Women handing credit card to barista
Understanding the basic terminology surrounding credit card processing will help you understand the overall payment process and negotiate lower rates. — Getty Images

Most merchants don’t know every little detail about credit card processing when they launch a business. However, having a good understanding of even the most basic credit card processing terms will put you in a better position to negotiate lower rates, understand the payment process and choose a credit card processor (if you haven’t already), which, in turn, will improve your service for both yourself and your customers.

This guide lists the 12 most common credit card processing terms business owners should know.

[Read: 5 Things to Consider Before Choosing a Credit Card Processor]

Basic credit card processing terms

These common terms will help you better understand the payments industry and negotiate better rates:

Acquiring bank versus issuing bank. The acquiring bank refers to the merchant’s bank, while the issuing bank refers to the customer’s bank. When customers pay by credit card, the issuing bank will pay the acquiring bank, and the customer is then responsible for repaying the issuing bank.

Address verification services (AVS). AVS is a fraud prevention process, typically used for card-not-present sales. It requires customers to input their address, which is then compared with the address associated with their bank account. Transactions without AVS result in higher fees.

Authorization fee. Whenever an authorization request occurs between the merchant and authorizing network, an authorization fee is charged. It covers the cost of approving a card for payment.

Card associations. Card associations are organizations that are responsible for setting interchange fees, as well as working as a middleman between acquiring and issuing banks. VISA, Mastercard, American Express and Discover are all card associations.

Chargeback. A chargeback occurs when a customer disputes a purchase with their bank or card issuer. The charge is reversed, and the merchant is then responsible for covering the purchase. Having a high rate of chargebacks (1% or higher of total purchases) can lead to penalties or even a cancellation of the merchant’s account.

[Read: Understanding Credit Card Processing Fees and Chargebacks]

Most merchants don’t know every little detail about credit card processing when they launch a business.

Flat rate pricing versus tiered pricing. A flat rate is a set fee charged to the merchant per transaction or dollar amount. Flat rates can help a merchant avoid extra charges, but often cost more per transaction. Tiered pricing, also known as bundled pricing, charges different fees for different types of transactions. This option can be more cost-effective, especially for larger businesses, but it’s important to keep an eye out for hidden fees.

Hidden fees. Hidden fees, as the name implies, are various charges that are not explicitly stated (but are often hidden somewhere in a contract). During negotiations, asking the payment service provider to disclose all fees can minimize the possibility of paying hidden fees.

Interchange fees. Whenever a customer uses a card to make a purchase, the merchant is charged an interchange fee to cover the costs of processing as well as any potential risk. Factors such as card type, transaction type and business size and industry can all impact interchange fees.

Payment card industry (PCI) compliance. PCI compliance refers to a set of security standards that all businesses working with credit cards must follow. Being out of compliance puts you at risk for penalties.

Payment gateway. The payment gateway is what connects merchants with their payment processor, much like a point-of-sale terminal at a brick-and-mortar store. Gateways are just one of the requirements to be PCI compliant.

Processor costs. Processor costs are additional, typically non-negotiable fees that cover a variety of costs: support, technology fees, PCI compliance fees and more.

Virtual payment terminal. A virtual payment terminal allows the merchant to process cards fully online, without the use of point-of-sale hardware.

[Read: 3 Things to Know About Credit Card Processing in 2019]

With these 12 terms in your back pocket, you can better find a payment processing solution that will fit your business’s needs at a favorable rate.

CO— does not review or recommend products or services. For more information on choosing the best credit card processors, visit our friends at business.com.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published January 30, 2020