Payments 101 – Common online payment industry terms and definitions

Payments 101 – Common online payment industry terms and definitions

Are you starting your first online shop and searching for online payment solution? Are you trying to make some sense out of payment solution provider contract written in gibberish? This is a complete list of payment industry terms and definitions commonly used in the payment ecosystem, including acronyms. These brief payments 101 can provide anyone with a quick knowledge improvement and an easy-to-use reference guide.

Choosing the right payment solution for your business is one of the most important decisions you make when setting up your online shop. To make an informed decision, you’ll need to get familiar with common online payment industry terms and definitions.

All terms are organized in alphabetical order.

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Table of Contents

A

Account Number – A unique sequence of numbers assigned to a cardholder account that identifies the bank or credit union issuing the card and the type of financial-transaction card.

ACH (Automated Clearing House) – An electronic payment network for the processing of electronic financial transactions between banks in the United States. Used for direct deposit, recurring transactions, clearing electronic checks and Demand Deposit Account (DDA) transactions.

Acquirer – A financial institution that maintains the merchant credit card processing relationship and receives all transactions from the merchant to be distributed to the Cardmember financial institutions. Sometimes referred to as the acquiring bank.

Acquirer Reference Number (ARN) – A unique number attached to a card transaction when it is passed from the merchant’s bank to the cardholder’s bank. The numbers are used to track transactions and their progress. They can also be called trace IDs because they are most often used to trace where the funds for a transaction are in the process.

Address Verification Service (AVS) – Fraud protection service to check that the billing address given by the customer matches the one on file with the issuing bank to make sure they are a valid customer.

Alternative Payments / Local Payments – Payment types that eliminate card associations and that are used as an alternative to credit-card transactions (e.g., debit cards, prepaid or stored-value cards, direct debit, bank transfers, mobile payments, checks, cash, money orders).

Authorization – a type of transaction used to check if a customer has enough funds to pay. It doesn’t include the actual money transfer. Instead, during authorization, a merchant ensures that a cardholder is capable of paying for an ordered item. An authorization transaction is used for orders that take time to ship/manufacture.

Average Monthly Volume (AMV) – The average amount of transactions processed by an organization (merchant, processor, etc.) during a month.

B

Bank Identification Number (BIN) – The first six digits (or more) of a payment card number that identifies the financial institution that issued the payment card to the cardholder.

Bank Identifier Code (BIC) – an International Organization for Standardization (ISO) technical code that uniquely identifies a financial institution. SWIFT is the registration authority for BICs.  A BIC consists of eight or eleven characters, comprising a financial institution code (four characters), a country code (two characters), a location code (two characters) and, optionally, a branch code (three characters).

Batch – A group of card transactions collected for submitting to settlement to the merchant’s bank account.

Beneficiary – a recipient of funds (payee) or securities. Depending on the context, a beneficiary can be a direct participant in a payment system and/or a final recipient.

Bitcoin – Bitcoin is the most recognizable of an increasing number of decentralized digital currencies, also known as cryptocurrencies, that are not backed by any country’s central bank or government. A cryptocurrency can be traded for goods or services, though only with vendors accepting that cryptocurrency as payment.

Blockchain – This is a term used in the field of cryptocurrency transactions (or the use of digital currencies exchanged for payments). A blockchain is a digital ledger where all transactions, in the form of blocks, made in a specific cryptocurrency are recorded in chronological order. That digital ledger is then made publicly available to anyone using that cryptocurrency. Blockchains are decentralized, in fact copies are stored across multiple computers, and then synchronized as needed, allowing markets to track and verify transactions without the need for central bookkeeping.

C

Capture – After a card is authorized, a second set of data is passed for the transaction itself and this is called capture. It signifies that an actual transaction has taken place and the data is passed to the acquiring bank for settlement.

Card  issuer –  a  financial  institution  that  makes  payment  cards  available  to  cardholders,  authorizes  transactions  at  point-of-sale  (POS)  terminals  or  automated  teller  machines  (ATMs)  and  guarantees  payment to the acquirer for transactions that are in conformity with the rules of the relevant scheme.

