Understanding Online Payment Processing Terms and What They Mean
If you’ve just started to accept online payments, you may believe that the process is fairly simple. Just place a shopping cart or attach a payment method to your eCommerce site. Or, if you’re only providing certain services, you may simply think that you can merely bill your clients with an electronic invoice and magically have the funds available to your bank account.
Unfortunately, it’s not that simple. Processing payments online can be complex and perplexing of you’re new to the game. To help you get started, and make accepting payments online as painless as possible, here’s a breakdown of the most common online payment processing terms that you need to learn first.
An authentication method established by Visa, as well as other credit card organizations, that is named after a three domain model (acquirer domain, issuer domain, and interoperability domain.) 3-D Secure protects customers against fraud, however, since it involved a pop-up window, it may not be as convenient for mobile users.
This is a service offered by payment processors that provide updated account numbers, expiration dates, account status, and cardholder contact information to merchants. It’s useful if you offer recurring billing or a subscription service since it can prevent declined transactions. It also helps you retain customers since they’ll be less likely to cancel the recurring payment.
Short for Automated Clearing Housing and also referred to as eChecks, ACH payments let customers enter their bank information in order to initiate transfers from their bank account to the merchant’s account.
Address Verification Service (AVS)
AVS is a system that is used to verify the cardholder’s’ billing address. The way this information is verified is by checking for the validity of information that has been provided to the issuing bank, which is the bank that has issued the card to the customer. AVS reduces fraud and is supported by Visa, MasterCard, Discover, and American Express.
This is the bank or financial institution that processes the credit or debit payments on behalf of the merchant. It’s their responsibility to clear all transactions and make deposits into a bank account when payments are processed. If there are too many questionable transactions, the acquiring bank may apply additional fees.
This is the process of validating funds available on a credit or debit card and is done whenever a transaction is entered. In a matter of seconds, there’s a response from the issuing bank to the acquirer to the merchant with an authorization code notifying them if the request is approved or declined.
These are transactions when the actual card is not present. Because merchants can not see or have customers enter a PIN or signature, this is where the majority of fraudulent activity occurs. AVS is the three-digit code on the back of the credit card and can be used to monitor any fraudulent activity during CNP transactions.
A chargeback is enacted whenever a customer disputes a charge. While chargebacks protect customers from the disreputable business organization by refunding the money spend on inferior goods, they’re not merchant-friendly since these chargebacks come with fines. To avoid chargebacks always be transparent about the products that you sell, easily issue refunds, be easy-to-contact, and take steps to prevent fraud, such as using AVS.
Also known as digital cash or eCash, cryptocurrencies relies on cryptography to initiate secure transactions between two parties. Cryptocurrencies are decentralized, meaning that it’s not regulated by any governing body.
This is a percentage of every sale that merchants must pay to your acquiring bank for accepting consumer credit cards. For example, if the merchant discount is 4 percent, then the merchant would keep $96 for every $100 in sales. The discount rate is usually between 1-3 percent, but that rate is typically for online merchants because of the risk involved and is bundled into a single, percentage rate which typically includes interchange, assessments, and processor fees.
This is the process where customer’s personal information and payment processing transactional data is encoded. This ensures that it’s secure enough to be transmitted across the Internet. Encryption is also an important part of PCI compliance.
Level 1 Data
For all online transactions information, such as account number, transaction date, purchase amount, supplier, category code, supplier name, city, state, and ZIP code, are required by the card brands.
Level 2 & 3 Data
For most online merchants Level 1 data will suffice, but if you process business-to-business (B2B) payments or business-to-government (B2G) payments, you’ll be required to enter additional information like Tax IDs customer code, tax amounts, item descriptions, and freight amounts. This is Levels 2 & 3 processing.
If you accept credit or debit cards online then you’ll need a merchant account. Essentially, this is a line of credit offered by the acquiring bank. The bank is then responsible for debiting the funds from your customers and depositing them into your bank account.
Merchant Identification Number
Processors or acquirers generate unique numbers for each merchant location so that they can identify the merchant during the processing of daily transactions.
Merchant Pricing Fees & Models
If you accept payments then you’ll be charged a wide-range of processing fees. These fees can vary from processor to processor and are based on other factors such as the card being used, how many transactions you process daily, and the type of business that you are. We’ve already put together a useful guide detailing these fees, but here’s a brief overview:
- Processing fees such as the card brand fee, discount rate, transaction fee, interchange differential, and non-qualified rate.
- Fixed fees like AVS, network access fee, monthly service fee, PCI fee, payment gateway fee, and online reporting fee.
- Situational fees including cancellation, chargeback, monthly minimum, and international fees.
On top of processing fees, payment providers also have various pricing models:
- Interchange Plus where you must pay the card’s interchange rate (the cost of accepting that card) plus a markup, which is a fixed percentage that the payment provider will tell you.
- Interchange Differential where you pay the qualified rate, the non-qualified fee, the card brand fee and the interchange differential fee.
- Flat where you’re charged the same rate no matter which type of card that you process.
- Tired where a number of categories are used to determine the price you’ll be charged.
- Billback/ERR is also known as Enhanced Recover Reduced, or Mixed Rate or Blended Rate, the Billback pricing model is comprised of a flat rate, as well as a fee for all non-qualified cards.
Monthly Processing Limit and Volume
The monthly processing limit is the amount of money that a merchant service provider permits a merchant to process each month. The monthly processing volume is the gross monthly payment card sales that a merchant processes. This figure, along with the average ticket sale, must be specified when applying for card processing. These are used to help determine the processing fees that you’ll be charged.
This allows merchants to price goods in multiple currencies so that overseas customers can understand the price of goods or services.
This is a service, such as PayPal, that receives the online payment request from your website and then directs it to the payment processor.
This is a service that validates the purchaser’s credit card details and verifies if there are sufficient funds. Payment processors are responsible for handling the authorization and settlement, determining how much you’ll be charged you for each transaction, and transferring funds from your customer’s bank to your merchant bank.
Payment providers actually operate the payment gateway or payment processor services. It’s not uncommon for the payment gateway and payment processor to be combined.
This is an abbreviation for Payment Card Industry Data Security Standards. These are rules that have been established by the card industry that merchants must follow in order to prevent credit card fraud, such as encrypting customer data. If not, you may be subject to fines.
Recurring billing is a set amount of money that your customers are automatically charged at set intervals.
Thi is where payment processors hold a percentage of the transaction or a flat amount for a certain amount of time in order to mitigate risks from chargebacks or bank reversals. This is not a fee. The money will be deposited into your account once it’s determined that there’s no issue of risk involved with the payment.
Secure Socket Layer (SSL)
SSL is a secure web protocol that is used for encrypting the data between a web browser and web server so that a third-party cannot intercept your customer’s payment information.
This is the last step when processing payments. Settlement occurs once the card issuer transfers the appropriate funds to your acquiring bank, which will then deposit them into your merchant account.
A virtual terminal, as explained in a previous Due post, is “a program that lets you put your customer’s information into an online payment form.” In other words, it’s the electronic equivalent of a physical point-of-sale terminal.