If your company engages in credit card processing, then you’re likely well acquainted with the complexity of deciphering a monthly credit card processing statement.
Unfortunately, the credit card processing industry has a vested financial interest in maintaining a veil of confusion in their statements and uses jargon that is virtually incomprehensible, even to sophisticated business executives.
In this article, we attempt to decode 10 terms specific to the credit card processing industry that a business or finance executive needs to know.
There are two banks involved in any credit card transaction, the Issuing Bank which created and underwrites the customer’s credit card, and the Acquiring Bank, which underwrites the business’ credit card processing merchant account. The acquiring bank maintains a relationship with Visa and MasterCard, and is responsible for clearing transactions from Visa and MasterCard and depositing funds from previous sales into the business’ bank account. Additionally, they are underwriting a business’ merchant account, which means that they are potentially financially liable for losses incurred on the account.
Also commonly called a transaction fee, this is the amount charged to a merchant account for managing the communication between the business’ payment gateway or point of sale terminal and the authorizing network. This fee is typically charged in a flat amount per transaction (e.g. $0.20). In plain English, this is the fee assessed by the credit card processor for transmitting your customer’s card data to Visa, MasterCard, AmEx, etc. so that the card brand can authorize the charge or refund.
When a credit card is swiped or run by a business it is merely authorized at that time. This means that the funds are confirmed to be available and set aside by the issuing bank, but not actually transmitted to the business’ acquiring bank until the transaction is batched. Batching typically occurs once per day at the close of business, and it is at this time that funds are actually transmitted from the issuing bank to the acquiring bank and eventually to the business. Credit card processors charge a batch fee, which typically consists of a flat amount (e.g. $0.20 per batch).
A chargeback refers to instances in which a cardholder disputes a transaction with their card issuing bank. The issuing bank then processes a retrieval request against the business’ merchant account, and the disputed funds are held in escrow until the dispute is resolved. The merchant is then provided ten days to respond to the reason the customer gave for issuing the chargeback in an attempt to refute the complaint and demonstrate that the charge was legitimate. Typically, the credit card processor levies a ‘chargeback fee’ (e.g. $25 – $50) each time that a chargeback occurs to compensate the credit card processor for handling the process.
The largest component of a business’ merchant account fees, the discount rate is the percentage of a transaction charged by the credit card processor (e.g. 2.5%). It is comprised of the interchange and assessment fees (which the credit card processor pays to the Visa, MasterCard, etc.) and the credit card processors markup.
Just like consumers, business are categorized as either high risk and low risk by the acquiring bank’s underwriting team. This is based on the risk of loss (and/or oversight requirements) posed by the particular industry. For example, businesses in regulated industries such as tobacco, firearms, or adult products are high risk because of the oversight requirements imposed upon the credit card processor. Meanwhile, phone sales businesses, startup businesses, and businesses with large average tickets are all high risk because of the increased risk of financial loss these businesses pose to the acquiring bank.
A sub-component of transactions within the Discount Rate are subject to the non-qualified rate. For example, this means that if your company’s Discount Rate were 2.5%, and the non-qualified rate is subject to an additional 1.5%, the total charge for accepting that card would be 4%. Non-qualified transactions typically include transactions that are particularly risky or particularly expensive to process. For example, credit card payments accepted over the phone, or transactions involving certain types of rewards credit cards or corporate credit cards are often subject to the non-qualified rate.
Retail businesses accept credit card payments by swiping or accept chip cards via a point of sale device. Phone or eCommerce businesses, by contrast, accept payments via a payment gateway. This piece of software handles the transmission of customer card data between the merchant’s website (or desktop computer) and the credit card processor. There are dozens of payment gateways available in the market, and fees are typically levied in the form of a nominal monthly fee (e.g. $9.00 per month) and a per transaction fee (e.g. $0.25 per transaction).
PCI is an acronym for “Payment Card Industry” which sets forth basic standards that businesses must follow in securing cardholder data. In practice, for most small and mid-sized businesses, this simply means completing a short online data security survey once per year, and scheduling a scan of your company’s servers.
A PCI Non-Compliance Fee is a charge assessed by a credit card processor for failing to be PCI compliant, or more likely, for failing to complete the annual survey.
This is a fee levied by some merchant account providers to compensate them for reporting your company’s transaction information to the IRS via the 1099-K form. Typically, these fees are quite nominal ($3-5 per month) but in some instances can approach $100 per year.
Comparing these features and fees is an important part of choosing a credit card processing company or payment gateway. Understanding the complexity is the first step toward making an informed – and profitable – decision.
Dedicated to your (credit card) profits, Brad.
Guest blogger Brad Martin is an editor with Soar Payments, a merchant services provider specializing in high risk merchants. To read the latest updates by Soar Payments, please visit their Facebook page.
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One thought on “Credit Card Processing Glossary: 10 Terms You Need to Know”
HRMA-LLC says:
Hey Brad, great post on credit card processing.