Card Not Present Transaction (CNP) – A payment card transaction where the card cannot be physically presented to the merchant at the time of the transaction. Commonly used for online, mail-order and telephone transactions but also used in a few other cases.

Card Verification Code (CVC) – A unique numerical value calculated from the data encoded on the magnetic stripe of a MasterCard card, validating card information during the authorization process.

Card Verification Value (CVV) – A unique value calculated from the data encoded on the magnetic stripe of a VISA card, validating card information during the authorization process.

Cardholder – a person to whom a payment card is issued and who is authorized to use that card.

Chargeback – The result of a cardholder or the cardholder’s bank disputing a specific credit or debit card transaction. The chargeback is sent back to the merchant bank for resolution. The merchant has a set amount of time in which to defend the chargeback, depending on the rules of the card association. A chargeback fee is usually charged to the merchant in addition to the amount of the transaction.

Chip card (smart card) – a card with an embedded microprocessor (chip) loaded with the information necessary to enable payment transactions.

Compliance – Any process that is used by any of the partners in a payment transaction to meet with and follow regulatory procedures applying to that transaction. These can include government regulations, card network regulations, bank regulations and others.

Credit Card –  A plastic card with a credit limit used to purchase goods and services and to obtain cash advances on credit for which a cardholder is subsequently billed by the issuer (the institution, such as a bank or credit union, which offers the card to the individual) for repayment of the credit extended.

Credit Card explained

Credit Card Number – The number on the credit card provided for a given transaction. For any charge or refund transactions against a credit card, the credit card number must be provided. In the case of refund transactions, the first four and last four digits may be provided in lieu of the full number.

Credit transfer – a payment instrument allowing a payer to instruct the institution with which its account is held to transfer funds to a beneficiary.

Cross-border payment – a payment where the financial institutions of the payer and the payee are located in different countries.

Cryptocurrency – Digital currency, such as bitcoin, that relies on blockchain technology using cryptography to create, distribute and track the currency.

Currency conversion – The process of converting an amount of funds from one currency into another. Typically involves one or more national currencies and is governed by published daily conversion rates for buying and selling each currency.

D

Debit – A charge to an account. Basically, any amount proposed to be withdrawn from an account is referred to as a debit.

Debit Card – A payment card that primarily accesses a Deposit Account and which can be used to make purchases or withdraw cash.

Decline – The transaction request has been refused, usually by the issuing bank but sometimes by other entities along the processing chain. Reasons are typically insufficient funds or more rarely fraud or theft. Reasons are coded for return with the decline.

Deposit Account – A financial account with a balance of funds rather than a credit account. Examples include checking, savings, share draft, and many others.

Digital Wallets – Digital wallets allow consumers to shop online and pay using a wallet system, rather than entering a credit card for each purchase. Wallets typically use a username and PIN or other security device to authenticate the buyer

Direct debit – a payment instrument for the debiting of a payer’s payment account whereby a payment transaction is initiated by the payee on the basis of authorization given by the payer.

Discount Rate – A discount rate is a fee associated with collecting, assessing, approving, processing, and settling credit card transactions. This fee is often a percentage of the transaction value.

Dispute – A claim made by a cardholder to the issuing bank questioning the validity of a credit or debit card charge. Disputes start an interaction with the merchant that could lead to retrievals or chargebacks.

E

E-commerce payment system  – the entire process for a customer to select products or services and for the e-commerce merchant to accept card payments, including a website with shopping pages and a payment page or form, other connected devices or systems (for example Wi-Fi or a PC used for inventory), and connections to the merchant bank (also called a payment service provider or payment gateway). Depending on the merchant’s e-commerce payment scenario, an e-commerce payment system is either wholly outsourced to a third party, partially managed by the merchant with support from a third party or managed exclusively by the merchant.

Payments 101: E-commerce payment system

Electronic funds transfer (EFT) – The electronic transfer of funds between two bank accounts, using electronic means rather than paper methods. Includes ACH, wire transfers, payroll deposits and any other fund transfer made completely electronically.

