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The Green Sheet Online Edition

November 09, 2009 • Issue 09:11:01

Glossary of common payments industry terms

Following are definitions of frequently used payments industry terms. These are also posted online under the Resources link found at the top of our home page, www.greensheet.com/glossary.php. Going forward, we will be adding more terms to the glossary, including those pertaining to data security and electronic commerce. We will welcome your feedback; please e-mail suggestions and comments to greensheet@greensheet.com.

ACH: See automated clearing house.

acquirer: A federally insured financial institution responsible for connecting merchants to Visa Inc. and MasterCard Worldwide authorization and settlement systems. Also called an acquiring bank, merchant bank or sponsor bank.

Acquirers and merchants are the two signatories to merchant agreements. Acquirers can be thrifts, banks or credit unions. For example, First National Bank of Omaha is an acquirer and a bank. To sell bankcard services, it is necessary to have a signed agreement with an acquirer or be part of an ISO that is sponsored by an acquirer.

Among other things, an acquirer deposits daily card totals to merchant accounts and debits monthly processing fees from those accounts. The acquiring bank must handle all funds, deposits and settlements with merchants.

ISOs and other entities on the acquiring side of the bankcard business also refer to themselves informally as acquirers, as evidenced by several regional acquirers associations thriving throughout the United States, but strictly speaking, they are not acquirers.

acquirers association: A regional, independent and nonprofit organization that provides training, education and networking opportunities for professionals working in the acquiring side of the bankcard industry, including financial institutions, ISOs, MLSs, equipment vendors and providers of value-added services.

acquiring bank: See acquirer.

address verification service (AVS): A fraud deterrent technique used in card-not-present situations. AVS offers various levels of address verification detail, including cardholder ZIP codes and street numbers.

agents: People who sell bankcard services to merchants on behalf of ISOs, acquirers and processors. Also known as merchant level salespeople (MLSs) and independent sales agents (ISAs), most agents are independent contractors. Others are paid employees of ISOs, acquirers and processors.

authorization: An electronic exchange between a card issuing bank and an acquiring bank, initiated through a POS terminal, confirming a cardholder has sufficient credit (or funds in a demand deposit account if it is a debit card) to cover a pending transaction.

automated clearing house (ACH): An electronic payment network most commonly associated with payroll direct deposit and recurring payments. The ACH can be used also to clear electronic checks and other demand deposit account (DDA) transactions.

AVS: See address verification service.

bank identification number (BIN): A numerical code assigned to each federally insured financial institution for the routing of transactions and other purposes. ISOs and MLSs board merchants using the BINs of their respective acquiring banks.

batch: A collection of card receipts saved for submission, usually at the end of the business day. When the receipts are sent, the batch is "closed."

BIN: See bank identification number.

buy rate: The acquiring bank's fee; it is equal to interchange (which is paid to the issuing bank) plus the acquiring bank's markup. Think of it as the wholesale price of a transaction to which processing and other fees are added to come up with the cost to a merchant. Buy rates have not been widely used since the multitude of interchange rates came into being; many ISOs and acquirers now use pricing models that involve splits of net revenue.

card laundering: When a merchant processes sales through his or her merchant account on behalf of another merchant. Laundering violates the terms of merchant agreements. Also called draft laundering and factoring.

Card-not-present: Card transactions (Internet or MO/TO purchases, for example) for which the customer's card is not physically handled by the merchant. Interchange is set higher on these transactions because there is a greater likelihood of fraud.

card verification value (CVV): The three- or four-digit numbers appearing on the signature panel on the back side of most credit and debit cards, typically following the account number. However, CVV numbers on American Express Co. cards appear on the face of the card above the card number.

chargeback: When a cardholder's bank (issuer) reverses all or part of a card transaction back to the merchant bank (acquirer), which typically kicks the transaction back to the merchant's account, leaving the merchant financially liable for the payment and subject to fines. Chargebacks can be initiated by customers or by cardholders' banks (for example, due to procedural errors). Chargebacks that exceed 1 percent of monthly sales generally are considered excessive.

check scanner: A counter-top device used to scan images of checks, according to legal specifications, for electronic clearing and settlement.

credit cards: Can be issued by banks and nonbanks and are associated with such brand names as AmEx, Discover Financial Services, MasterCard, JCB International Co. Ltd. and Visa.

CVV: See card verification value.

DDA: See demand deposit account.

debit cards: Issued by financial institutions and tied to cardholders' DDAs. Debit cards come in online/offline and offline-only versions. Online in this context means able to interface with the card brand networks for authorization at the POS. Debit cards can be co-branded with Discover, MasterCard or Visa. Online debit requires customers to enter PINs; offline debit card payments are authorized with cardholder signatures.

demand deposit account (DDA): A checking account with a financial institution.

discount rate: The percentage of card sales acquirers collect from merchants for transaction authorization, settlement and so forth.

draft laundering: See card laundering.

