Navigating the world of payment processing can feel overwhelming, especially when faced with industry jargon. Whether you’re a business owner setting up an online store or simply curious about how transactions work, understanding key payment processing terms can make a huge difference. Here's a clear explanation of the most commonly used terms in the payment world.
A merchant account is a type of bank account that allows businesses to accept payments via credit and debit cards. When a customer swipes their card, the funds first go into the merchant account before being transferred to your business bank account. Without this account, you won’t be able to process card transactions.
A payment gateway is a technology that securely transfers payment information from the customer to the acquiring bank. Think of it as a digital bridge between your website and the payment processor. It encrypts sensitive card details, ensuring they’re safely transmitted during online transactions.
The payment processor is the company or service that handles transactions between you, the customer, and the financial institutions involved. It communicates with the issuing bank (the customer’s bank) and the acquiring bank (your business bank) to approve or decline transactions in real-time.
Authorization occurs when the payment processor verifies the customer’s card information with their issuing bank to ensure the necessary funds are available. At this stage, the funds are "held" but have not yet been transferred to your account. Authorization confirms the transaction but doesn't complete it.
Settlement is the process of transferring the funds from the customer’s account to your merchant account. After the transaction is authorized, it enters the settlement phase, where the money moves through the system and ends up in your business’s bank account, usually within a couple of days.
A chargeback happens when a customer disputes a transaction and asks their bank to reverse the payment. This could be due to fraudulent activity, a billing error, or dissatisfaction with the product or service. As a business owner, you may need to provide evidence to contest the chargeback.
Interchange fees are the card-issuing banks charge for processing credit card transactions. These fees are typically a percentage of the transaction amount plus a small fixed fee. Payment processors pass these fees on to merchants, and the fees vary depending on the card type and transaction type.
PCI compliance refers to the Payment Card Industry Data Security Standard (PCI DSS), a set of security protocols designed to protect sensitive cardholder information. All businesses that accept card payments must adhere to these standards to ensure secure handling and storage of card data.
Tokenization is a security method that replaces sensitive payment data with a unique identifier or “token.” This token is used during the transaction process instead of the actual card information, protecting the customer’s details from being exposed.
EMV stands for Europay, Mastercard, and Visa, and it refers to the technology behind chip-enabled credit cards. These cards store payment information in microchips, which offer enhanced security over traditional magnetic stripe cards. EMV technology helps reduce fraud by making it harder to clone cards.
An acquirer is a financial institution that manages and processes credit or debit card transactions on behalf of a merchant. The acquirer works with payment processors and networks to ensure transactions go through smoothly and funds reach the merchant's account.
The issuer is the bank or financial institution that provides a credit or debit card to the customer. When a customer makes a payment, the issuer is responsible for approving or declining the transaction based on the cardholder's account status and available funds.
Contact us today to learn how these key payment processing terms can help you make informed business decisions.
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