F

Fraud Score – For merchants using fraud screening programs, a fraud score may be available during transaction authorization. This is a number, usually between 0 and 1000, that represents the overall fraud risk of a particular transaction. The higher the number, the riskier the transaction.

Friendly Fraud – Friendly fraud is the term used when a consumer (or someone with access to their credit card) makes a purchase and then initiates a chargeback (saying that they did not make the purchase and/or did not receive the goods or services).

G

Gateway – A computer application that routes transactions from eCommerce websites to a financial institution’s processing system. Gateways typically offer transaction management, reporting, and fraud screening functionality. Charges are usually per transaction basis.

H

High risk industries – Industries which poses a huge risk to buyer, seller, or financial institution. Read more High-Risk Industries for Payment Processing: complete list 2020.

Hosted payment gateway – A hosted payment gateway acts as a third party, as it requires your customers to leave your website to complete a purchase. In a hosted payment gateway, when a user clicks on a content to purchase it, he/she will be redirected to the payment service providers page (PSP).  Here the user needs to fill his/her payment details. Then the user will be redirected back to your website to finish the checkout process, once he/she has made the payment.

Payments 101 - Common online payment industry terms and definitions: Hosted payment gateway

I

IBAN (International Bank Account Number) – an International Organization for Standardization (ISO) technical code that is an expanded version of the basic bank account number (BBAN).  Intended for use internationally, the IBAN uniquely identifies an individual account at a specific financial institution in a particular country. The IBAN also includes the bank identifier of the financial institution servicing that account.

Interchange Fees – Fee paid (percentage of each transaction) by the acquirer to card issuing banks. Covers cost of fraud, accounts paying off monthly balances, etc. MasterCard and Visa have multiple interchange fees, based on card type, merchant type and market data requirements; covers the risk of loss and the cost of processing the transaction.

Interchange Network – An electronic network maintained by American Express, Discover, MasterCard, or Visa that exchanges data relating to the value of card sales and credits among Issuers and Acquirers.

ISO (Independent Sales Organization) – ISOs sell merchant accounts from other processors – they are usually purely sales and support organizations.

J

JCB (Japanese Credit Bureau) – Credit cards issued by the Japanese Credit Bureau, established in Japan in 1961, which are now owned by American Express.

K

Know Your Customer (KYC) – The compliance process of confirming the identity of a merchant or customer. Most commonly refers to government, bank, and card network requirements to verify identity to prevent fraud, identity theft, money laundering, and terrorist financing.

M

Merchant – in eCommerce terms, any business that accepts credit or debit cards, alternative payment methods or digital wallets as a source of payment. Merchant is the party that offers goods for sale or provides services in exchange for payment.

Merchant Agreement – The contract between merchant and acquiring bank listing legal warranties, rights and responsibilities.

Merchant bank – a bank or financial institution that processes credit and/or debit card payments on behalf of merchants. Acquirer, acquiring bank, and card or payment processor are also terms for this entity.

Merchant Identification Number – A number each merchant is provided under the card acceptance agreement, which is unique to that merchant.

Merchant Service Provider (MSP) – Provides a merchant with an account, processing and report tools to enable that merchant to process online transactions. Each transaction is facilitated by the MSP on behalf of the Merchant.

Mobile Payments – Using a mobile phone to pay for a wide range of services, digital and hard goods. Mobile payments can be made using direct operator billing (or WAP billing) allows the charges to be added to the user’s mobile bill. Mobile payments can also be made using a credit card or mobile wallet.

Money Laundering (ML) – An illegal activity designed to convert illegal funds into acceptable funds by passing them through accounts and businesses in transactions that hide their origins.

N

NFC (Near Field Communications) – Set of standards for smartphones and other devices to establish radio communications with each other by touching them together or bringing them into close proximity (usually no more than a few inches).

O

Online Payments – The process of exchanging money electronically to pay for goods or services, using the internet, computer networks and digital stored value systems.

