PAYMENT PROCESSING OVERVIEW AND TERMINOLGY
Over the last two decades modern forms of payment has evolved considerably. Even payment forms like cash and cheques are decreasing in usage whilst electronic and digital payments (credit, debit, and mobile payments) are increasing in popularity.
The payment process is becoming more and more “invisible” and fluid.
Consumers are now able to purchase through a variety of different channels and this has created opportunities for value added technologies to emerge, leading to a friction-free payment ecosystem between merchants and buyers.
The payment industry is a landscape with many different entities relying on each other to operate efficiently and securely. At its core, the payments industry is a network that communicates payment information from point to point. However, they do not all speak the same “language”, and often have unique roles – creating complexity and confusion.
Whether you are a merchant or a consumer, the payment process will always start with card brands. Think of them as “wholesalers” who only talk to banks (issuers and acquirers).
The card brands allow the issuer to issue cobranded credit cards to consumers, and the acquirers to acquire merchants who accept credit cards. Some acquirers process payments themselves, while other acquirers allow third parties (payment processors) to use their services as well as further innovate payment technology to bring more value to merchants.
Modern consumers value convenience, speed, and personalization. This has prompted the industry to respond with more friction-free experiences and new payment technologies. This boom in Fintech companies has resulted in an expansive landscape, providing merchants with a large number of ways in which to accept payments.
Payment processing is a rapidly growing industry with promising growth opportunities. Every week, there are new entrants in the market with no one company monopolizing payment processing. The right processor for your business depends on your unique needs.
FREQUENTLY ASKED QUESTIONS
A bank or financial institution that accepts debit or credit card transactions for a cardholder.
Acquirers/Acquiring Banks are registered members of a card network, such as MasterCard or Visa, and accept (or acquire) transactions on these debit and credit card networks' behalf for a merchant. The card network connects Acquiring Banks to banks that issue credit cards, or Issuing Banks, so that a customer transaction can be verified. Whenever a cardholder uses a debit or credit card in a purchase, the Acquiring Bank will either approve or decline the transaction based on the information the card network and Issuing Bank have on record about that card holder's account.
Aside from managing all transactions that a cardholder completes with his or her credit or debit card, an Acquirer also assumes full risk and responsibility associated with the transactions it processes. Because of this, the Acquirer charges various fees for its services. These fees vary by Acquirer, but they're commonly assessed on a routine schedule for activity such as transactions, refunds, chargebacks, and other various situations and reasons. The Acquirer assesses fees on behalf of themselves, the card network, and the Issuing Bank.
Address Verification System
A service used to verify a card holder's billing address.
A system created and maintained by Visa, the Address Verification System was designed to prevent fraudulent activity by allowing a merchant to verify whether a card's given address matches the address in the Card Issuer's system. This system is especially useful in situations where a buyer and a merchant do not complete their Transaction in person but online.
Aggregators are also known as third-party processors and allow merchants to process payments without setting up their own merchant account. They bundle several merchants together and allow them to process payments using a joint merchant account. The set-up is simple and straightforward.
Application Programming Interface (API)
A set of functions and procedures that allow the creation of applications which access the features or data of an operating system, application, or other service.
Card brands, or card associations, are colloquially known as credit and debit card companies. Their job is to govern compliance policies pertaining to their payment cards, monitor processing activity, develop new products, and oversee the clearing and settlement of transactions.
Credit Card Authorization Code
Five or six numbers generated by an Issuing Bank, or the bank of a buyer using a credit card, for the purpose of validating a credit card whenever it is approved in the sale of a good or a service.
During a sales transaction, an authorization code is sent from an Issuing Bank with the message to either authorize or decline a sale. The outcome depends on whether the customer has sufficient funds or credit to purchase the product or service in question. If the customer does not have sufficient funds (or the card is stolen or counterfeit), the message signals to decline the transaction.
If the customer does have sufficient funds, the message is to approve the transaction, and the code itself can be used to verify that the transaction was approved.
BIN (Bank Identification Number)
The first four to six digits on a credit card, which can be used to identify the issuing bank that issued the card.
The first section of the Bank Identification Number identifies the location of the bank that issued the card, while the latter portion identifies the specific name of the bank. BINs are traditionally used by online Merchants as a way to detect fraud by matching the geographic area where the cardholder is located to the geographic area identified in the Bank Identification Number. The term Issuer Identification Number (IIN) and Interbank Card Association Number (ICA) also refer to this same collection of numbers. A personal identification number or PI identifies a cardholder.
