Glossary of Merchant Service Related terms
A form of electronic payment. Automated Clearing House is
typically used to process high volumes of relatively small-dollar
payments for settlement within one or two business days. ACH
transactions are settled in a manner similar to the way checks are
settled: The clearinghouse takes all ACH files received daily from
its member banks, sorts them by the originating bank (the bank
where the check was cashed or deposited) and the paying bank (the
bank against which the check was drawn), totals the accounts, and
credits or debits appropriate accounts accordingly.
Acquiring Bank: A financial institution that contracts with
merchants to settle electronic transactions. The acquiring bank
provides the merchant with its credit card processing account.
This acquiring bank sends credit card and purchase information
from transactions to a credit card association (such as Visa and
MasterCard), which forwards it to the issuing bank.
Authorization: The process by which an issuing bank
approves the availability of funds for a credit card transaction
for a specific amount.
Bankcard Association: The Visa and MasterCard associations.
Batch Processing: A collection of credit card transactions
saved for submitting at one time, usually each day. Merchants who
do not have real-time verification systems must submit their
transactions manually through a POS terminal (Point Of Sale).
Batch fees are charged to encourage a merchant to submit his or
her transactions at one time, rather than throughout the day.
Chargeback: A payment dispute initiated by the cardholder
with their credit card issuing bank. The amount of the disputed
transaction is immediately withdrawn from the merchant's bank
account, and the merchant can dispute the chargeback with proof of
purchase, signature, proof of delivery, etc. A chargeback fee is
usually assessed to the merchant on top of the actual transaction.
Chargeback is usually generated when a cardholder disputes a
transaction because of one of the following criteria:
*Non fulfillment of product or Service
*Product/service expectations not met
*When a chargeback is generated, the issuing and acquiring banks
must research the facts to determine which party is responsible
for the transaction.
Debit Card: A bank issued card that allows its user to
access their funds for the purpose of paying for merchandise. A
debit card acts like a credit card, the difference being that
funds are immediately taken from the cardholders checking or
Discount Rate: A fee in percentage paid to the merchant
account provider or ISO for handling an electronic transaction.
E.F.T.: Much like ACH, the Electronic Fund Transfer is the
transfer of funds from one financial institution to another.
Interchange Rate: The rate that is set and charged by the
bankcard association to the acquiring banks for the transaction.
The interchange rate, which is actually a percentage of the
transaction amount, also helps account for authorization costs,
fraud and the general or average banks cost of funds.
I.S.O.: An Independent Sales organization is an
organization that provides a variety of merchant functions (i.e.
processing) on behalf of the acquirer. These functions can also
include selling new merchant accounts or providing backroom
services. An I.S.O. can also be referred to as an M.S.P. (Merchant
Service Provider). It is important that the acquirer must register
all ISOs/MSPs with bankcard associations.
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
Merchant Account: A bank account established by a merchant
to receive the proceeds of credit card purchases. By establishing
a merchant account, the merchant/acquiring bank 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 bank that holds a merchant account. After
a consumer buys a product using a credit card, the merchant bank
places funds into a merchant account in exchange for the right to
collect on the debt owed by a consumer. See also merchant account
Merchant Processing: The settlement of electronic payment
transactions for merchants. It is a separate and distinct business
line from credit card issuing. Merchant processing involves
gathering sales information from the merchant, collecting funds
from the issuing bank, and payment to the merchant.
Merchant Underwriting: Merchant underwriting & approval
policy helps control credit risk. The policy is effective in
designating and targeting merchants who meet the acquiring banks
processing criteria. The policy also acts as a an agreement
between the third party billing agent & the acquiring banks as
to what information is needed from the merchants to measure the
merchant against the acquiring desired list of criteria. The
policy also outlines and lists what information is needed from the
merchant, for the merchants agreement.
Merchant services provider: A bank, ISO, or other firm that
provides services for processing financial transactions, usually
credit card sales. Many MSPs provide merchant accounts, while
others require their clients to establish merchant accounts on
their own. Some MSPs claim that they do not require merchant
accounts; this may indicate factoring, which is illegal in many
MOTO discount rate (mail order / telephone order discount
rate): The discount rate charged by the merchant account
provider for credit card transaction in which the actual credit
card was not available to the merchant. MOTO discount rates are
generally higher than swipe discount rates to account for the
increased chance of fraud or nonpayment.
POS terminal (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
Real-time processing: The verification and processing of
credit card transactions immediately following a purchase.
Real-time verification on the Web usually takes less than five
minutes. Real-time verification is especially important for Web
sites that sell products and services that consumers expect
immediately, such as memberships to the site or software
Retrieval Request: A retrieval request is what happens when
a card holder cannot remember a credit card transaction, or the
bank wants order information for some reason. The card issuer
initiates a retrieval request, in which the merchant has 10 days
to respond with the order information or the retrieval request
will turn into a chargeback. There is usually a retrieval request
fee issued against the merchant also in these cases.
Risk: Until a few years ago, it was not as challenging to
obtain a merchant account as it is today. The Internet was new to
most banks and their underwriting departments had little
information in regards to the level of loss possible with internet
accounts. Coupled with the fact that a lot of operators of sites
were less then credible, made the mix volatile to say the least.
In the old days of merchant processing ( 3-4 years ago) a
acceptable level of chargebacks for most banks was 3-4% of your
monthly volume. Today, if your account reaches 1% of monthly
volume in chargebacks, you are in serious risk of losing that
Unfortunately most new merchants are even unaware of where the
risk factor enters into the picture, and do not understand such
basic concepts as personal guarantor, liability, etc. For the most
part, in a conventional merchant account. The signer, or guarantor
on a merchant account is liable for the processing volume. In our
scenario, we assume much of the risk, hench, the higher discount
points, and the need for high tech fraud control features which we
Rolling Reserve (a.k.a. hold back): A portion of the
revenue from a merchant's credit card transactions, held in
reserve by the merchant account provider to cover possible
disputed charges, chargeback fees, and other expenses. After a
predetermined time, holdbacks are turned over to the merchant.
Note: Merchant account providers almost never pay interest on
Settlement: The process by which funds less applicable fees
for bona fide sales are sent to merchants.
Shopping cart program: A software package that runs as part
of a Web site to collect and record purchasing decisions by a
visitor. Shopping cart programs are stored on Web servers.
Swipe discount rate: The discount rate charged by a
merchant account provider for transactions in which a credit card
is available. Swipe discount rates are generally lower than MOTO
discount rates because the merchant can match signatures and
perform other checks for fraud or misuse.
Third-party Organization: Any outside company with which
the acquirer contracts to provide merchant processing services.
Transaction fee: A charge for each credit card transaction,
collected by the merchant account provider or ISO Transaction fees
usually fall between $0.20 and $1 (U.S.).