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Merchant Accounts

Merchant Account Glossary of Terms

There are a variety of terms used in the merchant account business and sometimes not knowing these terms can make it difficult to know if you are getting a good deal or not.  We feel our job is to educate you and for us, an educated customer, is our best customer.  Below are the definitions for most common merchant account terms.

  • ABA Routing Number:  This is the nine digit American Bankers Association number sometimes referred to instead as only the Routing number or alternatively as the Transit Routing Number that appears at the bottom of your check next to your checking account number and the individual check number.  Each back has its on ABA Routing number so it uniquely references a bank and so in a sense is the Banks account number.  On a business checking typically the check number appears first before the Routing Number compared to a personal check where it appears first.
    ABA Routing number  Business Check
  • ACH stands for Automated Clearing House.  This is the alternative technique to accept payments from credit card acceptance that is typically used or associated in what is called "Electronic Checks".  An ACH is a payment from one bank account to another.  ACH payments, like checks are not guaranteed and can bounce like checks until they finish a process called "settlement".  ACH Settlement is the time and process by which these electronic payments are followed by paper process via the Federal Reserve to confirm they are authentic.
  • Acquiring Bank.  This is the merchant account bank that has the direct relationship with Visa and MasterCard.  The acquiring bank performs the deposits and recovery of funds and fees between the cardholders bank or issuing bank and your merchant checking account.
  • Authorization.  This is the process ONLY of Validating funds are available at the issuing bank for the individual cardholder.  It is the first step of processing a credit card.  An authorization in and of itself does cause a funds transfer but rather "earmarks" those funds as "transacted" on behalf of the acquiring bank.  This occurs in real time and a six or seven digit authorization number or code is issued indicating the authorization was accepted.  If the code is not returned, a decline is returned instead.
  • Authorization Code.  The six or seven digit number provided by the terminal that indicates an authorization has been approved and accepted.  Its important for the merchant to keep track of this number as it serves as proof of authorization.
  • Auth Only or Authorization Only Transaction.  A type of transaction where the sale is Authorized only but the funds are not captured and the funds are not settled.  This is useful to earmark funds for a purchase until such a time that the goods and services are delivered or the actual charges are determined.  Its useful to prevent fraud and to guarantee funds such as deposits or prolonged delivery of products and services.  The only downfall of the process is that transactions that are authorized but not captured and settled within 24 hours or a batch is not closed, then the transaction will downgrade and  thus cost more.  This additional expense though could be trivial compared to its intended purpose and functionality within the sales process.
  • AVS or Address Verification Service.  Address Verification Service (AVS) is the process of obtaining a check of the cardholders address as provided during the sale with the address of record of the cardholder as provided to the issuing banks credit card records.  There is a fee charged by the processor for this additional service step.  It is required in card-not-present (non-swipped) transactions.  In some cases, such as foreign cards, the information to perform this will be NOT PRESENT instead of giving a MIS-MATCH error.  At that point, it becomes an individual merchants decision to accept the card or not.
  • Average Ticket Size.  This is the average amount of a credit card sale.  This is necessary information when applying for a credit card merchant account.  However, since you may not have an account yet, you may have to estimate this.  You can estimate this by taking your sales for a period and dividing it by the number of sales for that period.  However, credit card sales will typically be higher than cash sales so the estimate you reach in this manner will typically be low.  You will need to up your estimate using this approximation.
  • Basis Points.  Basis points are a way to talk about increased rates without respect to knowing what the bottom rate is.  This is typically used to describe your rate above your discount rate.  A basis point is 1/100th of one percent.  So 201 basis points is equal to 2.01%.
