Credit Card Processing Glossary Illinois

Acquirer: An Acquirer is a Visa / MasterCard Affiliated Bank or Bank/Processor alliance that is in the business of processing credit card transactions for businesses and is always Acquiring new merchants.

Acquiring Financial Institution: An acquiring financial institution (or "acquirer") contracts with the bank and merchants to enable credit card transactions. The acquirer deposits
the daily credit card totals and debits the end-of-month processing fees from the merchants' accounts.

Address Verification Service (AVS): The process of validating a cardholder's given address against the issuer's records, to determine accuracy and deter fraud. This service is provided as part of a credit card authorization for mail order/telephone order transactions. A code is returned with the authorization result that indicates the level of accuracy of the address match and helps secure the most favorable interchange rates.

Adjustment: An adjustment is initiated by the acquirer to correct a processing error. The error could be a duplication of a transaction or the result of a cardholder dispute. The acquirer debits or credits the merchant DDA account for the dollar amount of the adjustment.

Audio Response Unit (ARU): This is an electronic authorization and capture product where the merchant uses a touch-tone telephone to process transactions.

Authorization: The process of verifying the credit card has sufficient funds (credit) available to cover the amount of the transaction. An authorization is obtained for every sale. An approval response in the form of a code sent to a merchant's POS equipment (usually a terminal) from a card issuing financial institution that verifies availability of credit or funds in the cardholder account to make the purchase. Also see Point-Of-Sale.

Authorization Response: An issuing financial institution's electronic message reply to an authorization request, which may include:

Approval -- transaction was approved

Decline -- transaction was not approved

Call Center -- response pending more information, merchant must call the toll-free authorization phone number.

Authorization Code: A code that a credit card issuing bank returns in an electronic message to the merchant's POS equipment that indicates approval of the transaction. The code serves as proof of authorization.

Auto Close: A terminal feature that allows an end-of-day batch closing to occur automatically at a specified time, without having to be initiated by the merchant.

Automated Clearing House (ACH) File: A file with instructions for the exchange and settlement of electronic payments passed between financial institutions. It represents debits and credits to be deducted from an account automatically as they occur.

Average Ticket (Average Sale): The average dollar amount of a merchant's typical sale. The average ticket amount is calculated by dividing the total sales volume by the total number of sales for the specified time period.

Bankcard: A credit card issued by a Visa or MasterCard-sponsored financial institution. (American Express, Discover, Diners Club, JCB, etc., are issued directly from their respective operations, rather than through banks.)

Batch: The accumulation of captured credit card transactions in the merchant's terminal or POS awaiting settlement.

Capture: The submission of an electronic credit card transaction for financial settlement. Authorized credit card sales must be captured and settled in order for a merchant to receive funds for those sales. Also see Settlement.

Cardholder: Any person who holds a payment card account (bankcard or otherwise). Person that uses a credit card to purchase goods and services.

Card Issuing Bank: An EFT Network Member-Bank that runs a credit card or debit card "purchasing service" for their account holders. An example is CitiBank and the CitiBank Visa Card that they issue.

Card Not Present: A transaction where the card is not present at the time of the transaction (such as mail order or telephone order). Credit card data is manually entered into the terminal, as opposed to swiping a card's magnetic stripe through the terminal.

Chargeback: A credit card transaction that is billed back to the merchant after the sale has been settled. Chargebacks are initiated by the card issuer on behalf of the cardholder. Typical cardholder disputes involve product delivery failure or product/service dissatisfaction. Cardholders are urged to try to obtain satisfaction from the merchant before disputing the bill with the credit card issuer.

Close Batch: The process of sending the batch for settlement.

Code 10 Authorization: If you suspect a card is fraudulent at the time of the transaction, the merchant can call their voice authorization phone number and ask for a code 10. The voice operator will instruct the merchant on how to proceed.

Commercial Cards: Credit or charge cards issued to businesses to cover expenses such as travel and entertainment and procurement. Includes the multiple payment card brands of purchasing cards, business cards, corporate cards and multi-utility fleet cards. Visa and Master Card now have special procedures for passing billing information back to the card issuing bank so that it can be displayed on card holder statements; this is a program for promoting the use of credit cards for business purchases by providing purchase tracking to business users. New regulations require that this billing information be passed back with the transactions, otherwise a higher pass through fee will be incurred.

