Payment processing is a series of actions that occurs once a business initiates a digital payment transaction. It facilitates the exchange of money between said business or merchant and its customers. To the customer or consumer, payments should feel simple. However, business owners and payments teams know the process is much more complex than swiping a credit or debit card.
Each time a digital transaction is initiated, whether online or in-person, multiple unseen entities must coordinate and communicate to authorize and complete it. These entities can include the payment processor, payment gateway, the issuing bank (of the purchaser’s credit or debit card), and the merchant’s bank (acquirer).
It’s easy to feel overwhelmed by the complexities of payment processing, especially when you’re unfamiliar with the jargon. Below we have provided many of the most common payment processing terms and their definitions so you can talk the talk.
The information provided here does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
Jump straight to your desired term(s):
Image Replacement Document (IRD)
Independent Sales Organization (ISO)
Instant Payment Notification (IPN)
Interchange Fee
Issuing Bank
Know Your Customer (KYC)
Marketplace
Merchant
Merchant Account
Merchant Acquirer
Merchant Agreement
Merchant ID Number (MID)
Merchant of Record (MoR)
Method of Payment (MOP)
Magnetic Ink Character Recognition (MICR)
Mobile Point of Sale (mPOS)
Money Laundering
Money Transmitter License (MTL)
Multi-Factor Authentication (MFA)
National Automated Clearing House Association (NACHA)
Near Field Communication (NFC)
Net Settlement
Network Fees
Non-Bank
Originator
Payment Facilitator
Payment Card Industry (PCI)
Payment Card Industry Data Security Standard (PCI DSS)
PCI Compliance
Payment Dispute
Payment Gateway
Payment Rails
Payee
Payment Service Provider (PSP)
PIN Authorization Request (PIN Verification)
Point of Sale (POS)
POS Terminal
Prepaid Cards
Reason Code
Receiving Depository Financial Institution (RDFI)
Payment Reconciliation
Reserve Account
Retrieval Request
Routing Transit Number (RTN)
Settlement
Settlement Statement
Swipe Fees
Void
White Label Payment
An IRD, also known as a substitute check, is an electronic image of a paper check. It is legally equivalent to the original physical check.
An ISO is a third-party payment processing company that is authorized to manage merchant accounts and provide merchant services.
IPN is a message service that automatically notifies merchants of events related to PayPal transactions.
An interchange fee is charged to merchants for each card payment they accept. The fee payment is split between the credit card processor (or payment process service provider) and the issuing bank for each transaction.
An issuing bank is the bank that issues a credit or debit card to a customer.
KYC is the mandatory process of verifying a merchant or customer’s identity when opening an account.
Online ecommerce platform where multiple third parties offer products or services for purchase. Popular ecommerce platforms include eBay, Amazon, and Shopify.
A merchant is any business that accepts card payments in exchange for goods or services.
A specialized bank account that enables businesses to accept and process electronic payments, such as credit and debit card transactions. It acts as an intermediary, holding funds from card sales before transferring them to the business’s regular bank account.
Another term for an acquiring bank.
A merchant agreement is a contract between a merchant and the acquiring bank outlining rights and responsibilities.
A MID is a merchant id number, also called a merchant number. It is a fifteen-digit identifier for merchants that facilitates credit and debit card transactions.
A Merchant of Record is any legal entity responsible for selling services or goods and handling all payments and liabilities associated with those sales.
A “method of payment” is how a customer pays for a product or service, such as a check, credit card, or cash.
MICR is a technology invented in the 1950s to verify the legitimacy of checks using special ink to print certain characters on a check. These characters can be read by a computer even if they are covered by writing or other marks.
A mPOS is a mobile device or app allowing card reading and transaction processing.
Money laundering is an illegal activity in which illicit funds are disguised as legitimate funds.
An MTL is a license required for institutions handling payments in certain U.S. states.
MFA is a security measure that requires users to provide two or more verification factors to access online accounts.
The NACHA is the oversight body for the ACH.
A communication method that allows devices to complete transactions with a payment terminal.
Net settlement is performed by a bank to resolve the debits and credits from other banks that have accumulated throughout the day. This information is then filed with the Federal Reserve which transfers funds using the interbank settlement system.
Network fees are the fees charged for payment transactions by card networks.
A non-bank is a company that provides some banking services but is not a bank or does not have the legal status of a bank.
In the realm of payments, the originator is the sender of the first payment order in a funds transfer.
A payment service provider for merchants.
The payment card industry is the financial industry segment that includes all of the various organizations responsible for storing, processing, and transmitting cardholder data.
A set of security guidelines designed to ensure that all businesses that process, store, or transmit credit card information maintain a secure environment. It aims to protect cardholder data from theft and to secure and strengthen payment card transaction systems.
Adherence to the Payment Card Industry Data Security Standard. There are four levels of PCI compliance. The number of transactions a business processes determines the level of PCI compliance it must maintain.
Learn more about PCI DSS and PCI compliance.
Payment disputes are a type of consumer protection to prevent fraudulent charges. A payment dispute occurs when a cardholder files a claim questioning the validity of a credit or debit card charge.
A digital “bridge” that facilitates secure transaction processing between merchants and financial institutions. It quickly verifies transaction details, checks fund availability, and processes payments for online purchases. It ensures efficient and secure transactions while often offering features like fraud detection and currency conversion.
Payment rails are the infrastructure that facilitates money transfers from one party to another.
The entity or individual receiving a payment from a transaction.
A PSP is a third-party company that provides services to merchants so that they can accept electronic payments.
Security procedure that validates the cardholder’s identity using a personal identification number (PIN).
A point-of-sale system (POS) is a set of devices, software, and payment services merchants use to make sales in person.
A POS terminal is the physical hardware used to process card payments at retail locations.
Prepaid cards are similar to credit cards and traditional debit cards, but they’re not linked to a line of credit or a bank account. Unlike a bank card, your prepaid card comes with a balance that acts as your spending limit. Once you’ve spent the balance, the card becomes unusable until you add more money to it.
A reason code is a specific code used to indicate the underlying reason for a particular transaction status, especially in the case of a dispute or chargeback. A reason code clarifies why a transaction was declined, refunded, or disputed, helping merchants address and potentially resolve issues.
An RDFI is a bank or credit union that has an agreement with an ACH Operator to facilitate ACH transactions.
The process of verifying and matching financial records of payments received against payments made, ensuring consistency and accuracy in financial accounts. Reconciliation can identify discrepancies, prevent fraud, and ensure that the financial statements are accurate.
Read more about reconciliation.
A reserve account is an account that holds a portion of funds reserved for future purposes. A high-risk payment service provider may require merchants to provide and fund a reserve account. These funds can then be used to cover any losses.
A retrieval request is a request made by a cardholder to get more information about a transaction from the issuing bank.
An RTN is a nine-digit code on a check that identifies the issuing bank.
Transfer of funds for an approved payment transaction. The finalization and completion of a financial transaction, where funds are transferred from the payer’s to the payee’s account for an authorized payment. It ensures that the transaction is fully processed and that both parties have received or paid the correct amount.
A statement or report that shows a merchant’s transaction activity and fees.
Another term for interchange fees.
A merchant can void a transaction to cancel a payment or fund transfer.
White label payment refers to a payment solution from a payment facilitator that other companies can rebrand and embed.
The glossary provided offers a foundational understanding of payment processing terms. At Clear Function, we are always happy to answer any questions you may have. Book a call with us today!
The information provided here does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