  • Batch.  The batch is the last step in a credit card sales transaction.  Typically transaction are authorized for a days worth of sales.  These sales are authorized and stored in a batch, until the merchant provides the goods and services.  Once those goods and services are provided to the consumer, the merchant batches the transaction to settle.  At settlement, the transaction are committed and the funds are captured.  In all cases, a terminal or gateway batches transactions for a set period of time even in a auth-capture type of transaction.  A gateway or terminal can be set to "manually" batch or to "automatically" batch.  We suggest that in virtually all cases, you should have this set to automatically batch.  If you manually batch, then you are responsible at the end of the day to commit the batch and commit those transaction by submitting the batch.  Failure to do so, could result in a downgrade of all transactions in the batch.  With auto settlement, the batch is automatically closed and submitted at the end of a set time interval without the merchants additional involvement preventing this from happening.  Between the point of authorization and settlement, a transaction may be voided.
  • Business Type.  Generally Visa and MasterCard has statistically viewed different industries and methods of processes to determine the risks of each type of business and each way of processing a credit card.  Using these profiles, they establish certain rates for which merchant businesses are profiled.  When applying for a merchant account, a merchant service provided needs to know your business type and method of processing to determine your risk profile.  For example, a Retail merchant is expected to use a card swipe terminal to transact sales.  The same is true for a Wireless merchant.  Both of these types of merchants perform card-in-hand transactions and typically have a brick and mortar business or the customer is in front of them during the sale.  A MOTO merchant is a Mail Order Telephone Order transaction based merchant.  In these cases, the customer is not directly in front of the customer but submits an order over US mail or over the phone.  In these sorts of transactions, a terminal would be used but the transaction would be keyed into the terminal or into a gateway.  An Internet merchant provides sales over the Internet and typically the transaction is entered directly by the consumer into a shopping cart that processes the transaction via the gateway.  Each of these methods of process have their own individual rates and methods of process.  This is important, because sometimes a merchant may feel that they can simply enter a new area of business where the risk profile is higher.  For example, a Retail merchant may feel they will take Internet sales and key them into their terminal and thus be able to get lower fees and rates because they are a retail customer.  There is nothing further from the truth, because the transaction will downgrade in such a circumstance and the higher rate could be substantial than had the merchant actually processed the card in the manner than is prescribed for the business type.  Many merchants are loosing hundreds of dollars because of this confusion and most merchant service providers do not discuss this.  See downgrade.
  • Capture.  This is the step that occurs AFTER an authorization is performed.  When a capture is performed, the funds are "captured" and a transfer is initiated to move the funds from the cardholders account to the merchants bank account.  An authorization can be performed without a capture and this is typically called an Auth ONLY or Authorization only transaction.  AUTH CAPTURE performs the second step of capturing the funds after the close or settlement of the batch.  The time between Authorization and Capture a merchant may perform a VOID.  A void prevents the transaction from settling and the authorization automatically expires after a set time.
  • Card-Not-Present Transactions.  Transactions where the card numbers are keyed instead of swipped into the processing method.
  • Discount Rate (Confirming Rate).  The discount rate or conforming rate is the rate that the merchant will be charged if the transaction is processed per the type of account, in the manner prescribed by Visa and MasterCard as well as the card issuring bank, in conformance of all the rules and processes as prescribed and per the type of credit card used by the consumer.  It is the lowest rate that a merchant would have to pay for the B to C use of a ordinary consumer credit card processed in the ordinary manner prescribed by all authorities of the transaction.
  • Debit Cards.  A debit card looks like a credit card but it is not the same thing.  When a consumer makes a purchase with a debit card the transaction is immediately withdrawn from the bank.  As a result, these transactions can be less expensive to perform by a merchant if you are in a retail card-present environment.  A credit card on the hand is billed to the consumer on a monthly basis and the consumer may not have the funds right away to pay a transaction.  Interest fees are charged to the consumer to lend these charges to the consumer.  There is additional risk for the credit card company that the consumer will default where as on a debit card this risk is diminished.  However, there are generally two types of debit card transactions and this risk profile is diminished if the consumer is not in front of the retailer.  The first is Pin-Debit or Online Debit. With Pin debit, a pinpad is provided by the merchant and the consumer enters the pin.  These type of transactions have lower risk than the other debit card transactions.  The second is signature-Debit or Offline Debit.  In these cases, no pin is collected.  In a retail transaction, a signature may be obtained.  In an Internet or MOTO transaction, no pin and no signature may be collected as well.  In such a case, the risk of a signature-less, offline debit transaction is nearly the same as a credit card.
