Guide to Payment Processing Terms
Accepting credit cards from your customers isn't as simple as some merchants might imagine. Not only is the process by which the transactions are approved and funds are delivered complicated, but there are many terms that are used. Many of them can be confusing. Chargebacks, payment gateways, ISOs, discount fees, and batches are just a few of the terms that business owners need to learn. Below, we'll provide you with easy-to-understand definitions for the terms that are used most often.
Merchant Account - A merchant account is a contract between a financial institution (called an "acquiring bank") and a business owner. The contract allows the business owner to accept credit card payments.
Issuing Bank - An issuing bank is the financial institution that offers credit cards to consumers. When a cardholder makes a purchase, the issuing bank either approves or denies the request for funds from the merchant bank.
Chargeback - A chargeback occurs when a customer requests that a credit card transaction be reversed and the funds returned to him. Often, this happens due to a customer identifying a transaction as unauthorized or fraudulent. The issuing bank will reclaim the funds that were used for the purchase from the merchant bank.
Payment Gateway - Retail stores have credit card terminals through which customers swipe their cards or the card's numbers are input manually. A payment gateway is used for the same purpose for online purchases. The gateway encrypts the card data and communicates the details of the transaction to the merchant's bank.
Settlement Time - Many payment processors and merchant banks will hold the funds from a card transaction for a predefined time period. This may be for 1 day or several weeks.
For business owners who rely upon steady cash flow, a long settlement time may be impractical.
Payment Processing Fees
Fees are an important of each credit or debit card transaction. Some fees are exclusive to merchant accounts while others are associated with third party processors. Here are a few of the most common fees that business owners will need to know about if they intend to accept credit cards for payment:
Interchange Fee - An interchange fee is the portion of every purchase transaction that a cardholder's issuing bank retains when sending payment to the merchant's bank. It is only relevant for transactions that are processed using Visa or Mastercard.
Discount Rate - The discount rate reflects an assortment of fees that are paid by business owners whenever they process a credit card payment. The interchange fee (described above) is one of the fees that make up the discount rate. This rate can vary wildly between merchant accounts.
Authorization Fee - Whenever a transaction is processed, a request is made to the cardholder's issuing bank for authorization. Whether the purchase is approved or denied, the merchant must still pay a small authorization fee.
Batch Fee - At the end of each day, a business owner should "batch up" and send that days' transactions to his merchant bank. Some merchant banks will charge the business owner a small batch fee for the daily settlement of the merchant account.
Knowing The Terms
If you do not already have a merchant account or payment processing solution, the terms described above may seem confusing. Once you gain experience by accepting credit card payments, you will begin to appreciate how each facet impacts your business. There are many other terms that are used within the industry. But, if you have a clear grasp of those explained above, you should feel confident about exploring your payment processing options.
Merchant Account - A merchant account is a contract between a financial institution (called an "acquiring bank") and a business owner. The contract allows the business owner to accept credit card payments.
Issuing Bank - An issuing bank is the financial institution that offers credit cards to consumers. When a cardholder makes a purchase, the issuing bank either approves or denies the request for funds from the merchant bank.
Chargeback - A chargeback occurs when a customer requests that a credit card transaction be reversed and the funds returned to him. Often, this happens due to a customer identifying a transaction as unauthorized or fraudulent. The issuing bank will reclaim the funds that were used for the purchase from the merchant bank.
Payment Gateway - Retail stores have credit card terminals through which customers swipe their cards or the card's numbers are input manually. A payment gateway is used for the same purpose for online purchases. The gateway encrypts the card data and communicates the details of the transaction to the merchant's bank.
Settlement Time - Many payment processors and merchant banks will hold the funds from a card transaction for a predefined time period. This may be for 1 day or several weeks.
Payment Processing Fees
Fees are an important of each credit or debit card transaction. Some fees are exclusive to merchant accounts while others are associated with third party processors. Here are a few of the most common fees that business owners will need to know about if they intend to accept credit cards for payment:
Interchange Fee - An interchange fee is the portion of every purchase transaction that a cardholder's issuing bank retains when sending payment to the merchant's bank. It is only relevant for transactions that are processed using Visa or Mastercard.
Discount Rate - The discount rate reflects an assortment of fees that are paid by business owners whenever they process a credit card payment. The interchange fee (described above) is one of the fees that make up the discount rate. This rate can vary wildly between merchant accounts.
Authorization Fee - Whenever a transaction is processed, a request is made to the cardholder's issuing bank for authorization. Whether the purchase is approved or denied, the merchant must still pay a small authorization fee.
Batch Fee - At the end of each day, a business owner should "batch up" and send that days' transactions to his merchant bank. Some merchant banks will charge the business owner a small batch fee for the daily settlement of the merchant account.
Knowing The Terms
If you do not already have a merchant account or payment processing solution, the terms described above may seem confusing. Once you gain experience by accepting credit card payments, you will begin to appreciate how each facet impacts your business. There are many other terms that are used within the industry. But, if you have a clear grasp of those explained above, you should feel confident about exploring your payment processing options.
This article is brought to you by PaySimple, a leading provider of merchant account services.
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