10 April 2010

20 Important Terms to Help You Better Understand Merchant Account Processing

Some of the most important terms used in connection with opening and maintaining a merchant account include the following: acquiring bank, Address Verification Service (AVS), authorization, batch, card association, card issuer, card present, cardholder, chargeback, credit card, credit card processors, card verification value (CVV2)2, discount rate, gateway, holdback, interchange, Internet merchant account, merchant account provider, point-of-sale (POS) terminal, and virtual terminal.

Before you can accept credit card payments for your business and increase your profits, you need to open a merchant account.  To fully understand the nature of merchant account processing, you need to acquaint yourself with the terms related with opening and maintaining a merchant account.  Here are the most important terms to start with:

Acquiring bank

Simply known as acquirer, this bank is a licensed member of Visa or MasterCard that works on the establishment and maintenance of merchant accounts as well as processes all transactions of the merchant in the credit card process.

Address Verification Service (AVS)

AVS is a security measure used by merchants with card-not-present transactions, such as mail order/telephone order (MOTO) and Internet purchases.  The address for billing as provided by the customer for a certain transaction is being checked against the recorded address at the client's card issuing bank.  This will help reduce the risk that goes with credit card processing when the card is not swiped, but does not guarantee that a transaction is valid.

Authorization

Authorization is the process by which a credit card issuing bank approves a certain transaction for a specified amount through a secure terminal.  Merchant account providers usually charge an authorization fee for communicating and seeking authorization whether it is a sale, void, credit, or when processing a batch.  In case of sales, this fee applies whether the transaction is approved or declined.

Batch

Batch is a group of transactions that is stored in the merchant's terminal.  Once submitted for processing, usually at the end of the day, the batch is considered to be settled or closed.

Card Association

These associations act as intermediaries between acquirers and issuers for the authorization and funding of transactions.  Examples are Visa, MasterCard, and Discover.

Card Issuer

Otherwise known as the issuing bank, this company issues a credit card to a qualified individual.  This financial institution must be a licensed member of Visa or MasterCard.

Card Present

This is the case when a card payment is done by swiping a credit or debit card through a point-of-sale terminal or through a credit card draft that is printed and signed.

Cardholder

The cardholder is the person who owns the credit or debit card.  He is the person to whom the card is issued and whose name appears embossed on the card.

Chargeback

A chargeback is a credit card sale amount that has been disputed by the cardholder coursed through the issuer.  This amount is debited from the merchant account.  Merchants are given ten days to refute the dispute through the acquiring bank, then to the issuing bank.  Once found valid by the issuing bank, the amount is credited back to merchant account.  When chargebacks occur, a chargeback fee is usually charged by the merchant account provider for the processing.

Credit card

Also known as a charge card, it is a plastic card from the issuing bank with a magnetic strip that is used to buy goods or acquire services on credit.

Credit card processors

Credit card processors are the ones who handle the details of processing credit card transactions between merchants, issuers, and merchant account providers.

Card Verification Value 2 (CVV2)

CVV2 is security feature made of a three-digit code, that is found at the back of the credit card to help avoid fraudulent transactions.  Merchants usually ask purchasers for this code with card-not-present transactions to ensure that the other credit card information given is valid and that the card is in possession of the purchaser.

Discount Rate

A discount rate is the amount charged by the acquirer to the merchant for processing credit card transactions.  This is a percentage of each transaction processed.

Gateway

Otherwise known as payment gateway, it is a service that links the shopping cart with the card processor.  It translates information received from shopping carts and sends it credit card processors and translates the information sent by credit card processors back to the shopping cart during the entire process of authorization

Holdback

A holdback is a certain amount that is being held as a reserve from a merchant account in order to cover possible chargebacks and related fees.  This amount will be turned over to the merchant after a determined period of time has elapsed.

Interchange

Interchange is the entire process by which credit card transactions undergo starting from authorization down to the settlement of funds to the merchant account.

Merchant account

A merchant account  is a special type of checking account that allows merchants to accept credit card and other electronic payments over their retail store, over the Internet, or for telephone and mail order purchases.  It is also a contract between a business and the acquirer for processing card payments.

Merchant account provider

A merchant account provider gives businesses the ability to accept credit and debit cards as payments for the goods and services purchased by their customers by providing card processing services.

Point of Sale (POS) terminal

A POS terminal is device that allows you to swipe the credit card to make a charge.  It records and transmits data for authorization and processing almost instantly via an Internet connection, a regular telephone line, or a wireless signal.

Virtual Terminal

A virtual terminal is equivalent to the POS terminal for retail stores.  This terminal can be used to manually process card transactions over the Internet.  It further allows merchants to do recurring billing for customers, check the status of transactions, and generate reports that a merchant may need regarding card transactions.

These are just some of the most important terms you need to understand before getting yourself a merchant account.  When you start to canvass different merchant account providers, these terms will come out easily.  With your knowledge of these, you are able to understand what their representatives are talking about.  It will also help you understand the nature of merchant account processing, as well as card processing as a whole.

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