Payment Processing Glossary of Terms Pt. 2

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.

Image Replacement Document (IRD)

What is an IRD?

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.

Independent Sales Organization (ISO)

What is ISO?

An ISO is a third-party payment processing company that is authorized to manage merchant accounts and provide merchant services.

Instant Payment Notification (IPN)

What is IPN?

IPN is a message service that automatically notifies merchants of events related to PayPal transactions.

Interchange Fee

What is an interchange fee?

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.

Issuing Bank

What is an issuing bank?

An issuing bank is the bank that issues a credit or debit card to a customer.

Know Your Customer (KYC)

What does KYC mean?

KYC is the mandatory process of verifying a merchant or customer’s identity when opening an account.

Marketplace

What is a marketplace?

Online ecommerce platform where multiple third parties offer products or services for purchase. Popular ecommerce platforms include eBay, Amazon, and Shopify.

Merchant

What is a merchant?

A merchant is any business that accepts card payments in exchange for goods or services.

Merchant Account

What is a merchant account?

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.

Merchant Acquirer

What is a merchant acquirer?

Another term for an acquiring bank.

Merchant Agreement

What is a merchant agreement?

A merchant agreement is a contract between a merchant and the acquiring bank outlining rights and responsibilities.

Merchant ID Number (MID)

What is an MID number?

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.

Merchant of Record (MoR)

What is a Merchant of Record?

A Merchant of Record is any legal entity responsible for selling services or goods and handling all payments and liabilities associated with those sales.

Method of Payment (MOP)

What is a MOP?

A “method of payment” is how a customer pays for a product or service, such as a check, credit card, or cash.

Magnetic Ink Character Recognition (MICR)

What is MICR?

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.

Mobile Point of Sale (mPOS)

What is mPOS?

A mPOS is a mobile device or app allowing card reading and transaction processing.

Money Laundering

What is money laundering?

Money laundering is an illegal activity in which illicit funds are disguised as legitimate funds.

Money Transmitter License (MTL)

What is MTL?

An MTL is a license required for institutions handling payments in certain U.S. states.

Multi-Factor Authentication (MFA)

What is MFA?

MFA is a security measure that requires users to provide two or more verification factors to access online accounts.

National Automated Clearing House Association (NACHA)

What is the NACHA?

The NACHA is the oversight body for the ACH.

Near Field Communication (NFC)

What is NFC?

A communication method that allows devices to complete transactions with a payment terminal.

Net Settlement

What is net settlement?

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

What are network fees?

Network fees are the fees charged for payment transactions by card networks.

Non-Bank

What is a non-bank?

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.

Originator

What is an originator?

In the realm of payments, the originator is the sender of the first payment order in a funds transfer.

Payment Facilitator

What is a payment facilitator?

A payment service provider for merchants.

Payment Card Industry (PCI)

What is PCI?

The payment card industry is the financial industry segment that includes all of the various organizations responsible for storing, processing, and transmitting cardholder data.

Payment Card Industry Data Security Standard (PCI DSS)

What is PCI DSS?

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.

PCI Compliance

What is PCI compliance?

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 Dispute

What is a payment dispute?

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.

Payment Gateway

What is a payment gateway?

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

What are payment rails?

Payment rails are the infrastructure that facilitates money transfers from one party to another.

Payee

What is a payee?

The entity or individual receiving a payment from a transaction.

Payment Service Provider (PSP)

What is a PSP?

A PSP is a third-party company that provides services to merchants so that they can accept electronic payments.

PIN Authorization Request (PIN Verification)

What is a PIN Authorization Request (PIN Verification)?

Security procedure that validates the cardholder’s identity using a personal identification number (PIN).

Point of Sale (POS)

What is a POS?

A point-of-sale system (POS) is a set of devices, software, and payment services merchants use to make sales in person.

POS Terminal

What is a POS terminal?

A POS terminal is the physical hardware used to process card payments at retail locations.

Prepaid Cards

What are prepaid cards?

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.

Reason Code

What is a reason code?

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.

Receiving Depository Financial Institution (RDFI)

What is an RDFI?

An RDFI is a bank or credit union that has an agreement with an ACH Operator to facilitate ACH transactions.

Payment Reconciliation

What is payment reconciliation?

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.

Reserve Account

What is a reserve account?

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.

Retrieval Request

What is a retrieval request?

A retrieval request is a request made by a cardholder to get more information about a transaction from the issuing bank.

Routing Transit Number (RTN)

What is an RTN?

An RTN is a nine-digit code on a check that identifies the issuing bank.

Settlement

What is a settlement?

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.

Settlement Statement

What is a settlement statement?

A statement or report that shows a merchant’s transaction activity and fees.

Swipe Fees

What are swipe fees?

Another term for interchange fees.

Void

What is a void?

A merchant can void a transaction to cancel a payment or fund transfer.

White Label Payment

What is a white label payment?

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.

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