EFT: See electronic funds transfer.

electronic funds transfer (EFT): A way of performing financial transactions electronically. The Pulse and Star networks are examples of EFT systems.

factoring: See card laundering.

floor limit: The payment amount above which credit and debit card transactions must be authorized; this amount is specified in each merchant's processing agreement.

hold back: See reserve.

interchange: The fee paid to the card issuing bank by the card acquiring bank by way of the processor. Interchange is the base fee to which all other acquiring and processing fees are added to come up with the merchant discount rate. Interchange rates vary widely based on card type, transaction amount, risks and retail sector. It is assessed on all Visa- and MasterCard-branded cards, even PIN-based debit cards. In certain circumstances interchange flows in reverse, such as following a chargeback.

independent sales agent (ISA): See agents.

independent sales organization (ISO): An organization registered with Visa and sponsored by an acquiring bank to sell VISA card acceptance services; also refers to an organization that works with and does business under the name of such a registered ISO. ISOs may also service merchant accounts once they are registered, dependent upon the contract with the acquirer. MasterCard uses the term "member service provider" to describe ISOs. However, it is common within the payments industry to use the term "ISO" when referring to independent sales organizations registered with either or both card brands.

ISA: Abbreviation for independent sales agent. See agents.

ISO: See independent sales organization.

issuing bank: A federally insured financial institution that issues credit and debit cards; this is the cardholder's financial institution.

magnetic ink character reader (MICR): A countertop device used to scan magnetic ink character recognition lines. A MICR line is a sequence of digits at the bottom of a check that provides details about the bank and account on which the check is drawn and supports authorization and clearing routines.

mail order/telephone order (MO/TO): A category of card-not-present transactions involving purchases made through mail order or telesales companies. In this type of transaction, the merchant typically has a card terminal and manually keys in required card information for transmission to the appropriate authorization network. Interchange rates for these transactions are among the highest.

merchant bank: See acquirer.

merchant discount: Consists of interchange fees charged to merchants by issuing banks for the ability to accept bankcard transactions combined with fees charged to merchants by acquirers to cover such services as processing, terminal installation, help desks and statement rendering. The merchant discount is set by the acquirer at a percentage of the purchase amount, typically between 1.5 percent and 3.5 percent. Sometimes the acquirer's portion of the merchant discount is referred to as the net merchant discount. Also referred to as a transaction fee.

member service provider: See independent sales organization.

MICR: See magnetic ink character reader.

MSP: Short for member service provider. See independent sales organization.

Payment Card Industry (PCI) Data Security Standard (DSS): Established for securing payment card information. Failure to adhere to the standard (by any party that handles card information, including merchants and ISOs) can result in hefty fines. Often shortened to PCI.

PCI DSS: See Payment Card Industry Data Security Standard.

personal identification number (PIN): A number used by a cardholder to authorize card payments and make ATM withdrawals.

PIN: See personal identification number.

PIN debit: A debit card transaction authorized by a cardholder using a personal identification number.

point of sale (POS): The place where retail sales occur and payment transactions are initiated.

POS: See point of sale.

prepaid card: A payment card with a set amount of money that has been preloaded onto it for future use by the consumer. It is not a credit card or debit card. Prepaid cards can be used in an open-loop (branded by Visa, MasterCard and so forth) or closed-loop (merchant or mall-branded). The most common type of prepaid card in use today is the gift card.

processor: The company that moves transactions on behalf of acquirers among merchants, banks and the card networks. Some, but not all acquirers are processors.

RDC: See remote deposit capture.

remote deposit capture (RDC): Electronic check services by which paper checks are converted into digital images for electronic clearing and settlement, through either electronic check or ACH systems.

reserve: The money set aside from a merchant's credit card receipts to cover potential chargebacks or other disputes. Typically, the amount is returned after a specified period. Also known as a hold back.

response code: A number provided by a card issuing bank to a merchant either verifying that a particular transaction was accepted or explaining why it was declined.

reversal: A method of recourse for merchants to counter chargeback claims. Cardholders can also set reversals in motion when they rescind chargeback claims.

settlement: The process by which the processor, working on behalf of the acquirer, debits the issuer for a transaction and credits the acquirer, and where the acquirer then credits the merchant. Settlement also involves payment to the card brands, calculating discount and qualifying a transaction for the appropriate interchange. Other aspects include exception processing, returns and disputes.

signature debit: A Visa Debit or Debit MasterCard transaction authorized by a cardholder's signature; to the casual observer it looks just like a credit card transaction.

sponsor bank: See acquirer.

super ISO: A large, independent sales organization that supports multiple downstream ISOs and MLSs. Some super ISOs are also processors.

terminal: A POS device, usually with a small display monitor and keyboard, connecting to the Visa and MasterCard payment network and/or to a proprietary network that authorizes payment card transactions and transmits card data to a receiving institution. end of article

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