Payment Processing Glossary
Over 62 payment processing and business finance terms explained in plain language with real-world examples. Bookmark this page for quick reference when managing your merchant services.
A
ACH (Automated Clearing House)
Electronic network for processing bank-to-bank transfers. Lower fees than credit cards but slower (1-3 days).
Example: Processing payroll or recurring bill payments via ACH costs $0.25-$1.50 per transaction.
Acquirer
Bank or financial institution that processes credit/debit card payments on behalf of merchants. Also called "acquiring bank".
Example: Chase Paymentech is an acquirer that settles card transactions to your business bank account.
Address Verification Service (AVS)
Security feature comparing billing address entered by customer with address on file with card issuer.
Example: AVS mismatch (street matches but ZIP doesn't) may indicate fraud.
Authorization
Approval from card issuer confirming funds are available. Holds funds but doesn't transfer them.
Example: Gas station authorizes $100, then settles actual amount when you pump $45 of gas.
B
Batch Processing
Grouping multiple transactions together for settlement at end of business day.
Example: Restaurant batches all day's credit card sales at midnight for next-day funding.
BIN (Bank Identification Number)
First 6 digits of credit/debit card identifying issuing bank and card type.
Example: Cards starting with "4" are Visa, "5" are Mastercard. BIN lookup helps detect fraud.
Basis Points (bps)
One hundredth of a percent (0.01%). Used to describe small percentage fees.
Example: A 20 basis point fee on $10,000 = $20 (0.20%).
C
Capture
Finalizing an authorized transaction to initiate fund transfer from customer to merchant.
Example: Hotel authorizes your card at check-in, captures final amount at checkout.
Card Not Present (CNP)
Transaction where physical card isn't present (online, phone, mail order). Higher fraud risk and fees.
Example: E-commerce transactions are CNP, with interchange ~0.5% higher than card-present.
Card Present
Transaction where physical card is swiped, dipped, or tapped at point of sale.
Example: In-store chip card payments have lower fraud risk than online CNP transactions.
Cash Flow
Movement of money in and out of business. Positive cash flow means more coming in than going out.
Example: Invoicing Net 30 but paying suppliers immediately can create negative cash flow.
Chargeback
Reversal of credit card transaction initiated by cardholder disputing the charge.
Example: Customer claims item never arrived, bank reverses $100 payment + $25 chargeback fee.
Chargeback Ratio
Percentage of transactions disputed. Ratios >1% trigger penalties; >2% risk account termination.
Example: 15 chargebacks out of 1,000 transactions = 1.5% ratio (exceeds acceptable threshold).
Contactless Payment
Payment made by tapping card or mobile device on terminal using NFC technology.
Example: Apple Pay, Google Pay, and tap-to-pay cards use contactless technology.
CVV (Card Verification Value)
3 or 4 digit security code on back of card. Required for most CNP transactions.
Example: Requiring CVV reduces fraud as it proves customer has physical card.
D
Discount Rate
Total percentage fee merchant pays per transaction (interchange + processor markup).
Example: 2.9% + $0.30 means on $100 sale, you pay $3.20 in fees.
Direct Deposit
Electronic funds transfer directly to recipient's bank account, typically via ACH.
Example: Payroll processed via direct deposit hits employee accounts in 1-2 business days.
Dispute
Customer challenging a transaction, which may become a chargeback if not resolved.
Example: Customer calls bank about unauthorized charge, bank initiates dispute process.
E
EFT (Electronic Funds Transfer)
Umbrella term for electronic money movement including ACH, wire transfers, and card payments.
Example: EFT includes everything from ACH payroll to credit card purchases.
EMV (Europay, Mastercard, Visa)
Global standard for chip-enabled credit/debit cards. More secure than magnetic stripe.
Example: Chip cards generate unique transaction codes, preventing card cloning.
Effective Rate
Total fees divided by total sales volume. Shows true cost of payment processing.
Example: $3,200 in fees on $100,000 sales = 3.2% effective rate.
F
Fraud Detection
Systems and processes to identify potentially fraudulent transactions before processing.
Example: Velocity checks flagging 10 transactions in 5 minutes from same IP address.
Friendly Fraud
Customer disputes legitimate transaction (claiming non-delivery, unauthorized use, etc.).
Example: Customer buys digital download, uses it, then disputes saying they never received it.
Funding
Transfer of settled funds from processor to merchant's bank account.
Example: Next-day funding means batched sales arrive in your account the following business day.
G
Gateway
Service that securely transmits transaction data between merchant and payment processor.
Example: Stripe, Authorize.net, and Braintree are popular payment gateways.
H
High-Risk Merchant
Business in industry with elevated chargeback rates or regulatory scrutiny. Faces higher fees and reserves.
Example: Travel, adult content, CBD, and subscription services are often classified high-risk.
Holdback
Percentage of transaction funds withheld by processor to cover potential chargebacks.
Example: High-risk merchant with 10% holdback on $10,000 sales receives $9,000 immediately.
I
Interchange
Fee paid to card-issuing bank, set by card networks (Visa/Mastercard). Largest component of processing costs.
Example: Interchange for consumer credit card CNP transaction is typically 2.3% + $0.10.
Interchange Plus
Transparent pricing model: exact interchange + fixed processor markup.
Example: Interchange (2.3% + $0.10) + processor markup (0.3% + $0.05) = 2.6% + $0.15 total.
Issuer
Bank that issues credit/debit cards to consumers. Approves or declines transactions.
Example: Chase issues your Visa card and decides whether to approve your $500 purchase.