Card Not Present (CNP)
Whenever a Transaction is completed and the cardholder (or his or her credit card) is not physically present to hand to the seller.
Whenever credit card information is exchanged over the internet, phone, or mail, it is called a CNP transaction. The card associations created this term to help identify these transactions, because CNP situations tend to be where the majority of fraudulent activity occurs. The Address Verification System is one way that the card associations encourage sellers and banks to monitor for fraud in CNP transactions.
A Transaction in which an issuing bank pulls funds from a merchant back to a consumer. This usually occurs because the consumer escalated a dispute about a purchase to his or her bank for resolution.
When a consumer is either unhappy with a product or service or didn't receive a product or service he or she purchased, the customer's last resort is to contact his or her bank or Credit Card company after trying to resolve the issue with a Merchant. The Issuing Bank or credit card company, as a last option can issue a credit to the customer, called a Chargeback, compensating the consumer for his or her stated loss. Other reasons for a chargeback include bank processing errors, duplicate billing, identity theft, disputes over price charged and processed, or missed refunds.
Merchants may suffer heavy penalties for chargebacks. Chargeback processing is an expensive process for all parties involved, from the Issuing Bank to the Acquiring Banks, to the Payment Service Provider, and the fees charged to the merchant for each chargeback often reflects that. The card associations have strict rules about chargeback management which they require Banks, Payment Service Providers, and Merchants to follow. If a merchant receives too many chargebacks, it will no longer be given permission to accept credit cards from the card associations. It is always in a merchant's best interest to issue a refund before a chargeback occurs.
Closed Loop Payment Networks
Closed loop payment processing includes bitcoin wallets or apps that are limited to a specific vendor or location. Consumers are able to load money into a spending account that is linked to a payment item (i.e. gift card for a specific company or a mobile app).
A thin plastic rectangle with an information-holding magnetic strip that is issued to a cardholder, for the use of purchasing goods and services through a credit account.
Credit Cards contain several informational and security features: usually, on their front, is a 16-digit embossed card number, an expiration date, and a hologram. On the reverse side is a magnetic stripe, signature panel, and 3-digit Card Verification Value (CVV). Some payment systems use non-standard alternatives such as key fobs and miniature cards.
Credit cards are linked to lines of credit, so their use signifies an obligation to pay the credit issuer, as opposed to a direct withdrawal from existing funds. The credit card holder is usually required to pay an interest on outstanding credit that is not paid back within a month.
Credit Card Account Number
The number that uniquely identifies a specific credit card account.
The first 6 digits of the number are the Bank Identification Number, identifying the Issuing Bank. The last digit is a check-digit, used to detect errors. The remaining 9 digits represent the account number assigned to the cardholder. The type of account assigned by the Issuer, for example, classic, debit, signature, business, commercial, and prepaid, is one component in pricing the transaction to the Merchant.
Credit Card Authorization
A request to see whether a credit card is approved for use to complete a given purchase Transaction.
Authorization is necessary to check whether a card holder's Credit Card holds sufficient funds and is approved to purchase from a Merchant. An Authorization Request first emerges whenever a cardholder attempts to purchase a good or service through a debit or credit card.
The request for Authorization is first sent through the merchant's Acquiring Bank to determine the card holder's bank. When notified, the card holder's bank then determines whether the Transaction with the merchant will either be approved or declined based on the card holder's line of credit. After the Acquiring Bank clarifies whether the cardholder holds sufficient funds or credit for the Transaction, this information of whether the Transaction was declined or approved travels back through the Acquiring Bank to the Merchant. If the Transaction is approved, then the amount of the Transaction is deducted from the card holder's account and the cardholder is given Receipt.
Credit Card Interchange
The process in which an acquirer or Acquiring Bank submits approved card Transactions on behalf of its Merchants.
Interchange refers to the clearing and Settlement of records between payment system participants. The term can also be used to describe the fees or transfer pricing between Issuers and Acquirers. Participating Acquirers and Issuers pay or receive interchange each time a credit or debit card is used. For example, banks pay interchange for the fees associated with card-based transactions. This fee tends to be paid by the Acquiring Bank, or the merchant's bank, to the consumer's banks, or the Issuing Bank.
Delayed Delivery Transaction
A transaction in which a buyer does not receive a good or service immediately at the time of purchase.
A Delayed Delivery Transaction occurs when a cardholder completes two separate Transaction Receipts. The first Receipt functions as a deposit, such as a down payment, for goods or services. The second receipt is to pay the remaining balance due to the Merchant.
