Payment processing plays a crucial role in the modern business landscape. It involves the seamless transfer of funds from a customer's bank account to a merchant's bank account in exchange for goods or services.
To navigate the intricacies of payment processing effectively, it's essential to familiarize yourself with key terms and concepts.
In this quick reference guide, we'll explore and demystify common payment processing terms, enabling you to grasp their significance and apply them to your business operations.
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Payment Processing Terms
- Account Updater
Account Updater is a service provided by payment processors that automatically updates customers' payment information, such as credit card details, to ensure seamless transaction processing. It helps merchants maintain accurate and up-to-date customer data.
2. ACH (Automated Clearing House)
ACH, or Automated Clearing House, is an electronic payment network used for direct bank-to-bank transfers. It enables transactions such as direct deposits, bill payments, and electronic checks, offering a secure and efficient payment method.
3. Authorization
Authorization refers to the process of verifying whether a customer's payment method has sufficient funds or credit to complete a transaction. It ensures that the customer's account can be charged or debited accordingly.
4. Batch
A batch represents a collection of transactions grouped together for processing. It simplifies the payment processing workflow by consolidating multiple transactions into a single entity, enhancing efficiency and streamlining reconciliation.
5. Card Verification Value (CVV)
CVV is a three or four-digit security code found on credit and debit cards. It serves as an additional layer of authentication during online transactions, reducing the risk of fraudulent activities.
6. Chargeback
A chargeback occurs when a customer disputes a transaction and requests a refund from their bank or credit card issuer. Chargebacks can happen due to various reasons, such as unauthorized transactions, product/service dissatisfaction, or fraudulent activities.
7. Credit Card
A credit card is a payment card that enables customers to make purchases on credit. It allows individuals to borrow funds from a financial institution, with the understanding that they will repay the borrowed amount along with any applicable interest.
8. Debit Card
A debit card is a payment card linked directly to a customer's bank account. It allows individuals to make purchases using funds available in their accounts, providing a convenient and immediate payment method.
9. EMV (Europay, Mastercard, and Visa)
EMV is a global standard for secure payment transactions. It involves the use of chip-enabled cards and terminals, which provide enhanced security compared to traditional magnetic stripe cards.
EMV technology helps prevent card fraud through the generation of unique transaction data for each payment.
10. Fraud
Fraud refers to deceptive or unauthorized activities carried out to obtain goods, services, or funds dishonestly. Payment processors employ robust security measures to detect and prevent fraudulent transactions, safeguarding both merchants and customers.
11. Gateway
A gateway serves as the interface between a merchant's website or application and the payment processor. It securely transmits transaction data, facilitates authorization, and ensures the smooth flow of information during the payment process.
12. Merchant
A merchant is a business or individual that sells goods or services and accepts payments from customers. Merchants engage payment processors to facilitate the acceptance and processing of customer payments.
13. Payment Processor
A payment processor is a company that handles the technical and financial aspects of payment transactions. It acts as an intermediary between the merchant, the customer, and the financial institutions involved, facilitating the secure transfer of funds.
14. PIN (Personal Identification Number)
A PIN is a numeric code used for cardholder verification during certain types of transactions, such as debit card payments. Customers enter their PIN to authenticate their identity and authorize the transaction.
15. Processing Fee
A processing fee is the cost charged by the payment processor for their services. It typically includes a percentage of the transaction amount, known as the discount rate, and may also include a flat fee per transaction.
Merchants should consider processing fees when evaluating payment processors, as they can impact overall profitability.
16. Reconciliation
Reconciliation is the process of comparing and matching financial records to ensure accuracy and consistency.
In payment processing, it involves verifying that transactions recorded by the payment processor align with the merchant's internal records. Reconciliation helps identify any discrepancies or errors that may need to be resolved.
17. Settlement
Settlement refers to the final stage of the payment processing cycle when funds are transferred from the customer's account to the merchant's account.
It involves the completion of the transaction, including authorization, verification, and the actual movement of funds. The settlement ensures that the merchant receives payment for the goods or services provided.
18. Swipe
Swiping refers to the physical act of running a payment card, such as a credit or debit card, through a card reader. The card reader reads the card's magnetic stripe or chip to capture the necessary payment information for processing the transaction.
19. Tokenization
Tokenization is a security measure used to protect sensitive payment data. It involves replacing the actual payment information, such as credit card numbers, with a unique identifier called a token.
Tokens are used for transaction processing while the actual data is securely stored by the payment processor, reducing the risk of data breaches.
20. Transaction
A transaction represents an individual payment or financial activity. It involves the exchange of funds between a customer and a merchant in return for goods, services, or other obligations. Each transaction undergoes authorization, processing, and settlement to ensure a smooth and secure payment process.
21. Vault
A vault is a secure digital storage system provided by payment processors to safeguard sensitive payment data. It encrypts and stores customer payment information, allowing merchants to securely process recurring transactions or store payment details for future use.
Conclusion
Understanding how does payment processing work and terms associated with it is vital for merchants and businesses operating in today's digital economy.
By familiarizing yourself with these terms, you can navigate the payment processing landscape with confidence and make informed decisions about payment processors, fees, security measures, and transaction management.
Remember to stay updated on the latest industry trends and seek clarification whenever necessary to ensure a smooth and secure payment processing experience.