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

As a business owner, knowing the basics of credit card processing can help you make more informed decisions. This credit card processing glossary details the most common terminology so you can understand the differences between various credit card processing providers.

Most merchants don’t know every detail about the credit card transaction process when they launch a business. However, understanding some of the most common terms and definitions will put you in a better position when it comes to negotiating lower rates and finding the best network for good credit card processing services.

In turn, you’ll be able to streamline your operations, reduce costs and deliver better customer service and easier payment options to your customers—online or at the point-of-sale.

This credit card processing glossary outlines 16 of the most common credit card terms and their definitions.

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

Basic credit card processing terms

Acquiring vs issuing bank: It’s important to know the difference between the acquiring and issuing bank, as this is at the heart of how credit card payment processing works. 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 pays the acquiring bank. The customer is then responsible for repaying the issuing bank, which they do when they pay their credit card bill each month.

Address verification services (AVS): AVS refers to a fraud prevention process and is typically used for card-not-present sales, such as e-commerce transactions. Customers must input their billing address, which is then compared with the address associated with their issuing bank credit card account. AVS fees refer to additional charges that may be added to a purchase if online transactions occur without AVS to cover the liability of credit card fraud from card-not-present sales.

Authorization fee: Credit card processing companies charge authorization fees for authorizing a transaction. This covers the cost of approving a card for payment. The credit card processor passes these fees on to the merchant, who can choose to cover the fees or pass those charges on to the end customer. If the merchant chooses to cover those fees, they can write them off as a tax deduction, since it is part of the cost of doing business.

Card associations: Card associations are organizations responsible for setting interchange fees. They work as a middleman between acquiring and issuing banks. Examples of credit card associations include VISA, Mastercard, American Express and Discover.

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. The credit card processing service may even cancel the merchant’s account for too many chargebacks. It is not always possible to avoid chargebacks if you face an angry customer, so merchants should consider a fair return policy to avoid the added costs and risks of chargebacks.

Credit card processing fee sign: Brick-and-mortar businesses that decide to pass credit card processing and interchange fees on to customers must post a credit card processing fee sign disclosing the amount that will be added to each transaction for credit card sales.

Flat rate pricing versus tiered pricing: Flat rate pricing occurs when the credit card payment processing company charges a set fee to the merchant per transaction or dollar amount.

[Read more: Understanding Credit Card Processing Fees and Chargebacks]

Most merchants don’t know every detail about the credit card transaction process when they launch a business.

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.

Gateway fee: A gateway fee, or gateway charge, covers the costs of your payment processor facilitating the transaction. This money goes directly to the processor. You may be able to avoid these fees by using a service such as Square to accept credit card payments on your e-commerce site.

Hidden fees: Hidden fees, as the name implies, are various charges that are not explicitly stated (but are often hidden somewhere in a contract). When you’re negotiating credit card processing fees, ask the payment service provider to disclose all fees. That can minimize the possibility of paying hidden fees.

Interchange fees: Unlike gateway fees, interchange fees go to the card-issuing bank to cover the cost of the transaction, along with fraud, bad debt, credit card rewards and risks involved in accepting credit card payments. Factors such as card type, transaction type, business size and industry can all impact interchange fees. Interchange fees are calculated as a flat rate plus a percentage of the total sale.

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 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.

Payment processor: The payment processor is the company who mediates between the merchant, the acquiring bank and the issuing bank. The processor authorizes transactions and manages fund transfers. When you’re choosing a credit card payment processor, you’ll want to ask about the services they provide, which may include point-of-sale equipment, cybersecurity services, PCI compliance assistance, customer support and more.

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 using point-of-sale hardware.

With these 16 basic credit card processing terms in your back pocket, you’ll know the questions to ask and what to look for as you shop for a payment processing solution.

Read the fine print carefully to 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 June 14, 2021