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Definitions for the Payment Processing Industry

This post is out of date -- an updated payments glossary can be found here.

Industry definitions

Acquirer - the financial institution that processes credit card transactions. An acquirer is also normally interchangeably referred to as a Processor even though they are different.

ACH - (Automated Clearing House) A system of the U.S. Federal Reserve Bank that provides electronic funds transfer (EFT) between banks. It is used for all kinds of fund transfer transactions, including direct deposit of paychecks and monthly debits for routine payments to vendors. The ACH is separate and distinct from the various bank card networks that process credit card transactions. ACH operations are done in a batch mode, which can take up to 72 hours before the money is actually transmitted. A return notification is sent if there are insufficient funds in the account.

Authorization - The approval given from the customer's bank that a transaction has been approved. When a card is authorized, a unique code is generated for each specific transaction.

AVS (Address Verification System) -
In 1996, Visa/MasterCard started requiring businesses who manually key in credit card transactions to have a special fraud prevention feature on their credit card processing equipment. This feature is referred to as an address verification system (it checks to see that the billing address given by the customer matches the credit card).

Bankcard
-A debit or credit card issued by a bank or other financial institution, such as a MasterCard or Maestro card.

Batch - A submittal of transaction information to credit card Acquirer to be settled to the merchants bank account.

Capture
- The submission of a credit card transaction for processing and settlement.

Card Association
- a specific credit card company, e.g. Visa, MasterCard, American Express, Discover, JCB, etc.

Cardholder -The customer to whom a card has been issued or the individual authorized to use the card.

Chargeback
- A chargeback occurs when a card holder disputes a credit card transaction with his or her credit card issuer. The card issuer initiates a chargeback against the merchant account. The amount of the disputed transaction is immediately withdrawn from the merchant's bank account, and the merchant has 10 days in which to dispute the chargeback with proof of purchase, signature, proof of delivery, etc.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. See also retrieval request.

Chargeback defense
- A customer who does not receive his goods or services, or says he did not place an order, can ask his issuing bank to charge back the merchant. The Issuing Bank sends the chargeback request to the merchant bank, which forwards it to the merchant asking to validate the charge. Information such as the amount, an invoice, customer signature, or shipping documents, and the shipping address (used in AVS during the authorization) are needed to defend against a chargeback.

Clearing
- The process of exchanging financial transaction details between an acquirer and an issuer to facilitate posting of a cardholder's account and reconciliation of a customer's settlement position.

Co branded card
- A credit card issued jointly by a member bank and a merchant, bearing the "brand" of both.

Corporate card
- A bankcard issued to companies for use by company employees. The liability for abuse of the card typically rests with the company and not with the employee.

Credit card processors (or third-party processors)
- Merchant services providers that handle the details of processing credit card transactions between merchants, issuing banks, and merchant account providers. Web site operators usually must first establish their own merchant account before contracting for credit card processing services.

Currency conversion - The process by which the transaction currency is converted into the currency of settlement or the currency of the issuer for the purpose of facilitating transaction authorization, clearing and settlement reporting. The currency of transaction is determined by the acquirer; the currency of the issuer is the preferred currency used by the issuer, and most often, the currency in which the cardholder will be billed.

Debit card - A plastic card used to initiate a debit transaction. In general, these transactions are used primarily to purchase goods and services and to obtain cash, for which the cardholder's asset account is debited by the issuer.

Electronic draft capture (EDC)
- A system in which the transaction data is captured at the merchant location for processing and storage.

Electronic funds transfer (EFT)
- (also see ACH) A system of the U.S. Federal Reserve Bank that provides electronic funds transfer (EFT) between banks. It is used for all kinds of fund transfer transactions, including direct deposit of paychecks and monthly debits for routine payments to vendors. The ACH is separate and distinct from the various bank card networks that process credit card transactions. ACH operations are done in a batch mode, which can take up to 72 hours before the money is actually transmitted. A return notification is sent if there are insufficient funds in the account.

Interchange fee - The fee that the Card Association charges the merchant to get the funds into his bank (merchant bank) and to get the billing information to the cardholder's bank (issuing bank). Interchange fees are based on following credit card regulations and capturing appropriate data including card swipe, address, and electronic signature as needed. These fees are also based on the timeliness of the settlement of transactions.

Issuer - A financial institution that issues a credit card to a consumer or business.

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 - Any business that accepts credit card payments.

Payment gateway -  A payment gateway is software used to transfer payment information from the merchant to acquiring bank.

Purchasing card - Designed to help companies maintain control of purchases while reducing the administrative cost associated with authorizing, tracking, paying, and reconciling those purchases.

Processor
- A company who communicates with the issuing banks to authorize and settle complete credit card transactions.

Reserve account - 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 holdbacks.

Retrieval request - A retrieval request is what happens when a cardholder cannot remember a credit card transaction, or the bank wants to 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.

SSL (secure socket layer) - A system for encrypting data sent over the Internet, including e-commerce transactions and passwords. With SSL, client and server computers exchange public keys, allowing them to encode and decode their communication.

Settlement
- The process by which merchant and cardholder banks exchange financial data and value resulting from sales transactions, cash disbursements and merchandise credits.

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