Payment Processing Glossary of Terms Pt. 1

What is Payment Processing?

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.

Account Takeover (ATO)

What is ATO?

ATO stands for “account takeover” and refers to the unauthorized access to an online account, typically through stolen login credentials.

Automated Clearing House (ACH)

What is the ACH?

A U.S. electronic payment network that facilitates financial transactions between banks.

ACH Transfer

What is an ACH transfer?

An ACH transfer is the electronic transfer of funds from bank to bank using the ACH network.

Acquiring Bank

What is an Acquiring Bank?

An acquiring bank, also called a merchant bank, is a financial institution that allows merchants (businesses) to accept debit and credit card payments.

Acquirer Reference Number (ARN)

What is an ARN?

An ARN is a unique number assigned to a card transaction for tracking purposes. An ARN is available for bank, Visa®, and Mastercard® transactions.

Affinity Card

What is an affinity card?

An affinity card is a credit card linked to an organization or group that offers benefits to both the issuer and the organization.

Anti-Money Laundering (AML)

What is AML?

AML refers to the tools, policies, and regulations used to combat money laundering where illicit funds are disguised as legitimate funds.

Application Programming Interface (API)

What is API?

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.

ATM Interchange Fee

What is an ATM Interchange Fee?

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

What is Authorization?

Authorization refers to the process of verifying a cardholder’s funds for a transaction.

Average Monthly Transaction Volume (AMTV)

What is an Average Monthly Transaction Volume?

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.

Average Ticket

What is an average ticket?

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.

Address Verification Service (AVS)

What is AVS?

AVS is a service that verifies a customer’s billing address with the issuing bank.

Back Office Conversion (BOC)

What is back office conversion?

BOC is a process that allows businesses to scan and convert paper checks to digital ACH transfers in a centralized back office.

Bankcard

What is a bank card?

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.

Bank Identification Number (BIN)

What is a BIN?

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.

Bank Routing Number

What is a bank routing number?

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.

Basis Point (BP)

What is a basis point?

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

What is batch processing?

Batch processing, also known as batch clearing, is when a merchant submits a group of card transactions to the payment processor for settlement.

Payment Beneficiary

What is a payment beneficiary?

A payment beneficiary is the payee, or designated recipient, of funds collected in the context of a payment transaction.

Payment Capture

What is payment capture?

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.

Capture Date

What is the Capture Date?

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.

Card Association

What is a card association?

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.

Cardholder

What is a cardholder?

An individual issued or authorized to use a credit or debit card.

Card Issuer

What is a card Issuer?

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.

Card Not Present (CNP) Transaction

What is a CNP transaction?

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.

Card Present (CP) Transaction

What is a CP transaction?

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.

Card Verification Value (CVV), Card Verification Code (CVC), and Card Identification (CID) Numbers

What is the difference between a CVV number, CVC/CVC code, and CID number?

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.

Chargeback

What is a chargeback?

A chargeback refers to funds returned by the card issuer due to a disputed charge.

Chargeback Defense

What is a chargeback defense?

A chargeback defense is a strategic plan and information used by a merchant to defend against a chargeback.

Chargeback Period

What is the chargeback period?

The timeframe in which an issuing bank can charge a transaction back to the acquiring bank.

Check 21

What is Check 21?

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.

Clearing

What is clearing?

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.

Credit Card Processors

What are credit card processors?

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.

Crowdfunding

What is crowdfunding?

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.

Cryptocurrency

What is cryptocurrency?

Digital currency using blockchain technology and cryptography.

Currency Conversion

What is currency conversion?

Currency conversion is the process that facilitates transactions where the issuer and acquirer use different currencies by exchanging one type of currency for another.

Debit

What is a debit?

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.

Debit Card

What is a debit card?

A debit card is a payment card linked to a depository account. A debit card is used for purchases or cash withdrawals.

Decline or Decline Response

What does it mean for a transaction to be declined?

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.

Deposit Account

What is a deposit account?

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

What does disbursement mean?

Disbursement is the distribution of approved transaction funds to an account.

Discount Rate

What is a discount rate?

A discount rate is the interest rate charged to a merchant by the payment processor for processing credit card transactions.

eCheck

What is an eCheck?

An eCheck is the digital version of a paper check, also known as an electronic check.

Ecommerce

What is ecommerce?

Ecommerce refers to buying and selling of goods and services online.

Electronic Check Acceptance (ECA)

What is an ECA?

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.

Electronic Bill Payment (E-PAY)

What is E-PAY?

E-PAY stands for “electronic payment.” It is an online method that consumers can use to pay bills.

Electronic Funds Transfer (EFT)

What is EFT?

Electronic transfer of funds from one account to another.

Europay, Mastercard, and Visa (EMV)

What is EMV?

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.

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