December 1, 2023
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.
ATO stands for “account takeover” and refers to the unauthorized access to an online account, typically through stolen login credentials.
A U.S. electronic payment network that facilitates financial transactions between banks.
An ACH transfer is the electronic transfer of funds from bank to bank using the ACH network.
An acquiring bank, also called a merchant bank, is a financial institution that allows merchants (businesses) to accept debit and credit card payments.
An ARN is a unique number assigned to a card transaction for tracking purposes. An ARN is available for bank, Visa®, and Mastercard® transactions.
An affinity card is a credit card linked to an organization or group that offers benefits to both the issuer and the organization.
AML refers to the tools, policies, and regulations used to combat money laundering where illicit funds are disguised as legitimate funds.
API is a set of rules and protocols that allows different software applications to communicate with each other. It defines the methods and data formats that applications can use to request and exchange information. In the context of fintech, APIs play a crucial role in enabling various financial systems to interact seamlessly.
An ATM interchange fee is a fee charged by a bank whenever a customer, a.k.a. an account holder, uses another bank’s ATM to withdraw money. The fee amount is set and charged to Bank B (the ATM owner) by Bank A (the account holder’s bank).
Authorization refers to the process of verifying a cardholder’s funds for a transaction.
AMTV refers to the average number of transactions a business or system processes each month. It’s a metric commonly used in various industries, especially in finance and e-commerce, to gauge the activity and performance of a platform, system, or business.
The term “average ticket” refers to the average dollar amount a customer spends in one transaction. This metric can help businesses spot trends and make financial predictions.
AVS is a service that verifies a customer’s billing address with the issuing bank.
BOC is a process that allows businesses to scan and convert paper checks to digital ACH transfers in a centralized back office.
A bank card is a physical card, e.g., a credit or debit card, issued by a bank, that is linked to a depository account. This term is sometimes used for Visa® and Mastercard® credit cards because they are issued by banks even though they are not linked to a depository account.
A bank identification number (BIN) refers to the first four or six digits on a payment card. The BIN refers to the issuing institution and can be used to identify that financial institution.
A routing number is the nine digits on a check that identifies the issuing bank. They are used to direct the exchange of funds to and from accounts. You can usually find them in the lower left corner of a paper check.
A basis point is a unit of measurement used to calculate interest rates and other types of percentages. Simply put, it is one one-hundredth of one percent or 0.01%.
Batch processing, also known as batch clearing, is when a merchant submits a group of card transactions to the payment processor for settlement.
A payment beneficiary is the payee, or designated recipient, of funds collected in the context of a payment transaction.
Payment capture is a legally binding step after authorization when funds are moved from the customer’s account to the merchant account. It is part of the settlement process and you may encounter scenarios where the two terms are used interchangeably.
The Capture Date is the official calendar date that a transaction is captured. It is usually the same date that a card was swiped. However, it might be the following day if the transaction is initiated outside of a bank’s operating hours.
Also called a card network, a card association is an organization that facilitates payment card transactions. Visa® and MasterCard® are two well-known card associations.
An individual issued or authorized to use a credit or debit card.
A card issuer is a financial institution, such as a bank or credit card company, that gives (or issues) payment cards, including debit and credit cards.
A CNP transaction is one where the card is not presented to the merchant. CNP transactions include online purchases, phone orders, recurring payments, and card-on-file payments.
A CP transaction is one where a physical card is presented to the merchant. Typically the card is presented to the cashier at the checkout counter and processed using a point of service (POS) system.
A CVV, CVC, and CID are essentially the same. They all refer to a number printed on a credit or debit by card issuers for security purposes. Visa®, Mastercard®, Discover®, and American Express® all include a numeric code linked to a specific payment card.
These numbers are used to prove the person using the card for a CNP transaction is in possession of the card. It usually consists of three digits and is found on the back of the card. On American Express® cards, the number is four digits long.
A chargeback refers to funds returned by the card issuer due to a disputed charge.
A chargeback defense is a strategic plan and information used by a merchant to defend against a chargeback.
The timeframe in which an issuing bank can charge a transaction back to the acquiring bank.
Check 21 refers to the Check Clearing for the 21st Century Act—a law designed to increase check processing efficiency. It allows banks to create electronic images of checks in a process called check truncation. These images can then be used to electronically process checks.
Technically clearing refers to all the actions taken from the time a transaction is initiated until it is settled or completed. However, it is most often used to refer to the final step of the payment process, settlement, when the funds are moved to the merchant account, completing the transaction.
A credit card processor is a vendor that facilitates the processing of credit card transactions on behalf of a merchant. The processor allows businesses to accept credit and debit card payments from customers.
In terms of finance and payments, crowdfunding is a way of raising funds for a project or business. Instead of having just a few investors contributing a large amount of funds, crowdsourcing solicits investments from a large group of individual contributors.
Digital currency using blockchain technology and cryptography.
Currency conversion is the process that facilitates transactions where the issuer and acquirer use different currencies by exchanging one type of currency for another.
A debit is an expense, or money paid out from an account. It is an accounting term that distinguishes between funds flowing in and flowing out of accounts.
A debit card is a payment card linked to a depository account. A debit card is used for purchases or cash withdrawals.
A card transaction may be declined for a variety of reasons. A decline response is usually returned by the payment processor due to insufficient funds or fraud.
A deposit account is a bank account managed by a financial institution that a customer can use to deposit or withdraw funds, such as a checking or savings account.
Disbursement is the distribution of approved transaction funds to an account.
A discount rate is the interest rate charged to a merchant by the payment processor for processing credit card transactions.
An eCheck is the digital version of a paper check, also known as an electronic check.
Ecommerce refers to buying and selling of goods and services online.
ECA is a payment solution that converts paper checks into electronic items at the point of sale and automatically deposits funds directly into the merchant bank account.
E-PAY stands for “electronic payment.” It is an online method that consumers can use to pay bills.
Electronic transfer of funds from one account to another.
EMV is often used to refer to the increased security of payment card transactions through the use of a chip embedded in credit, debit, and prepaid cards. EMV stands for “Europay, Mastercard, and Visa,” the three companies that created the security standard.
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.
