Glossary
Acquirer or Acquiring Bank - From the Merchant's perspective, Acquirer or Acquiring Bank is most commonly referred to as a Merchant Bank (see Merchant Bank).
Address Verification System or AVS - Address Verification System is a method whereby the Merchant is asked to supply address information for the cardholder for non-swiped transactions. The Merchant’s system sends the street address and the zip code of the cardholder's billing address to the Front-End Processor. The Front-End Processor makes a request of the Issuing Bank to verify the validity of the address and lets the Merchant's system know whether the address supplied is valid.
While this does lower Discount Rates and is supposed to prevent fraud, most credit cards are stolen along with a wallet or purse, which usually has address information in it. This just may be another way of increasing the Interchange Fee.
What is interesting is that half of the Issuing Banks are not ready to handle AVS. Those that are may only have accurate zip codes in their systems. There is also some industry confusion as to which numbers in the street address should be included with AVS, e.g., should 1123 32nd St. be 1123 or 112332, or should 12591 Main St. Apt. 12 be 12591 or 1259112. With this still up in the air, many Issuing Banks are sticking with zip and zip+4. The Merchant is given the option of what they want to accept as a valid address: zip, zip+4, address plus zip, or address plus zip+4. The good news is that because the Issuing Banks are not yet with the program, in order to qualify for the best rate all you have to do is attempt address verification.
Authorization - The authorization process is different for each Merchant type. Different information must be sent depending on whether you are a restaurant, retail establishment, hotel or mail order/telephone order (MOTO) merchant. In the case of MOTO, since the transaction does not take place face-to-face, address information is required to guard against fraud. The authorization process usually takes place in the following ways:
- Mail/Telephone Order
- Check the cardholder's billing address (Address Verification System).
- If the address passes, go to step two.
- If the address fails, then stop.
- Perform an Authorization request.
- If the transaction is Good (Authorized), ship when ready.
- If the transactions is Declined, do not ship and ask for another form of payment. Return to step one.
- If the transaction is a Referral, call the voice center to get an authorization and ship when ready; or Decline the transaction, ask for another form of payment and return to step one.
- Lodging
- Request an authorization for the check in amount (usually an estimate based on room rate and length of stay).
- If a Referral response is received, the voice center must be called and a verbal authorization/decline will be issued.
- If declined, request an alternate form of payment.
- As additional charges are incurred during the guest's stay, incremental authorizations are made when additional charge amounts exceed the preset Authorization Tolerance (usually 10-15% of the check in amount). If additional charges do not exceed the Authorization Tolerance, they are considered to be under the authorization "ceiling" and covered by the previous authorization code.
- Upon check out, a final authorization is made to ensure full payment of any incidental charges. A lodging transaction is considered an authorization-only transaction until check out time, at which time it becomes a sale transaction. Only sale transactions can be settled to the bank. Note: A lodging Merchant's credit card software must capture all data pertaining to each and every authorization that was made throughout the stay. This will ensure adequate chargeback defense in the event that a guest disputes a particular charge and make the merchant eligible for the lowest possible Discount Rate. In addition, by tying all transaction data to a guest's unique invoice/folio number, DOLLARS ON THE NET® can significantly enhance and simplify the reporting and researching process.
- Restaurant
- Request authorization for total check amount.
- If a Referral response is received, the voice center must be called and a verbal authorization/decline will be issued.
- If declined, request alternate method of payment.
- Once approved, the customer indicates tip amount.
- If the tip is within the preset Authorization Tolerance (10-15% of total bill), no additional authorization code is needed.
- If the tip amount does exceed the Authorization Tolerance, an additional authorization must be obtained prior to settlement.
- Retail
- All Retail transactions are considered sale transactions, which means they can be immediately settled to the bank upon receiving an authorization approval.
AVS - Abbreviation for Address Verification System (see Address Verification System).
Bank Identification Number (BIN) - An identification number consisting of a two-part code assigned to banks and savings associations; the first part shows the location and the second identifies the bank itself. This identifies the institution that issued the card to the card holder, as well as the card type (i.e. debit, credit, gift card).
Brand - The brand of a card refers to the logo or type of card. Visa, MasterCard, American Express and Discover are all common brands.
Card Associations - These are organizations such as VISA and MasterCard that, along with the government, make the rules in regard to acceptance of credit cards. These rules include fees that are charged for interchange. American Express and Discover are different cases. They are both the issuer and acceptors, and Merchants must have a separate agreement with them. This may change as current litigation is resolved.
Cardholder - The authorized user of a credit card who has established a line of credit with the Issuer of the card and is financially responsible for transactions against the card.
Cardholder Verification Value or CVV2 - A 3 or 4 digit number that is printed on the card to verify authenticity.
Chargeback Defense - A customer who does not receive his goods or services, or says he did not place an order, can ask his Issuing Bank to chargeback the Merchant. The Issuing Bank sends the chargeback request to the Merchant Bank, which forwards it to the Merchant asking to validate the charge. Information such as the amount, an invoice or folio, customer signature or shipping documents, as well as the shipping address (used in AVS during the authorization), is needed to defend against a chargeback.
CVV2 - Abbreviation for Card Verification Value (see Cardholder Verification Value). The "2" refers to the printed code on the card. CVV1 refers to a code encoded on the magnetic stripe of the card.
Compliance - The Card Associations make regulations for each industry that accepts credit cards. These regulations are designed (according to the Card Associations) to prevent fraud.
