The world of credit card payment processing can be confusing. Processes can be complex, several players and entities may be involved, and the terminology isn’t exactly self-explanatory. For this reason, small businesses accepting payments should educate themselves on the ins and outs of how credit card payment processing works. Doing so will ensure that you stay compliant and can avoid getting overcharged.
Understanding credit card processing is indispensable for small business owners. The landscape demands awareness—from payment solution and processing services intricacies to regulatory compliance.
This comprehensive guide bridges the gap, equipping merchants with the knowledge to navigate the complexities of credit card payment processing confidently and mitigate potential pitfalls. We’re not suggesting that you get a PhD-like education in payments, but you should at least brush up on the basic terms used by industry players.
If you haven’t done that lately (or at all), take a look at the 80 terms below and familiarize yourself with their definitions.
Account Number
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 or credit card processing company (Mastercard, Visa, etc.).
Acquiring Bank
Sometimes referred to as the “merchant account provider,” “merchant services provider,” or “merchant’s bank,” this is the bank, credit union, or financial institution that creates and maintains your merchant account or business bank account (e.g., Chase, Bank of America, etc.).
Affinity Card
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 may or may not pass that cost on to the cardholder.
Annual Fee
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
Assessments are the fees that card brands charge to the acquiring bank. These fees exist to maintain the Interchange system.
Authorization
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.
Batch
A batch describes an accumulation of transactions (sales) waiting to be settled. Throughout the course of one day, numerous batches may be settled.
Biometric Authentication
Biometric authentication utilizes unique physiological or behavioral characteristics, such as fingerprints, iris patterns, or facial features, to verify an individual’s identity. By leveraging biometric data, payment systems can enhance security and streamline authentication processes, offering a seamless and secure user experience.
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.
Card Networks
Sometimes referred to as card associations, these are essentially the credit card brands—Visa, Mastercard, Discover, etc.
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 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 calculated from the data encoded on the magnetic stripe on the card and is used to validate card information during authorization.
Chargeback
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.
Chargeback Ratio
It is a metric that measures the frequency of chargebacks relative to the total number of transactions a merchant processes in-person and online. It is calculated by dividing the number of chargebacks by the total number of transactions and is used to assess a merchant’s risk of fraudulent activity or customer disputes.
READ ALSO: Credit Card Chargeback Merchant Rights: Everything You Need to Know to Protect Your Business
Check Digit
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.
Chip Card
A chip card (or EMV card) features an embedded microchip that enhances security during transactions. Unlike traditional magnetic stripe cards, chip cards generate unique transaction codes, reducing the risk of counterfeit fraud. This technology is widely adopted globally to safeguard cardholder data and prevent unauthorized use.
Co-Branded Card
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
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.
Contactless Payments
Contactless payment options allow users to complete transactions quickly and securely by simply tapping or waving their enabled card, wearable, or mobile device near a contactless-enabled POS system or terminal. This convenient payment method enhances efficiency and reduces physical contact during transactions.
Credit Card Processing
The electronic authorization, verification, and settlement of credit and debit card transactions between merchants and financial institutions is known as credit card processing. It involves multiple steps, including card authorization, capturing transaction details, encrypting sensitive data, and transferring funds securely, ensuring seamless and secure payment processing for businesses and consumers alike.
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. They earn revenue by charging credit card processing fees to merchants (such as yourself) for their services.
Credit Line
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.
Credit Report
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.
Credit Score
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.
Debt Consolidation
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.
Deferred Interest
Interest that accumulates on a credit account during a holding period but is not paid until a later date is called Deferred Interest.
Digital Wallet
A Digital Wallet describes software or an app that stores information for multiple credit cards and allows you to make purchases. Examples include Google Pay, Apple Pay, and PayPal.
Disputes
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.
Electronic Funds Transfer (EFT)
Electronic Funds Transfer (EFT) is a digital method of transferring funds from one bank account to another through electronic means, such as online banking, mobile banking apps, or automated clearing house (ACH) transactions. It enables individuals and businesses to send and receive money securely and efficiently without the need for paper-based transactions.
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
Encryption is a security measure that involves scrambling data automatically before transmitting it, in an effort to prevent fraud.
Finance Charge
The total cost, in a dollar amount, of borrowing credit that includes interest in fees is called a Finance Charge.
Forbearance
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.
Good Funds
Good funds refer to funds that are readily available and accessible for immediate use without any risk of reversal or insufficient funds. In credit card processing, good funds indicate successful and finalized transactions.
Guarantee of Payment
This is a contractual agreement between a merchant and a payment processor or acquiring bank, ensuring that funds will be provided for authorized credit card transactions. It assures the merchant that they will receive payment for valid transactions, reducing the risk of non-payment or chargebacks.
Grace Period
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.
High-Risk Merchant
A high-risk merchant is a business likely to pose an elevated financial risk to payment processors due to factors such as high chargeback rates, industry regulations, or a history of fraudulent activity.
Hold (Authorization Hold)
An authorization hold, commonly known as a hold, is a temporary deduction of funds from a cardholder’s available credit limit or bank account to secure payment for a pending transaction, ensuring sufficient funds are available upon settlement.
Interchange
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.
Interchange Fee
This is a per-transaction fee that the acquiring bank pays to the issuing bank for processing credit and debit card transactions. Interchange rates are set by card networks like Visa and Mastercard, to cover operational costs and incentivize card issuers. Interchange fees typically amount to a percentage of the transaction value plus a flat fee.
Introductory Rate
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.
Issuing Bank
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
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.
Merchant Account Provider
A Merchant Account Provider is a financial institution or a provider of merchant services that enables businesses to accept credit and debit card payments by facilitating the creation and maintenance of merchant accounts. These accounts allow merchants to securely process electronic payments from customers, typically through point-of-sale terminals or online payment gateways.
