Credit Card Processing Dictionary: 57 Terms to Know When Dealing with Payments
The world of credit card processing can be confusing. The processes can be complex, there are several players and entities involved, and the terminology isn’t exactly self-explanatory. For this reason, any business dealing with payment process should educate themselves on the ins and outs of payment processing. Doing so will ensure that you stay compliant and you can avoid getting overcharged.
We’re not suggesting that you get a PhD-like education in payments, but you should at least brush on the basic terms used by industry players.
If you haven’t done that lately (or at all), take a look at the 57 terms below and familiarize yourself with their definitions.
A credit card account number is a unique number assigned to each credit card customer, and it is also the number embossed on the physical credit card. The first digit of the account number denotes the card network (Mastercard, Visa, et al).
Sometimes referred to as the “merchant account provider” or “merchant’s bank,” this is the bank, credit union, or financial institution that creates and maintains your merchant account (e.g., Chase, Bank of America, etc.)
An affinity card is a credit card issued with an organization or professional group, such as a professional association or retired persons group. These organizations often earn a royalty from the card issuer, who pay or may not pass that cost on to the card holder.
A credit card’s annual fee is the yearly cost associated with having a credit card, if the card issuer assesses a fee. This fee is separate from the interest rate on purchases.
APR (Annual Percentage Rate)
APR is the yearly percentage rate charged when a cardholder carries a balance on a credit card account. The APR is incurred each month when an outstanding balance exists.
Assessments are the fees that card brands charge to the acquiring bank. These fees exist the maintain the Interchange system.
The process of verifying that the cardholder has adequate available credit for the transaction in question is called authorization. If approved, an authorization code is generated and the cardholder’s available credit limit is reduced by the amount of the purchase.
Balance Transfer APR
The Balance Transfer APR is the amount applied as interest to any balance transfer a cardholder might make on their credit card account. This rate is usually the same as the purchase APR, but may vary depending on the card issuer.
Balance Transfer Fees
Balance Transfer Fees are any fees associated with transferring a balance from one credit card account to another. The fees typically range from 1% to 5% of the balance, but many credit card issuers do not charge this fee.
A batch describes an accumulation of transactions (sales) waiting to be settled. Throughout the course of one day, numerous batches may be settled.
Card Member Agreement
The Card Member Agreement outlines all the terms and conditions of a credit card account. This agreement is a federal requirement and acts as a binding agreement between card issuers and cardholders.
Sometimes referred to as card associations, these are essentially the credit card brands — Visa, Mastercard, Discover, etc.
A Chargeback occurs when a cardholder or the cardholder’s bank disputes a specific transaction. The merchant bank is then responsible for resolving the issue within a set amount of time, according to the rules of the card association.
A Check Digit is a single digit of the credit card account number that is the result of an algorithm applied to the remaining digits, and is used for error detection when credit card numbers have been entered manually.
A credit card embedded with a computer chip is also known as an integrated circuit card or simple a Chip Card. The chip holds memory that can be updated if necessary.
A credit card sponsored by the issuing bank along with a retail organization (like a department store or airline) is called a Co-Branded Card. Cardholders may be eligible for benefits from the sponsoring merchant, such as discounts or free merchandise, for using their credit card. ]
Compliance describes the process by which any of the parties in a payment transaction adhere to regulatory requirements applicable to that transaction, which include government regulations, card network regulations, bank regulations and others.
Credit card processor
The credit card processor is a third-party company that passes along cardholder information to the card network (primarily) as well as various other parties. Credit card processors earn revenue by charging merchants such as yourself for their services.
The amount of credit awarded to a cardholder, which is also the amount of money that can be charged to a credit card account, is known as the Credit Line. This is also known as the credit limit.
A Credit Report is produced by one or more of the credit bureaus and reports on credit history, credit inquiries, and payment history on all accounts belonging to a specific individual.
Also known as a FICO score, a Credit Score is a three digit number calculated by the credit bureaus that represents an individual’s credit standing. The credit score is produced using a formula that includes various weighted factors, such as income, outstanding credit lines, repayment history, and debt to income ratio.
Card Verification Code (CVC)
A CVC is a three digit number that appears on the back of a MasterCard card. The number is a unique value that is calculated from the data encoded on the magnetic stripe on the card, and is used to validate card information during authorization.
Card Verification Value (CVV)
A CVV is a three digit number that appears on the back of a VISA card. The number is a unique value that is calculated from the data encoded on the magnetic stripe on the card, and is used to validate card information during authorization.
With credit card debt, Debt Consolidation refers to the process of combining multiple lines of credit, often involving a balance transfer from several higher interest rate cards to a single card with a lower rate.
Interest that accumulates on a credit account during a holding period but is not paid until a later date is called Deferred Interest.
A Digital Wallet describes software or an app that stores information for multiple credit cards and allows you to make purchases. Examples include Google Wallet, Apple Pay, and Paypal.
When a cardholder makes a claim to the issuing bank questioning the validity of a charge, the claim is called a Dispute. This may stem from suspected credit fraud, and generally kicks off an investigation with the merchant that could lead to chargebacks.
EMV (Europay, MasterCard, and VISA)
EMV is a technology that uses microchips embedded in credit cards to prevent fraud at the point of sale.
