Merchant Account Glossary
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 Financial Institution:
An acquiring financial institution (or "acquirer") contracts
with the bank and merchants to enable credit card transactions.
The acquirer deposits the daily credit card totals and debits the
end-of-month processing fees from the merchants' accounts.
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.
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.
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.
An issuing financial institution's electronic message reply to an
authorization request, which may include:
Approval -- transaction was approved
Decline -- transaction was not approved
Call Center -- response pending more information, merchant must
call the toll-free authorization phone number.
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.
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
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.
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
The accumulation of captured credit card transactions in the merchant's
terminal or POS awaiting settlement.
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
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.
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.
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.
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
Charge card designed for business-related expenses, such as travel
and entertainment. Please see Commercial Card.
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
This is the merchants Demand Deposit Account, otherwise known as
the merchant's home town bank account.
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.
The percentage of sales amounts that the bankcard acquirer or T&E
card issuer charges the merchant for the settlement of the transactions.
The rejection of a sales draft by Visa or MasterCard before a transaction
processes through interchange, but after it has been paid by the
Electronic Cash Register (ECR):
A device used for cash sales. Can also be integrated to accept credit
Electronic Date Capture (EDC):
Process of electronically authorizing, capturing and settling a
credit card transaction.
Private label credit cards designed mainly for repairs, maintenance
and fueling of business vehicles.
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.).
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.)
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.
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
Internet Service Provider (ISP):
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.
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.
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.
Network: Company and system used to authorize and capture credit
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
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.
Equipment used to capture, transmit and store credit card transactions
at the point of sale. Examples are Verifone terminals.
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
-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).
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.
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.
-They provide a system that passes credit card data, authorization
requests, and authorization responses over the internet using encryption
-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
-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.)
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.
Smart card: A credit-type card that
electronically stores account information in the card itself.
Terminal: Equipment used to capture,
transmit and store credit card transactions.
Programming that determines the characteristics and features of
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
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.
-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.
Equipment used to capture, transmit and store credit card transactions.
Terminal Identification Number (TID):
A unique number assigned to each POS terminal.
A Third Party Processor is an independent processor that is contracted
with by a Bank or Processor to conduct some part of the transaction
-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, Verisign
-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.
Value Added Reseller (VAR):
Third-party vendor that enhances or modifies existing hardware or
software, adding value to the services provided by the processor