Corporate Card: Charge card designed for business-related expenses, such as travel and entertainment. Please see Commercial Card.

Credit (Reversal): Nullification of an authorized transaction (sale) that has not been settled. If supported by the card issuer, a reversal will immediately "undo" an authorization and return it to the open-to-buy balance on a cardholder's account. Some card issuers do not support reversals.

DDA Account: This is the merchants Demand Deposit Account, otherwise known as the merchant's home town bank account.

Debit Card: Payment card whose funds are withdrawn directly from the cardholder's checking account at the time of sale (online debit on a Debit Network) or after batch settlement (off-line debit on a Credit Card Network).

Deposit Correction Notice (DCN): Adjustments (debits or credits) made for an out-of-balance condition due to various problems in the transmittal. The correction is made by the merchant's acquirer at the time of capture prior to being sent out for interchange.

Discount Rate: The percentage of sales amounts that the bankcard acquirer or T&E card issuer charges the merchant for the settlement of the transactions.

Edit Rejects: The rejection of a sales draft by Visa or MasterCard before a transaction processes through interchange, but after it has been paid by the acquirer.

Electronic Cash Register (ECR): A device used for cash sales. Can also be integrated to accept credit cards.

Electronic Date Capture (EDC): Process of electronically authorizing, capturing and settling a credit card transaction.

Fleet cards: Private label credit cards designed mainly for repairs, maintenance and fueling of business vehicles.

Footer: Text printed at the bottom of a sales draft. A merchant can customize the footer (i.e., Have a Nice Day, No Refunds, Thank You for Shopping With Us, etc.).

Independent Sales Organization (ISO): An ISO is an Independent Sales Organization that represents a Bank or Bank/Processor alliance. The ISO has an agreement to sell the services of the Bank or Bank/Processor alliance, and is allowed to mark up the Fees and sign up merchants.

-These entities are classic Middle Men, as they are typically not performing the services sold. They typically match the banking services they sell with “Front End” solutions for accepting transactions in order to offer merchants a working system.

-Their Front End Systems can be anything from Verifone or Hypercom POS Terminals to PC based Dial-Out Credit Card Processing Software, to Shopping Carts paired with a Secure Payment Gateway. (In all cases, the Front End solution must be compatible with the Processor in order to function.)

Interchange: The standardized electronic exchange of financial and non-financial data associated with sale and credit data between merchant acquirers and card issuers on various types of MasterCard and Visa transactions.

Interchange Fee: A fee paid by an acquirer to an issuer for transactions entered into interchange. The interchange fee is a percentage applied, according to Visa/MasterCard regulations, to the dollar value of each transaction. There are multiple categories of interchange, and Visa and MasterCard each have their own criteria for their own categories. A transaction must meet the specified criteria for a category in order for that category's rate to be applied. Each transaction is evaluated individually, so various interchange rates may apply within one batch of merchant transactions.

Internet Service Provider (ISP): Internet Service Providers (ISPs) are the Web Site Hosting companies that provide a home for merchant’s web sites.

-They typically resell and/or support the services of a Secure Gateway Provider and/or ISO or Agent or Bank.

Issuing Financial Institution: The financial institution that extends credit to a cardholder through bankcard accounts. The financial institution issues a credit card and bills the cardholder for purchases against the bankcard account. Also referred to as the cardholder's financial institution.

Manual Close: A batch close that must be initiated by the merchant on a daily basis, as opposed to an auto close at a pre-set time.

Merchant: Customer of a processor/acquirer.

Merchant Identification Number (MID): This number is generated by a processor/acquirer and is specific to each individual merchant location. This number is used to identify the merchant during processing of daily transactions, rejects, adjustments, chargebacks, end-of-month processing fees, etc.

Magnetic Stripe: A strip of magnetic tape affixed to the back of credit cards containing identifying data, such as account number and cardholder name.

Mail Order/Telephone Order (MOTO): Credit card transactions initiated via mail, email or telephone. Also known as card-not-present transactions.

Network: Company and system used to authorize and capture credit card transactions.