L
Level 2/3 Processing
Enhanced data for B2B/government transactions that qualifies for lower interchange rates.
Example: Adding customer code and tax amount reduces $10,000 B2B transaction fee by $50-$100.
M
Merchant Account
Special bank account allowing businesses to accept credit/debit card payments.
Example: Merchant account holds card payments for 1-2 days before transferring to business checking.
Merchant Category Code (MCC)
4-digit code classifying business type. Affects interchange rates and chargeback thresholds.
Example: MCC 5812 (restaurants) has different interchange than 5411 (grocery stores).
Mid (Merchant ID)
Unique identifier assigned to merchant account for tracking and reconciliation.
Example: Multi-location businesses often have separate MIDs for each store.
Mobile Wallet
Digital payment method storing card info on smartphone (Apple Pay, Google Pay, Samsung Pay).
Example: Tap iPhone on terminal to pay using tokenized card credentials.
MOTO (Mail Order/Telephone Order)
Card-not-present transactions taken over phone or by mail. Higher fraud risk than card-present.
Example: Restaurant taking delivery orders over phone manually enters card details.
N
NFC (Near Field Communication)
Wireless technology enabling contactless payments by tapping card/phone on terminal.
Example: Contactless cards and Apple Pay use NFC to transmit encrypted payment data.
O
Omnichannel
Integrated payment experience across in-store, online, and mobile channels.
Example: Customer starts purchase online, completes in-store with same cart and payment data.
P
Payment Facilitator (PayFac)
Company that onboards and manages sub-merchants under master merchant account.
Example: Square and Stripe are PayFacs enabling instant merchant onboarding.
Payment Processor
Company that handles transaction routing between merchant, gateway, and card networks.
Example: First Data (now Fiserv) processes millions of transactions daily for merchants.
PCI DSS
Payment Card Industry Data Security Standard. Required security standards for handling card data.
Example: PCI Level 1 (6M+ transactions/year) requires annual on-site audit by QSA.
Point of Sale (POS)
System where customer makes payment. Includes hardware (terminal) and software.
Example: Square Register is an all-in-one POS with card reader, receipt printer, and software.
Pre-Authorization
Holding funds on card without immediate capture. Common for hotels, rentals, and pre-orders.
Example: Hotel pre-auths $500 at check-in, captures actual charges at checkout.
Q
QR Code Payment
Customer scans code with mobile device to initiate payment. Popular internationally.
Example: WeChat Pay and Alipay use QR codes for in-store mobile payments in China.
R
Reason Code
Alphanumeric code explaining why chargeback was initiated.
Example: Code 10.4 (fraud - card absent environment) is most common e-commerce chargeback.
Recurring Billing
Automatically charging stored payment method at regular intervals for subscriptions.
Example: Netflix charges $15.99 monthly using saved card on file.
Refund
Returning funds to customer's payment method. Distinct from void (canceling unsettled transaction).
Example: Refunding $50 purchase costs merchant $50 + keeps the ~$1.75 processing fee.
Reserve
Funds held by processor to cover potential chargebacks or fraud losses.
Example: New high-risk merchant may have 10% rolling reserve for first 6 months.
Retrieval Request
Issuer requesting transaction documentation before deciding on chargeback.
Example: Cardholder questions charge, issuer sends retrieval request for receipt/proof of delivery.
Rolling Reserve
Percentage of sales held for set period, then released on rolling basis.
Example: 10% rolling reserve held 180 days means today's sales released in 6 months.
S
Settlement
Process of transferring funds from cardholder's bank to merchant's account.
Example: Batch settled at midnight, funds arrive next business day (T+1 settlement).
Surcharge
Fee passed to customer for credit card usage. Legal in most US states with disclosure requirements.
Example: Gas station adds 3.5% surcharge on credit card purchases (cash price $3.00, card price $3.11).
T
Terminal
Physical device for accepting card payments. Reads magnetic stripe, chip, or contactless cards.
Example: Clover Flex is a wireless terminal with chip reader, NFC, and receipt printer.
Tokenization
Replacing card number with unique identifier (token) for secure storage and recurring charges.
Example: Storing token "tok_abc123" instead of actual card number 4111-1111-1111-1111.
U
Underwriting
Risk assessment process before approving merchant account.
Example: Processor reviews business financials, credit history, industry, and chargeback risk.
V
Vault
Secure storage system for tokenized payment methods.
Example: Storing customer cards in vault enables one-click checkout and subscriptions.
Velocity Check
Fraud prevention monitoring frequency of transactions from same source.
Example: Blocking 5 transactions in 10 minutes from same IP address.
Virtual Terminal
Web-based interface for manually entering card details (phone orders, invoices).
Example: Call center agent enters customer card info via browser-based virtual terminal.
Void
Canceling unsettled transaction before batch close. No fees charged.
Example: Customer cancels order 2 hours after payment - void transaction to avoid processing fees.
W
Wire Transfer
Direct bank-to-bank electronic transfer. Faster than ACH but higher fees ($15-$50).
Example: International wire transfer for $10,000 may cost $25-$45 and complete same day.
Working Capital
Current assets minus current liabilities. Measures short-term financial health.
Example: $50K in receivables + $30K cash - $40K payables = $40K working capital.
#
3D Secure
Additional authentication layer for CNP transactions (Visa Secure, Mastercard Identity Check).
Example: Customer redirected to bank to enter one-time code before completing purchase.
Ready to optimize your payment processing?
Check out our interactive calculators and merchant guides.
Explore Payment Tools