  • Decline.  A decline is the opposite of an authorization.  It indicates the cardholders bank has rejected the transaction.  It can be because of insufficient funds but there are any number of other reasons an issuing bank can decline a transaction.  Only a cardholder can contact their bank to determine the actual reason as this information is held in confidence.
  • Downgrade.  A transaction downgrades for a particular credit card when the transaction is processed in a manner not determined for the card risk, merchant risk, or processing risk as prescribed by the issuing bank or by Visa and MasterCard.  When a transaction is downgraded, additional fees are charged to offset these risks.  These risks can be anything from not obtaining an AVS to keying in a transaction instead of swiping the card on the terminal.  See more on downgrade fees here.  Most merchant service providers do not talk about this part of the process because keeping it vague makes them more money at a huge disservice to you.  We educate our customers.
  • Issuing Bank.  The issuing bank is the consumers credit card bank.  The issuing bank typically determines many of the requirements the merchant must follow to obtain the best rate for the credit card.  As a result, the merchant does not have total control over their rates.  A corporate merchant bank may have entire different rules than a consumer credit card issuing bank.
  • Non-Qualified Rate.  If a transaction is downgrade, it will incur additional fees.  A non-qualified rate is the highest rate a merchant will be charged for use of a credit card by a consumer.  In this case, the card or method of processing the credit card created a higher than expected risk profile and this risk of fraud or the additional work necessary to process this transaction causes the fees to be passed on to the merchant.  You need to avoid non-qualified transactions whenever possible.  However, because of situations and because you do not control your customers card issuring bank, you have only limited control over these type of transactions.
  • Partial Qualified Rate.  If a transaction is downgraded, it will incur additional fees.  A partially-qualified rate is typically higher than the discount rate but not as high as the non-qualified Rate.  These sort of rate may occur only in select cases.
  • Settlement:  The process of sending a credit card batch or merchants "batch" to a processing network for final processing and payment.  Fees for this process are typically called Settlement Fees.  The Settlement process occurs after authorization and capture and a batch is typically committed after products or services are rendered in that order.  This process uses to be manual, however typically in modern day gateway processing, batches are typically auto-settled at a set time and end of day.  This is because batches not settled within a certain time after authorization and capture may be subject to downgrade feels.
  • Swiped Transactions.  Transactions where the credit card number is transferred to the processing method using a magnetic stripe on the credit card which is read by the processing method ensuring the credit card number is correct and since the card is present, the transaction caries less fraud risk.
  • Transaction Fee.  This is also sometimes called an Authorization Fee.  These are fees origination at the processor and so in all cases, a transaction fee is occurred each time any communication of any kind occurs, whether over a telephone line, leased line, a gateway or a terminal.  This fee reimburses the processing network for the use of their transaction processing system.  It occurs in all cases, where its a normal sale, an authorization only transaction or even a refund.
  • Void.  A Voided transaction is the process of cancelling a transaction that has been authorized but as not yet been captured and settled.  If a transaction is voided before the batch for which this transaction is set to be submitted, the customer will never see the charge appearing on their final account statement.
  • Volume (either Monthly Volume or Yearly Volume).  This is the total amount of credit card sales in a month or in a year.  You need this information when you apply for a merchant account.  If you don't presently do credit card sales, you will need to estimate this.  If you have to estimate, its typically better to estimate low on this amount since a higher amount could result in higher requirements by the merchant bank.  If your sales increase dramatically, most merchant banks will increase your limits without issue as long as your estimate was not completely unrealistically low as to some indication of fraud.