Electronic commerce or ecommerce is a term for any type of business, or commercial transaction, that involves the transfer of information across the Internet. It covers a range of different types of businesses, from consumer based retail sites, through auction or music sites, to business exchanges trading goods and services between corporations. It is currently one of the most important aspects of the Internet to emerge.
Ecommerce allows consumers to electronically exchange goods and services with no barriers of time or distance. Electronic commerce has expanded rapidly over the past five years and is predicted to continue at this rate, or even accelerate. In the near future the boundaries between "conventional" and "electronic" commerce will become increasingly blurred as more and more businesses move sections of their operations onto the Internet.
Ecommerce Payment Processors
From integrated APIs to hosted checkouts, eCommerce providers are enabling websites to simplify the checkout process and accept payments securely over the web.
Independent Sales Organization
A third-party sales organization that signs Merchants up to accept Credit Cards on behalf of one or more Acquiring Banks.
An Independent Sales Organization is a sales force for hire used by Acquirers that do not wish to staff and manage a sales force internally. Generally, ISO sales representatives receive a commission for each Merchant they sign.
Any bank or financial institution that grants credit cards and/or lines of credit through card associations.
An Issuing Bank is responsible for any card holder's ability to pay off the debt he or she accumulates with the Credit Card or line of credit given by the bank. The Issuing Bank initially writes a letter of credit, which ensures the payment of interest and principal on any purchase made by the card holder.
A person or company that sells goods or services. An e-commerce merchant refers to a party that sells goods or services exclusively through the internet.
A merchant works with an Acquiring Bank to apply for and receive a Merchant Account (an account that allows the Merchant to accept Credit and debit cards). Whenever a customer purchases an item with a Credit or debit card, the Merchant submits the purchase Transaction information to its Acquiring Bank, which will then submit it through the card association network to the card holder's Issuing Bank. The Issuing Bank will approve or decline the charge, and bill the cardholder the amount due to the Merchant.
An account issued by an Acquiring Bank that allows a business to accept Credit and debit cards.
A merchant account is an account number issued by an Acquiring Bank for a specific Merchant. This account number is similar to other unique account numbers issued by a bank (like a bank account number), but is specifically used by the Merchant to identify itself as the owner of the Transaction information it sends to the bank, and the recipient of the funds from the transactions. As part of the application to receive a merchant account, Merchants are required to agree to follow the regulations set by card associations, such as Visa or MasterCard.
Merchant accounts are subject to varying fees. These fees can either be implemented through monthly billing, as a percentage of each transaction or both.
Merchant Category Code
A 4-digit code designated by a credit card company that lists the product, service, or line of business of a merchant.
A merchant category code is first assigned by a Credit Card company, such as Visa or MasterCard, to a Merchant once it begins to accept one those companies' credit cards. If a merchant is involved in more than one type of business, than the Merchant Category Code will apply to that merchant's primary line of business.
Merchant Discount Rate
A fee assessed for the processing of a Credit Card payment from a customer.
Discount rates are traditionally stated as a percentage of each purchase Transaction processed. Often these rates are based on the type of business the transactions are being processed for, the types of Credit Cards used by consumers (business and rewards cards often cost more), and the size of the average Transaction (also known as average ticket, or average sale amount). Usually the largest component of the discount rate are the fees charged by the payment system itself, which is often called Interchange .
Sometimes referred to as digital wallets, mobile wallets allow consumers to pay with a smartphone. They’re apps that replace a physical wallet by storing virtual versions of payment cards, pre-paid cards, or gift cards on mobile devices.
Mobile Wallet Platforms
Mobile wallet platforms are commerce infrastructures that companies can configure to offer a mobile wallet solution to their consumers.
Mobile Payment Processors
Mobile payment processors allow merchants to accept payments using their existing mobile phones by keying the payment info into an app or via an attached card reader. This allows merchants to take payments wherever they are.
The rules that govern payment system participants regarding system membership, the acceptance and exchange of Transactions, the pricing of Transactions, the security of cards and data, and other topics.
Any software that facilitates the communication of transaction information.
Payment Gateways are software and servers that transmit Transaction information to Acquiring Banks and responses from Issuing Banks (such as whether a transaction is approved or declined). Essentially, Payment Gateways facilitate communication within banks.
Security is an integral component of all payment gateways, as sensitive data such as Credit Card Numbers need to be protected from any fraudulent parties. The card associations have created a set of rules and security standards which must be followed by anyone with access to card information including gateways. This set of rules and security standards is called the Payment Card Industry Data Security Standard (PCI-DSS or PCI).