Merchant account providers manage transactions, facilitate fund transfers between acquiring and issuing banks, and may offer additional services such as fraud prevention and payment processing analytics.
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.
READ ALSO: Merchant ID: What It Is and Why It Matters for Your Business
Minimum Payment
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.
Non-Compliance Fee
A non-compliance fee is charged to merchants who fail to meet the regulatory standards or industry requirements set forth by card networks or payment processors. This fee serves as a penalty for non-compliance and encourages adherence to established guidelines.
Network Fee
A network fee is a charge imposed by card networks, such as Mastercard or American Express, for processing transactions through their payment infrastructure. It covers the costs associated with transaction authorization, settlement, and network maintenance.
On-Demand Payment
An on-demand payment refers to a transaction initiated by a customer to make an immediate payment for goods or services rendered. It typically involves the use of a credit or debit card to authorize and process the payment instantly, providing convenience and flexibility to both merchants and consumers.
Over-the-Limit Fee
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.
Payment Gateway
A Payment Gateway is a technology platform that facilitates secure online transactions by transmitting payment data between merchants, customers, and financial institutions. It encrypts sensitive information, such as credit card details, ensuring safe transmission over the internet. Payment gateways authenticate transactions in real-time, authorizing or declining payments based on factors like card validity and available funds. They play a crucial role in enabling eCommerce businesses or online stores to accept electronic payments securely.
PCI Compliance
PCI Compliance refers to adhering to the Payment Card Industry Data Security Standard (PCI DSS), a set of security protocols established to protect sensitive cardholder data during credit card transactions. Compliance involves implementing robust security measures, such as encryption, access controls, and regular network monitoring, to prevent data breaches and ensure the secure handling of payment information.
Penalty APR
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.
Point-of-Sale (POS)
At the point of sale (POS), transactions reach their culmination, as customers finalize purchases and merchants process payments. Whether in physical stores or online platforms, the POS serves as the pivotal moment where goods or services are exchanged for payment, marking the completion of a transaction.
Recurring Payment
This is a preauthorized transaction arrangement where a cardholder authorizes a merchant to charge their credit or debit card at regular intervals (unlike one-time payments) for ongoing goods or services, such as subscriptions or memberships.
Representment
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.
Routing Number
A “routing transit number (RTN),” an “ABA routing number,” or simply a “routing number” is a code consisting of nine digits. Financial institutions in the US use it to identify the specific credit union or bank involved in a transaction’s routing process.
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.
Settlement
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.
Settlement Date
The Settlement Date refers to the day when funds from credit card transactions are transferred from the acquiring bank (merchant’s bank) to the merchant’s account. It marks the completion of the transaction process, ensuring merchants receive payment for goods or services rendered. Settlement dates typically occur within a few business days after the transaction takes place.
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.
Terminal Identification Number (TID)
TID is a unique alphanumeric code assigned to each point-of-sale (POS) terminal used by merchants to process credit and debit card transactions. It serves as a means of identifying and distinguishing individual terminals within a merchant’s network, facilitating transaction tracking, troubleshooting, and operational management for payment processing purposes.
Termination Fee
A Termination Fee is a charge imposed by a payment processor or merchant account provider when a merchant terminates their contract or agreement before its designated end date. This fee is typically levied to cover administrative costs or losses incurred by the provider due to the premature termination of the relationship.
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
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.
READ ALSO: The Ultimate Guide to Credit Card Tokenization for Small Businesses
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.
Velocity Limit
Velocity limit refers to the maximum number of transactions or dollar amount allowed within a specific time frame, typically set by payment processors or financial institutions to mitigate the risk of fraudulent activity or unauthorized usage of credit cards.
Virtual Terminal
A Virtual Terminal is an online interface provided by payment processors that enables merchants to manually enter and process credit card transactions. It allows businesses to accept payments without requiring physical card readers, making it ideal for eCommerce, mail order, or telephone order transactions.
These terms will help get you started with payment processing, but to learn more about how you can reduce your processing costs with interchange-plus pricing and improve the checkout experience, contact Payment Depot today.
FAQs about Credit Card Payment Processing
Q: How does the credit card payment process work?
The process starts with the cardholder making a payment either by tapping, dipping, or swiping their card at a payment terminal. A payment gateway securely captures and transmits the payment info to the payment processor. The processor, in turn, routes the request to the relevant card network which then forwards it to the appropriate issuing bank for authorization.
The issuing bank then conducts its due diligence, based on which it approves or declines the transaction. The card network relays this info to the processor which then sends an appropriate response to the payment gateway. If approved, the sale is completed, and funds are transferred from the customer’s issuing bank to the merchant’s acquiring bank.
Q: How long does it take for a credit card payment to process?
In general, credit card payments are processed in one or two business days. However, the exact duration may vary by card-issuing bank.
Q: What is the cost of credit card payment processing?
There are three main components of credit card processing fees—interchange and assessment fees (set by card networks/issuing banks and meant for covering operational costs), and payment processor fees.
Several factors affect the cost of credit card payment processing including the type of card used, type of transaction (in-person or online), payment processor fees and pricing model (flat-rate, tiered, interchange-plus, etc.). Typically, processing fees vary between 1.5% and 3.5% of the transaction amount.
Q: Who pays for credit card processing?
Merchants are responsible for covering the cost of credit card processing. However, in many US states, merchants can choose to pass on credit card processing fees to customers by levying a surcharge or convenience fee. Always make sure to check your state and federal laws before implementing surcharging at your business.
Q: What is free credit card payment processing?
Free, zero-cost, zero-fee, or no-fee credit card processing are all different names for surcharging. Essentially, this means that the merchant will add a markup to the total transaction amount at checkout (aka surcharge fee) to cover the cost of credit card processing.