Encryption is a security measure that involves scrambling data automatically before transmitting it, in an effort to prevent fraud.
The total cost, in a dollar amount, of borrowing credit that includes interest in fees is called a Finance Charge.
Forbearance is a temporary allowance a credit card company may grant to a cardholder to alleviate financial hardship for a specific period of time. This could involve postponing payments, removing or reducing fees, reducing minimum payments, and/or lowering interest rates.
Foreign Transaction Fee
When a credit card transaction is processed in foreign currency or simply processed outside of the United States, a Foreign Transaction Fee may be assessed.
The time during which a cardholder may pay their credit card bill without interest is known as the Grace Period. The Credit CARD Act of 2009 stipulates that, if offered, a grace period must be at least 21 days long.
Hard Credit Inquiry
A Hard Credit Inquiry or hard inquiry occurs when a credit card issuer or lender checks an individual’s credit report to determine whether or not to extend a loan or credit line. Hard inquiries lower an individual’s credit score and can remain on the credit report for up to two years.
Interchange refers to the systems operated by VISA and MasterCard, both domestic and international, that manage authorization, settlement and the passing through of interchange and other fees.
An Introductory Rate is a lower annual percentage rate (APR) that credit card companies sometimes offer for a temporary period as an incentive for enrollment. After the introductory period, the APR increases to a higher amount that is typically predetermined.
Independent Sales Organization (ISO)
An ISO is an entity affiliated with banks and/or payment processors. An ISO typically helps merchants find and set up their payment processing systems and some organizations provide additional services such as customer support and payment system maintenance. ISOs mainly work with Visa, while entities that work with MasterCard are called Member Service Providers or MSPs.
Also known as the cardholder’s bank, this entity is the bank or financial institution that granted the credit card account to the customer. During a transaction, the issuing bank pays the acquiring bank the sum in question.
Maintenance Fees may include an annual fee that is added to the balance on the card, as well as a setup charge or charges for additional cards associated with a single account. Not all credit card companies charge maintenance fees.
Member Service Providers (MSP)
An MSP is pretty much the same thing as an ISO (see description above). But instead of working with Visa, MSPs work with MasterCard.
Merchant Category Codes (MCC)
The Merchant Category Code or MCC for short is a 4-digit code assigned to your business by credit card networks (Visa, MC, Discover, Amex). Credit card networks use MCC codes to categorize your business, as well as to track or even restrict transactions.
MID (Merchant Identification Number)
Each merchant has a unique identifying number, called a MID, that identifies them to all other parties in the transaction processing chain. This number exists only for accounting and billing.
Each month, a credit card company designates the lowest payment that is due on a credit card statement, which is called a Minimum Payment.
Near Field Communication (NFC)
Used primarily in smartphones and other portable connected devices, NFC makes it possible to make purchases via wireless communication with a payment terminal.
When a cardholder’s balance exceeds the credit limit on their account, credit card companies often charge an Over-the-limit fee (and will decline additional transactions). The Credit CARD Act of 2009 protects cardholders against extremely high fees, and caps the fee at the amount a cardholder exceeds the limit.
Payment Card Industry Data Security Standards (PCI-DSS)
The payment card industry (PCI), which comprises credit, debit, prepaid and other payment card businesses, established a proprietary information security standard that all merchants and payment processors must meet. These standards are collectively known as PCI-DSS.
If a cardholder violates the terms of the card user agreement, the credit card company may raise the interest rate permanently, which is called Penalty APR.
POS is the location of the merchant in a credit card transaction, whether the cardholder is present or not.
In the chargeback process, Representment is the name for the second stage, in which the Acquirer returns a disputed transaction back to the issuer in response to the initial chargeback.
Secured Credit Cards
Often used by people with no or poor credit history, Secured Credit Cards require a cash deposit or another type of collateral in order to create a line of credit. Terms on secured credit cards vary by credit card company and can include hefty fees.
When a sales transaction completes the process of moving from merchant to acquiring bank to issuer, and the acquiring bank and issuer exchange funds or data, this is known as the Settlement of the sales ticket created by the purchase.
Soft Credit Inquiry
A Soft Credit Inquiry occurs when an individual’s credit report is checked as a background screening, in the “pre-approval” process of credit card offers, and when one requests their own credit report. A soft inquiry does not affect your credit score the way a Hard Credit Inquiry does.
Terms and Conditions
The document in which credit card issuers outline their practices and policies in detail is often called the Terms and Conditions. When a cardholder first uses a new credit card, the terms and conditions become a legal contract between the cardholder and the issuer.
Tokenization is a security measure that protects actual payment card numerical data by converting it with a unique token value. That token can be used for future transactions.
Unsecured Credit Cards
Unsecured Credit Cards do not require collateral like Secured Credit Cards do, and they are the most common type of credit card accounts.
Utilization Ratio (AKA Credit Utilization Ratio)
The percentage of a cardholder’s credit limit that is currently being used is called the Utilization Ratio. This factors heavily into the calculation of FICO scores.
Variable Interest Rate (AKA Floating Rate)
Most credit cards are also called variable-rate cards, because they carry a Variable Rate Interest, which is an APR that fluctuates in conjunction with another rate, called an index.