Acquiring Bank – This is also known as the “Merchant Bank”.  It’s the financial institution that is directly responsible for depositing funds into its merchants’ bank accounts.  The acquiring bank usually withholds fees and interchange from the deposit amount, so a $100 transaction processed by a merchant may result in a deposit of about $98 from the acquiring bank.

Address Verification System – Also known as “AVS”, is a method utilized by merchants to confirm cardholder information and is a tool used in card-not-present environments to prevent fraud.  The idea is that if the person presenting the credit card information for payment cannot confirm the billing address associated with the credit card account, the authorization will be declined.  The only problem is that many times, along with stolen credit cards are stolen driver’s licenses, which often contains the information AVS tries to verify.

Authorization – The term “authorization” is used to identify the process by which a credit card is accepted or declined at the point of sale.  The process is slightly different depending on the type of merchant:

MOTO Accounts (Mail Order Telephone Order)

• The cardholder’s information should first be verified.  MOTO transactions occur without the credit card or cardholder present.  This type of environment makes credit card fraud a big concern for the banks.  If the cardholder’s information cannot be verified, the transaction should be declined and no further action taken.
• If the cardholder passes AVS, the cardholder’s bank comes back and either says “Yes, this person has enough available credit to make the purchase” or “No, there is not enough available credit”.  Depending on the response from the cardholder’s bank, the transaction will be processed or declined.

Lodging

• A request for authorization is first made for the “check in amount”.  This amount is determined by the room requested and the length of the stay.
• If the first authorization is approved, during the course of the customer’s stay, the merchant may charge the customer for incremental expenses (such as room service, Wi-Fi, etc.).  If the total amount of those incremental expenses are under the authorization “ceiling” they will be covered by the first authorization code.
• When the customer is ready to check out, one final authorization is made to make sure the merchant is covered.  These transactions are considered “authorization only” until the customer checks out, at which point the merchant will actually bill for the authorized amount(s).

Restaurant

• When a restaurant runs an authorization, they do so for the total amount of the check (not including tips).  If the authorization is approved, the customer will sign the receipt and (usually) add a tip to the authorization amount.
• If the tip amount is within 10% – 15% of the authorization amount, the existing authorization code will cover the transaction.  Otherwise, an additional authorization will have to be obtained prior to settlement.

Retail

• For retail transactions, the transaction can be immediately settled upon authorization.  The credit card and the cardholder are both present and a signature is obtained upon authorization.

Bank Identification Number – This is an identification number assigned to banks.  It consists of two parts and it identifies the location of the bank, the bank itself and the card type issued.

Brand – The card “brand” refers to the type of card (Visa, MaterCard, Amex, Discover, etc.).

Card Associations – The term “card associations” refer to organizations such as Visa and MasterCard.  Along with federal regulators, they make the rules relating to the acceptance of credit card transactions, including what is known as “interchange fees”.

Cardholder – The cardholder is the person authorized to use a credit card as a form of payment for goods and services.

Cardholder Verification Value – Also known as “CVV2″, it’s the 3 or 4 digit security code printed on the back of every credit card.  It’s used to verify authenticity, especially in MOTO or Internet environments.  ”CVV1″ refers to the magnetic strip on the back of the credit card, and is primarily used to verify authenticity in a card-present environment.

Chargeback Defense – All credit card issuing banks have a duty to protect its cardholders from charges made where authorization was not obtained or the product or service was not provided.  When a cardholder disputes a charge for these reasons, it’s called a “chargeback”.  When a chargeback occurs, the merchant bank will notify the merchant and give them a chance to validate the transaction.  This is usually done by providing a copy of the invoice, the signed receipt, proof of shipping or some other form of validation.

Compliance – Compliance refers to the regulations enforced by the Card Associations designed to protect cardholder data and prevent fraud.

Debit Network – Debit networks send transaction data between merchant banks and debit card issuers directly.  There are a number of different debit networks.  Some of more commonly known ones include STAR, NYCE and MAESTRO.

Discount Rate – The discount rate refers to the fees paid by a merchant to a merchant bank for their merchant services.  It usually consists of a percentage paid based on volume as well as a fixed transaction fee per item.

Effective Rate – No matter what rates a merchant is quoted, or what a merchant thinks they are paying for transactions, it’s easy to calculate their effective rate.  Just take the total amount paid in a given month and divide it by the total amount processed.  The effective rate takes into account the discount rate quoted plus additional fees that get charged including transaction fees, recurring monthly fees, etc.  When trying to calculate your effective rate, be careful because some statements are misleading about the total amount of the fees.  Some processors list fees relating to the previous month’s processing activity, other processors will list the amount debited from the merchant’s bank account (so any fees withheld during the course of the month would have to be added in).

Interchange – Interchange is the cost of processing a credit card transaction, and is defined by the Card Associations (Visa, MasterCard and Discover).  There are over a hundred different interchange categories that a transaction can fall into.  Which category a particular transaction falls into depends on a number of things, including the type of industry (restaurant, gas station, etc.), the type of card that is used (rewards card, business card, etc.), the method by which the card information is captured (swiped, keyed with an imprint, over the phone, via the internet, etc.) and the timeline between when the authorization is obtained and when the transaction is settled.  Interchange is paid by the Acquiring Bank to the cardholder’s Issuing Bank.  Generally, it’s passed through to the merchant, plus a markup.  The markup covers the cost of the Acquirer’s / Processor’s operations.

Issuing Bank – The term “Issuing Bank” refers to the bank that issues the cardholder’s credit card.  This is the bank that’s listed on the front of your credit card.  Some common issuers would include Bank of America, Capital One, or HSBC, or American Express.  Some big retailers even act as the issuing bank for their own credit card.  For example, if you have a Macy’s Visa card, Macy’s is the issuing bank.  It’s also not uncommon for a bank to be both an issuer and a processor or acquirer.

Match List or TMF List – Match stands for “Member Alert to Control High-Risk”, and TMF stands for “Terminated Merchant File”.  It’s a database of merchants and individuals whose merchant accounts have been terminated for cause.  It’s collectively updated and shared by credit card processors.

Merchant ID Number – Also called a MID.  This is an identification number or account number maintained by credit card processors.

Merchant Service Provider – An MSP is the entity that negotiates and quotes merchant fees with the merchant, and facilitates the setup with Front-End and Back-End processors to ensure that the funds are correctly routed to the proper bank account when transactions are settled.  An MSP can be an independent organization, who’s responsible for reselling services on behalf of certain credit card processors.

Processor – The processor is the entity that handles credit card transactions for Merchant Banks.  There are two kinds of processors:  Front-End and Back-End processors.  Front-End processors handle authorization and settlement for the merchant.  They do this through connections to the Card Associations’ networks.  These same connections to the Card Associations are also where transactions are identified according to the interchange category they qualify for.  Back-End processors use the Federal Reserve Bank to transfer funds between the Issuing Banks and the Merchant Banks.

Settlement – Settlement is the process  by which authorized transactions are sent to the Front-End processor to be forwarded to the Merchant Bank or Back-End processor.  From there, the transactions are forwarded to the FED to facilitate the payment from the Issuing Bank to the Merchant Bank.