessments, and processor fees. For example, if the discount rate is 2.5% on a sale of $100, the cost will be $2.50. Learn about processor fees.
Tip: Only work with payment service providers that are transparent about their fees. Types of payment structures that commonly exist include flat-fee/flat-rate pricing, percentage rates, and tiered-pricing.
A small accessory that you plug in to your mobile device to securely process in-store payments - either with a physical card or electronically. Once you’ve got your system all set up, it comes with other perks for your business, such as enabling your shoppers to find and check in with you on their phones and receive personalized offers.
The process where your customer’s personal information and payment processing transactional data is encoded to ensure secure transmission across the Internet.
Tip: Encryption is an important part of what’s known as PCI compliance. And keep in mind that not all payment processors are PCI compliant. This can lead to unexpected fees (and complications) for you, so it’s a good idea to choose one that can help with your PCI compliance needs.
A highly transparent pricing model where you pay the payment service provider a flat percentage on the transaction volume for all credit and debit cards. (This is generally preferred by merchants over other more complicated ways to pay for credit processing.) Learn more about PayPal’s Fees.
Interchange Plus Pricing
When your customers make a credit or debit card purchase, their bankcard association charges a percentage of the transaction - this is called an interchange rate, and it varies based on the card category. With the Interchange Plus Pricing, a fixed markup is added by your payment processor on top of that interchange fee. (This is also sometimes called “cost plus pricing.”)
Issuer or Issuing Bank
This is where credit and debit cards come from. An Issuer is any financial institution or company that issues physical cards to cardholders.
If you want to accept credit and debit cards, you need a Merchant Account, a special bank account set up between you and your acquiring (or merchant) bank. The bank is responsible for debiting the funds from your customer and depositing them into your account.
Tip: If you’re seeking a new merchant account, look for accounts with simple, straightforward fee structures (see “Flat-rate pricing”). That way, you can eliminate the guesswork in how much it will cost.
A Payment Gateway is the software that connects your website (or cash register) to the processing networks. When you process a credit card (or other form of electronic payment) the Payment Gateway securely authorizes cards and electronic payments by encrypting and protecting the customer’s sensitive information - like credit card numbers and other account information. Learn more about Payment Gateway.
A Payment Processor is the company that actually gets the work done. It is responsible for moving the transaction from point A to point B and back again. They handle the authorization and settlement, figure out how much to charge you for each transaction, and transfer the money from your customer’s bank to your merchant bank. You probably don’t (and won’t) need to know who your payment processor is, as their relationship is with your acquiring bank, not you directly.
If you want to take credit or any other electronic payment, you’ll need to follow the rules set by the payment card industry (PCI). PCI compliance is mandated by all card brands to protect and encrypt card information during and after a financial transaction. All organizations or merchants, regardless of size or number of transactions, are required to follow the rules to be PCI compliant if they accept, transmit, or store any cardholder data.
Tip: Some payment providers offer built-in features within their payment solutions that can help you reduce your PCI compliance workload - and make your life a lot easier. Be sure to ask your provider for details.
Most payment processors hold back a percentage of the transaction or a flat amount - and this amount is called a Reserve. It’s important to note that this is NOT a fee - it’s still your money. However, you cannot access it for a certain amount of time. Why do they do this? They need to ensure that you can meet liabilities that may incur from a chargeback, claim, or bank reversal. Reserves are a common industry practice and are used to create a safer shopping experience. Learn more about reserves.
Tip: The reserve limit is often set based on processing history or if the business/industry is deemed higher risk. So, it’s a good idea to talk with your payment processor and ask them to review the reserve limit on your business - in some cases they can lower or eliminate it.
The last step in card processing, settlement occurs when the card issuer sends the appropriate funds to your acquiring bank, which then deposits them into your merchant account.
This is a rate structure for fees you pay the payment processor for every card or electronic payment transaction. Rate structure criteria are based on a system of qualification. While it’s more complicated than this, there are generally three tiers (also called buckets):
- Qualified rate
This is sometimes called a card-swiped rate, since it is (usually) applied to a transaction where the merchant swipes the credit card through a terminal. Since the merchant can easily verify that the shopper is the owner of the credit card, the incidence of fraud is quite low - so, the rate is the lowest.
- Mid-qualified rate
This rate is usually applied when a merchant key-enters a customer’s credit card (in phone or mail order sales, for example). Since there is no physical credit card present, the risk is higher - and so the rate is also higher.7
- Non-qualified rate
Transactions that are processed without supplying the customer’s billing address are often downgraded to the non-qualified rate, which is not surprisingly the most expensive fee. E-commerce transactions fall into this category. Rewards cards and commercial card transactions do, too.
Tip: Beware: Most payment processors with tiered pricing may offer low “show rates” (aka “teaser rates”) to entice merchants. Also, since the rules for qualification vary from processor to processor, it’s virtually impossible to decipher which processor will give you the best overall rates. Perhaps the wisest thing you can do is to avoid a tiered-rate relationship altogether, in favor of a Fixed-Rate or Interchange Plus pricing plan.
Transaction Fee or Authorization Fee
This is a flat service fee (e.g., $0.30 per transaction), you pay the payment processor every time you send a customer’s card details to your payment gateway, regardless of the outcome. For example, a customer tries to buy something from you, but their card is declined. You, the merchant, still pay a transaction fee to cover the cost of the processor handling that transaction. Learn about processor fees.
Tip: There are almost as many transaction fees out there as there are transactions. When shopping around, be sure to look for payment providers that offer completely transparent fees and no hidden charges.
An online way to accept in-person payments. It’s the electronic equivalent of a physical point-of-sale terminal that retailers use to swipe cards. Instead, you manually enter the card information. Virtual terminals let you take your business on the road - all you need is an Internet connection. Learn more about Virtual Terminal.
Tip: Virtual Terminal processing usually comes with its own set of pricing. Be sure to check with your merchant service provider. Also, if you want to swipe credit cards using your mobile phone or tablet - and take advantage of lower, card-swiped rates - you can download an app and get a credit card reader (or dongle).
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