Submitting an order is usually completed using HTTPS protocol, which securely communicates personal information through the parties involved in the Transaction. Many Payment Providers, such as 2Checkout, enable Merchants with added options when a cardholder purchases a service or product. Aside from providing the ability for real-time transactions, these providers can help to translate currencies between two parties in different countries, as well as bridge language and payment methods. Payment gateways usually charge those who use them a per transaction fee.
A company authorized to process Credit Card Transactions between buyers and sellers.
Payment processors enable Merchants to receive debit or Credit Card payments online by providing a connection to an Acquiring Bank. These processors perform many functions such as evaluating whether transactions are valid and approved, using anti-fraud measures to assure that a purchase Transaction is initiated by the source it claims to be. Processors are held to standards and regulations organized by credit card associations. These standards include rules regarding fraud, chargebacks, and identity theft.
Payment Service Provider
A third party that helps Merchants accept and facilitate payments.
Payment Service Providers partner with Acquiring Banks to offer Merchants the capability to accept payments. Payment Service Providers often offer services in addition to processing transactions. These services include Payment Card Industry Data Security Standard (PCI) compliance, fraud protection and the ability to process different currencies and translate different languages.
Payment Card Industry Data Security Standard (PCI)
A mandatory set of rules and regulations created to reduce Credit Card fraud.
The Payment Card Industry Data Security Standard is maintained by the Payment Card industry Security Standards Council, a group created in 2004 after MasterCard, Visa, Discover, JCB, and American Express collaborated to create a universal platform to prevent fraud for whenever Credit Card information is being transmitted.
PCI Compliance currently has six objectives: to build and maintain a secure network, to protect cardholder data, to maintain a vulnerability management program, implement strong access control measures, regularly monitor and test networks, and to maintain an information security policy. These objectives are maintained through a set of strict regulations Merchants and Payment Service Providers must follow to collect and transfer Credit Card information.
The location where a Merchant and a cardholder complete a Transaction.
Traditionally, a cardholder or customer delivers payment for a good or service at a Point-of-Sale. Older Points-of-Sale used manual devices, such as cash registers, to help protect and organize all payment collected. Today, Points-of-Sale use scales, scanners, and other, newer technologies to collect credit card information. In addition peripherals to tablets and smartphones allow smaller merchants to collect credit card information through a payment service provider.
POS software is what brick-and-mortar businesses use to conduct sales, run their business, and manage inventory. These systems can be operated on tablets, computers, or smartphones.#
Recurring Billing Payment Processors
Recurring billing payment processors allow merchants to automate payments on a scheduled basis for product or service subscriptions.
A charge applied to a cardholder in predetermined intervals for services or goods of an ongoing nature (memberships, subscriptions).
In a Recurring Transaction a cardholder will purchase a service or good. Instead of charging one price, the Merchant will establish a set interval of time (usually a month) in which the consumer will be charged an agreed-upon sum. This payment will continue until the buyer either cancels the service or, if the charge applies to one lump amount (such as a car or house), that amount is paid off.
An electronic or paper record of a Transaction, generated at the Point-of-Sale.
Whenever a customer purchases a product or service, he or she will receive a paper or electronic note that usually includes the Merchant's name and address, as well as the Transaction number, the date, the item sold, and how much was charged for that item or service. Tax is often included in a receipt. Some Point-of-Sale devices include a touchscreen where customers can email the sales receipt to themselves.
A Merchant that contracts with a Payment Service Provider to obtain payment services.
A sponsored merchant clears its Transactions through a Payment Service Provider, which is the 'merchant of record' for the Transaction within the payment system.
Tablet POS Providers
For small brick-and-mortar businesses, tablet POS systems are great as it removes the need for a bulky traditional register. Tablet POS providers enable merchants to run a full register (with POS, inventory, and customer loyalty software) using just a tablet.
Terminal Hardware Providers
Terminal hardware providers are payment processors who equip merchants with traditional terminals. Often considered the standard and incumbent payment channel, traditional terminals are hardware that allow merchants to swipe or insert a consumer’s credit card to process the transaction.
The process through which a Merchant receives funds for a transaction with a customer.
Once a buyer purchases goods or services, his or her Issuing Bank sends funds to the seller's Payment Processor, which disperses said funds to the Merchant. The term 'settlement' is also used to refer to the specific amount of funds transferred by an Acquirer to a Merchant for the acceptance of a card transaction.Type your paragraph here.