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Merchant Account Terms – Glossary

by Jun 2, 2013General Merchant Account

Merchant account terms and general merchant services terminology can often be confusing and difficult to understand. When you heard terms like “Mid Qualified” and “Batching Your Terminal” it can be confusing to try to make sense of all the jargon especially if you have never had a merchant account before. I thought it might be helpful to explain what some of the terms are in case your current provider doesn’t have a customer service department that is able to help you. This might not be the entire list, but it is most of the common terms that are used when shopping for and using a merchant account. If I have missed any, please leave a comment below and I’ll be sure to add it.

Merchant Account Terms and Glossary

Annual Fee Annual Fee charged to merchant for having an open merchant account.
Authorization Fee a.k.a Transaction Fee: Fee charged every time the terminal dials out. Usually there are more authorizations than transactions.  The authorization process is where the card issuer or authorized agent approves a request for charging against the cardholders credit limit.
AVS Address Verification Service – process whereby merchant enters additional cardholder data such as the last 4 numbers of the card, billing zip code for cardholder, cvv2 code and expiration date of the credit card.  Used to help “qualify” certain card types and drive them into lower tiers or lower priced interchange categories.
Batch Fee a.k.a. “Batch Header.”  A per occurrence fee that is charged every time a terminal dials out and settles a batch of transactions.  Usually done at least on a daily basis but sometimes more frequently.
Chargeback A disputed credit or off-line debit transaction that is returned to the acquirer for reimbursement of the cardholder’s account.
Chargeback Fee A fee associated with the chargeback process.
CVV2 The 3 digit code on the back of every V/MC. Used in conjunction with AVS to help drive rates into lower priced rate tiers or interchange categories.
Daily Discount Process where transaction fees and discount rates are deducted from the daily batch totals and the merchant receives a net deposit into their bank account.
Discount Rate The percentage rate that the merchant agrees to pay based upon their credit card volume and type of card that corresponds to interchange.
Downgrade When a transaction does not meet the requirements for qualified or lower rate interchange levels.  For example, if the data entered at the POS, such as billing zip code or cvv2 code don’t match the card issuers information on file, then the transaction may downgrade to a non qualified rate.
Interchange Fees paid by the acquirer to the issuing bank to compensate for transaction expenses associated with the exchange of data between the acquiring and issuing institution.  Interchange rates are set by Mastercard and Visa and every Acquirer must pay the same interchange rates.
Key-Entered A transaction in which the cardholder’s card information is manually keyed into the processing equipment by the merchant.  This can occur if the processing equipment is not able to read the magnetic strip on the card or the card is not present at the time of sale.
Mail Order/ Telephone Order (MOTO) A merchant that conducts their business thorugh mail order or phone orders, as in catalog sales.  A MOTO merchant will have 100% hand entered transactions. MOTO accounts have the same rates as internet processing and often are priced with a 2 tiered rate program (qualified & non-qualified)
Monthly Discount Process where transaction fees and discount rates are calculated for an entire month and debited(charged) to the merchants bank account on a monthly (vs. daily) basis.
Monthly Minimum The monthly minimum amount that a processor dictates a merchant must incur on a monthly basis in discount fees and Inquiry fees.  In other words, a minimum usage fee for having an open account.
Non- Qualified Highest rate of a standard 3 tier rate program.  Includes SOME transactions that are key entered and this category is mostly reserved for business corporate cards or because other qualifying requirements were not met.
Off-Line Debit a.k.a signature debit:  A debit card transaction that is processed as a credit card transaction.  This transaction would have the cardholder’s signature but no PIN number would be obtained.  The cardholder’s account is not debited immediately, but within the same 2 to 3 day window as a credit card transaction.
On-Line Debit A debit card transaction in which the amount of the sale is a direct debit with the same or next day posting to the cardholder’s bank account at the time of the sale.  A PIN number is required for the on-line debit transaction and therefore is only available in a retail setting and not MOTO or internet.
Points Cards a.k.a “rewards” card.  See rewards cards for definition.
POS  (Point Of Sale) Point Of Sale – POS equipment will include any and all credit card terminals whether they are stand alone terminals (ex. Verifone or Nurit) or touch screen computer systems for restaurant and other retail businesses.
Pricing (Interchange Plus) Also known as “Cost Plus.”  Pricing program where interchange rates are passed along to the merchant and itemized on the statement.
Pricing (Tier Based) The most common pricing structure.  3 tiers include a qualified, mid-qualified, and non-qualified rates, and sometimes an “offline debit” category making it a 4 tiered program. Rarely you will see 5 or 6 tiered programs, but they do exist.
Qualified Transaction (tier) Tier based qualification where the card is present and swiped through the card reader at the POS.  Can include both signature debit and credit card transactions.
Rewards Cards A.k.a.  “points” cards.  This is a debit or credit card where the consumer earns bonus point that they can redeem with the issuing bank for cash rewards or other gifts that hold monetary value. An example of this would be a Southwest Airlines frequent flyer credit card.
Retrieval An Issuer’s request for an Acquirer to provide a copy of a sales draft that has been cleared and settled by the Acquirer.
Settlement Also known as “Batching Out.”  The process of transferring fund for sales and credit between the Acquirer and Issuer, including final debiting of the cardholder’s account and crediting the merchant’s account.  The merchant does not collect their funds unless a settlement occurs.
Standard Industry Code (SIC) Specific numbers assigned by the Card Associations to merchant types for identification and tracking purposes.
Statement Fee a.k.a  “customer service fee”  “monthly access fee”  “service fee” “monthly fee”  “bill statement”  “access fee”  “statements” Fee charged to merchant to cover the monthly reporting costs associated with maintaining a merchant
Swiped Transaction Same as a Qualified Transaction
Transaction Fee Similar to the authorization fee, this fee incorporates the entire process of transaction authorization and settlement.  Also known as “per item” or “inquiry” fee.
Voice Authorization A fee for the occasional instances that require a merchant to call for voice authorization approval on a credit card.  Not used very often.


Brian Manning

Bancardsales founder and 15 year payment processing veteran, Brian Manning has helped thousands of businesses streamline their electronic payment systems. With a healthy disdain for things like terminal leases and "lowest rate" guarantees he regularly advises on best practices to anyone setting up merchant account related solutions. Brian's mission and passion is to help business owners use their merchant account simply as one tool in the big picture of growing their own business and creating an experience that is positive and meaningful for their customers.


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