Debit Network - Debit Networks transmit transaction data between the Merchant Bank and debit card Issuer. There are a variety of Debit Networks and each network supported by a debit card will have its logo printed on the debit card. Some examples are STAR, NYCE and MAESTRO.
Discount Rate - This is the fee paid by a Merchant to the Merchant Bank to handle the deposit of credit card funds into their bank. It is usually quoted as a percentage to hundreds (or basis point).
Effective Rate - The calculated bundled rate to the Merchant of a transaction after combining the Discount Rate, assessments and other per item transaction fee.
Interchange - The exchange of transaction data, in this case credit card payments, between the Acquiring Bank and Issuing Bank.
Interchange Fee - This is the fee that the Card Association charges the Merchant to get the funds into his bank (Merchant Bank) and to get the billing information to the Cardholder's Bank (Issuing Bank). Interchange Fees are based on following credit card regulations and capturing appropriate data including card swipe, address, and electronic signature as needed. These fees are also based on the timeliness of the settlement of transactions.
Issuer or Issuing Bank - The financial institution, usually banks, that issue credit cards to individuals with agreements for repayment. These financial institutions promote the use of the various branded cards and charge the cardholders interest and fees for their use. They share in the Interchange Fee charged by the Card Associations. Most of the power in the credit card industry is seated with the Issuing Banks. An Issuing Banks’ worth is its portfolio of cardholders.
MATCH List - Also known as the Terminated Merchant File (TMF). The MATCH list provides a list of all Merchants and individuals that have had accounts terminated with cause. MATCH is an acronym for Member Alert to Control High-Risk.
Merchant - The authorized acceptor of a credit card as payment for goods and services.
Merchant Bank - Sometimes referred to as Acquirer or Acquiring Bank, this is the bank that stands in for all the Issuing Banks and puts up the funds to be deposited in the Merchant's account prior to it being transferred via interchange from the various Issuing Banks. Merchant Banks provide these funds for a Discount Rate, a fee charged for the use of the money. It's called a Discount Rate because it is usually taken away from credit card funds as they are deposited. They also share in the Interchange Fee charged by the Card Associations. A Merchant Bank’s worth is its portfolio of Merchants.
Merchant Identification Number or MID - An identification number that represents a Merchant's operating/profit center to its Acquiring Bank for the purpose of processing credit card transactions.
Merchant Services Provider - A Merchant Services Provider (MSP) is an organization that quotes a Discount Rate to the Merchant and handles the setup with the Front-End and Back-End Processors to ensure the Merchant's funds are correctly routed to his bank. An MSP can be a Merchant Bank or an independent sales organization for a Merchant Bank, called an ISO.
In either case, the MSP is responsible for getting all the paperwork together to setup the Merchant to accept the various cards and to allow the Merchant to process the cards with the Processor. In some rare cases, some Merchant Banks are agents for American Express and/or Discover, and can set up the Merchant to accept their cards. In every case, the MSP is responsible for setting up the Merchant with the Processor to accept all card types.
Non-Merchant Bank MSPs are usually paid a percentage of the Discount Rate. An MSP is basically responsible for the relationship between the Merchant, Card Associations, Processors and Merchant Bank.
Network - Many Merchant Banks and Processors talk about their credit card networks. These can be everything from a real network owned and utilized by the Processor, to utilizing the 800 service of AT&T, Sprint or MCI. Some Processors use private networks such as CompuServe to move their transactions, while others use pseudo-networks put together by wholesalers of the major networks for leased lines.
Processor - A Processor is a company (often a third-party) that handles credit card transactions for Merchant Banks. They are usually broken down into two types, front-end and back-end, with a gray area in between.
Front-End Processors have connections to various Card Associations and supply authorization and settlement services to the Merchant Banks' Merchants. Back-End Processors accept settlements from Front-End Processors and, via The Federal Reserve Bank (FED), move the money from the Issuing Bank to the Merchant Bank. In some cases, the Merchant Bank gets the settlement information from Front-End Processors and in other cases, from the Back-End Processors. This is the gray area.
It gets grayer when you consider that some third party Processors are both Front-End and Back-End Processors, and even grayer when you consider that some Merchant Banks are their own Front-End Processors, Back-End Processors, or both.
Processors are usually paid based on a per transaction fee basis.
Settlement - Settlement is the process by which already authorized transactions are sent to the Front-End Processor to be forwarded to the Merchant Bank and/or Back-End Processor. They in turn are forwarded to the FED to move the funds from the Issuing Bank to the Merchant Bank.
Regulations relative to settlement are different for each merchant type and card type. These regulations predominantly cover what information must be sent at the time of settlement.
Note: The product or service must be delivered or performed before settlement can take place. In the case of MOTO, this specifically means the goods must be shipped before the settlement process is performed.
Signature Capture - Electronic capturing of the cardholder's signature is becoming a powerful tool for chargeback defense. At the point of sale, the customer is asked to sign the invoice, folio or charge slip over a special digital device that turns the signature into a manageable set of digital events so that a program such as DOLLARS ON THE NET can reproduce the signature faithfully. A capture of the swipe and an electronic signature at the point of sale virtually assures that the customer and card were physically there and an authorization was obtained for the purchase of goods and/or services. DOLLARS ON THE NET maintains the signature in an encrypted form to be reproduced when requested for chargeback defense.