Non-Qualified Transaction Fees (NON-Qual): Bankcard sales transactions that do not meet set Visa/MasterCard criteria for that particular merchant and are processed at a higher interchange rate. An example of this is a merchant that is retail (card present) that processes a card-not-present transaction (or manually enters card data rather than swiping the magnetic stripe through the terminal). The merchant will pay the difference between what they should have paid on retail and what they actually qualified for (card not present). This difference is called non-qualified interchange fees.

PC Software: A software program that is designed to perform a specific function on a computer system. Examples would be accounting systems, manufacturing systems, order entry and fulfillment, ticketing, reservations, etc. The application is either purchased or built by the merchant, and must be interfaced with a credit card authorization system in order to provide on-line transaction processing.

Private Label Cards: Credit, debit or stored-value cards that can be used only within a specific merchant's store. Also referred to as proprietary cards.

Point Of Sale (POS): A location where credit card transactions are performed with the cardholder present, such as a retail store. The card is read magnetically, and the cardholder's signature is obtained as insurance against the transaction. This is the most secure form of credit card commerce.

POS Terminal: Equipment used to capture, transmit and store credit card transactions at the point of sale. Examples are Verifone terminals.

Processor: A Processor is the company that actually routes an Authorization Request from a Point of Sale device (such as a Verfone credit card terminal) to Visa or Master Card, and then arranges for Fund Settlement to the merchant. Such processors are traditionally accessed via direct dial out modems connecting to their system.

-Processors need to have a Sponsoring Bank in order to gain access to the Visa and Master Card networks. When a Processor or other entity has made such an arrangement with a Sponsoring Bank to resell their services, they are called an Agent of that bank.

-Any entity that sells Visa or Master Card must disclose themselves as an Agent of their Sponsoring Bank. Such sales entities may be a Processor, or an ISO/Agent of the Processor or Processor/Bank alliance.

-Many banks are also their own processors, while other banks will use a Third Party Processor to handle this processing for them (in their own brand name in some cases).

Processing Network (Vendor): The medium of data transport between the merchant application and the processor. This company authorizes and captures credit card transactions. Some examples of processing networks are FDR, MAPP and Envoy.

Procurement/Purchasing Cards: Charge cards used by businesses to cover purchasing expenses, such as raw materials or office supplies.

Real-Time Processing Real-Time Processing means that when a web site's customer conducts an online purchase, that the check or credit card information is conveyed to the Processor at that exact time so that an authorization can be requested and received at that moment. Real-Time Processing always implies that a Secure Payment Gateway is being utilized, whether proprietary or third party. Please see Secure Payment Gateways and Real Versus Non-Real Time Processing.

Reserve Account One method that ACH Processor's use to mitigate risk, is to require that merchants maintain a Reserve Account at the Processor's Sponsoring Bank. This allows the Processor to issue a Hold on funds in this account when fraud has been detected or an excessively large number of returns is received. Merchants with good credit and history can usually meet the expectations of ACH Processors for covering returns and so are not always required to keep a reserve account. In cases where a reserve is required, the minimum-reserve-balance in the account is set at about 20% of the anticipated processing volume. New merchants are usually allowed to build up their reserve by sending in transactions which are not withdrawn until the minimum reserve balance is achieved; after that, the merchant is allowed to withdraw the excess funds for transfer to their home town bank.

Sales Draft (Ticket): A form showing an obligation on the cardholder's part to pay money (i.e., the sales amount) to the card issuer. This is the piece of paper that is signed when making the purchase. Sales draft data can be captured electronically and sent to be processed over the phone lines. Also see Electronic Data Capture.

Secure Payment Gateway: Secure Payment Gateway companies help other Processors conduct secure business on the internet using Secure Socket Layer (SSL) technology.

-They provide a system that passes credit card data, authorization requests, and authorization responses over the internet using encryption technology.

-The transaction information is sent by the Payment Gateway secure server via leased line to the credit card network where the validity of the card is checked and the availability of funds on that account is verified. An authorization code is returned via leased line to the Payment Gateway; the authorization is encrypted by the Payment Gateway and transmitted in encrypted form to the web server of the merchant, which triggers fulfillment of the order.

-Rather than try and create their own Secure Web System, many Banks and Bank/Processor alliances will use a Secure Payment Gateway Provider to perform this task for them.