P

Payment Card industry (PCI) – The credit, debit, prepaid and other payment card businesses. Also refers to the requirements that they have set out that provide security management, policies, procedures, network architecture, software design and more.

Payment Gateway – An Internet-based service that transports credit card information from a computer terminal or Web site to a credit card processor, where it can be verified.

Payment Processor – Entity engaged by merchants to handle payment card transactions on their behalf. While payment processors typically provide acquiring services, payment processors are not considered acquirers (merchant banks) unless defined as such by a payment card brand. Also called a “payment gateway” or “payment service provider” (PSP). See also Merchant Bank.

Payment System – Encompasses the entire process for accepting card payments in a merchant retail location (including stores/shops and e-commerce storefronts) and may include a payment terminal, an electronic cash register, other devices or systems connected to the payment terminal (for example, Wi-Fi for connectivity or a PC used for inventory), servers with e-commerce components such as payment pages, and the connections out to a merchant bank.

PCI compliance – A common term used to indicate that a particular organization meets the Payment Card Industry Data Security Standard (PCI DSS) requirements. Failure to meet PCI compliance can mean penalties or the suspension of the ability to make card transactions.

PCI DSS (Payment Card Industry Data Security Standards) – Common standards for merchants and third parties resulting from the alignment of MasterCard, Visa and other card associations with the similar goal of protecting payment card account data wherever it is received or stored.

Processor – A member, MasterCard and/or Visa, or a MasterCard/ Visa approved non-member acting as the agent of a member, that provides authorization, clearing or settlement services for merchants and members. Processors must have a sponsoring bank in order to gain access to interchange networks and provide for the settlement of funds. A business entity that receives a Monetary Destination file for clearing purposes.

PSP (Payment Service Provider) – Company that provides merchants the ability to accept electronic payments. PSPs can connect to financial institutions, card and payment networks and manage relationships with them as a service to merchants.

R

Recurring Billing Transaction – A recurring billing transaction indicates that a similar transaction is submitted multiple times over a period of time. This flag is sent to the processor during authorization indicating that this is a recurring billing transaction.

Reserve account (also Rolling reserve, also Rolling Reserve Fund) – For high-risk merchants, an account that holds a reserve portion of funds. The acquiring bank requires reserve accounts to cover chargebacks, disputed charges, fees and other expenses. Some organizations require reserve accounts of all new merchant accounts.

S

Secure Payment Page. A secure payment page assures consumers that their payment information is encrypted for privacy and data integrity before it is sent over the Internet. This page is typically identified by the “s” in https:// (instead of http://). Payment gateway providers make this necessary eCommerce link possible by hosting the payment gateway software and individual secure payment pages on their own servers.

SEPA (Single Euro Payments Area) – a process initiated by European banks and supported, inter alia,  by  the  Eurosystem  and  the  European  Commission  with  a  view  to  integrating  retail  payment  systems and transforming the euro area into a true domestic market for the payment industry

Settlement – The process of transferring funds for sales and credits between Acquirers and Issuers, including the final debiting of a Cardholder’s account and crediting a Seller’s account.

Shopping Cart – Software that allows visitors to an internet site to buy from that merchant.

Small Merchant – A business that typically has a single location or possibly a few locations, with limited to no IT budget and usually with no IT personnel on staff.

T

Tokenization – The process of translating a credit card number into a random sequence of numbers as a method of encryption, to enhance credit card security during a transaction.

Transaction Fee – A per item fee charged to the merchant by the acquirer for transaction activities such as sales, credit/returns, batch closures, third-party services, etc.Transaction reference number (TRN) – a unique reference number used to identify individual payment or securities settlement instructions (e.g. SWIFT payment messages or credit card authorizations).

V

Virtual Payment Terminal – Web-browser-based access to an acquirer, processor or third-party service provider website to authorize payment card transactions. Unlike physical terminals, virtual payment terminals do not read data directly from a payment card. The merchant manually enters payment card data via the securely connected web browser. Because payment card transactions are entered manually, virtual payment terminals are typically used instead of physical terminals in merchant environments with low transaction volumes.