Secure Payment Software/Software Module/Payment Module: -In order to conduct secure business on the web, the Secure Gateway Provider runs a Secure Host System, and sells/licenses software modules that allow Shopping Carts and other applications to request and receive Credit Card Authorizations via their system using encrypted communications. (This is called Real Time Authorization.)
-The other features of this licensed software are the functions provided to merchants online when they connect to the Secure Payment Gateway host; merchant can access their own account information, use a “Virtual Terminal” to conduct transactions, handle administrative tasks, etc. (These features all “live” on the provider’s Host computer system.)
Settlement: The process of sending a merchant's batch to the network for processing and payment. For non-bankcards, the issuer pays the merchant directly (less applicable fees) and then bills the cardholder. For bankcards, the acquirer pays the merchant (less applicable fees) with funds from Visa/MasterCard. The bankcard issuer then bills the cardholder for the amount of the sale. Also see Capture.

Shopping Cart Software: -These applications typically provide a means of capturing a client’s Credit Card information, but they rely on the Software Module of the Secure Gateway Provider, in conjunction with the Secure Payment Gateway, in order to conduct secure Credit Card transactions online.

-Any given shopping cart can work with any given Secure Gateway Provider, the only requirement being that some computer code be written or provided to communicate with the Secure Gateway of choice, and that this code be integrated into the Shopping Cart Application.

Shopping Cart Software Providers: Shopping Cart Software Providers are software companies that either produce, utilize or resell Shopping Cart Applications (programs) that display merchandise and/or services, and take orders for merchants.

Smart card: A credit-type card that electronically stores account information in the card itself.

Terminal: Equipment used to capture, transmit and store credit card transactions.

Terminal Software: Programming that determines the characteristics and features of the terminal.

Smart card: A payment card that electronically stores account information utilizing chip technology rather than a magnetic stripe.

Software: A POS Terminal Application or PC or Internet Application that runs transactions and associated administration.

Sponsoring Bank: A Sponsoring Bank is a Chartered Bank or S & L that has obtained membership in Visa or Master Card in order to allow a Processor access to the Visa and Master Card networks ( in order to process these types of transactions).

-Since only a Bank may join Visa or Master Card, many Processors make deals with a Sponsoring Bank in order to gain access to the Visa and Master Card networks.

-Because these Sponsoring agreements are usually like a partnership, the line between the Sponsoring Banks and their Processors is not always clear; sometimes the partnership is referred to by the name of the bank, while other times they are referred to by the name of the Processor.

T & E cards: Credit or charge card used by businesses for travel and entertainment expenses. Examples of these cards are American Express, Diners Club, Carte Blanche and JCB. Also see Corporate Cards.

Terminal: Equipment used to capture, transmit and store credit card transactions.

Terminal Identification Number (TID): A unique number assigned to each POS terminal.

Third-Party Processor: A Third Party Processor is an independent processor that is contracted with by a Bank or Processor to conduct some part of the transaction processing process.

-Some of these Third Party Processors specialize in running and hosting networks of Point Of Sale (POS) terminals connected to their Host via dial out modem; they produce the software in the POS terminals as well as in their host, and route authorization requests to Visa or Master Card as needed (MAPP, MDI, FDR, for example).

-Other Third Party Processors specialize in the Settlement of credit card transactions with Visa and Master Card so that merchants can be paid (FDR for example).

-In the world of Internet Credit Card Processing, the Secure Payment Gateway Provider is another type of Third Party Processor.

Third Party Secure Payment Gateway: In this model, the Third Party Secure Payment Gateway's server-computers have to provide a connection between the merchant's web site and the Visa/MC (or Check) Merchant Processor. This is done via telephone (or leased land line). The Merchant Processor will receive the transaction through it's non-internet modem bank, and then send the transaction through it's direct connection to the Card Network (like Visa) for approval., The Merchant Processor returns a response via land line to the Secure Payment Gateway, which encrypts the message and transmits it over the web back to the originating secure web site host. The Third Party Secure Payment Gateway is a different company than the Merchant Processor, and has it's own fees that are separate from any Merchant Processing fees. Examples of these are Cybercash and Authorize.net.

-Rather than try and create their own Secure Web System, many Banks and Bank/Processor alliances will use a Secure Payment Gateway Provider to perform this task for them.

Value Added Reseller (VAR): Third-party vendor that enhances or modifies existing hardware or software, adding value to the services provided by the processor or acquirer.