Merchant Service Terms 101

Address Verification System (AVS) – This is a security feature that requires merchants to input address information for the cardholder during a manually entered transaction (such as payments made on a website).  The merchant’s system verifies the address entered matches the one that the issuing bank has on file.

Basis Point – It is a hundredth of one percent (1 basis point = .01% or .0001).  A merchant’s discount rate will usually be presented in this format, either as a percentage or fraction.

Batch – A group of authorized transaction from a given business day typically used in the settlement process.

Cardholder Verification Value (CVV2) – This is the three- or four-digit number that is printed on a card to verify authenticity.

Chargeback – When a customer makes a claim to his/her bank stating they did not receive the goods or services or never placed an order at all with a merchant within 60 days.  The issuing bank will then notify the merchant of the claim and will have a chance to validate and defend the purchase by providing such documentation as an invoice, customer signature or shipping documents.

Discount Rate – The fee paid to a merchant bank to handle the deposit of the funds into the merchant’s account.

Effective Rate – This is the actual amount charged by the merchant bank when processing each transaction.  This is usually more than the quoted discount rate because it is a calculated, bundled rate which includes the discount rated, assessment and other per-item transaction fees.

EMV – The smart chip technology that offers additional step for authentication above and beyond the normal magnetic stripe card payment for card-present transactions.  To learn more about EMV check out the Blog: The Top 5 EMV Questions Answered for Merchants.

Encryption – The process of transforming data into a secret code to ensure a safe and secure transmission.

Interchange – The exchange of transaction data between a merchant bank and the issuing bank.

Interchange Fee – This is the rate charged by Visa and MasterCard to complete a transaction and deposit money into a merchant’s account.  This feed is based on credit card regulations set forth by Visa and MasterCard.  American Express and Discover do not participate in the interchange process.  They each act as their own issuing bank handling all aspects of the card transaction and not sharing any of their fees.

Merchant Identification Number (MID) – The identification number that represents a merchant’s point-of-sale terminal for the purpose of processing and tracking credit card transactions. 

Merchant Services Provider (MSP) – The business that handles the setup of the front and back end of processors, along with the paperwork required in order for a merchant account to be allowed to receive transaction funds.

Monthly Processing Volume – This is the gross payment cards sales that a merchant processes in a month.

Payment Card Industry Data Security Standards (PCI DDS) – This was created by the four major credit card companies (Visa, MasterCard, Discover and American Express) in order to optimize the security of credit and debit transactions to protect the cardholders against the misuse of their personal information.  It is maintained by the PCI Security Standards Council.

Point of Sales (POS) – The application through which a payment transaction is processed in exchange for goods or services.  Point of sale usually refers to the actual device that processes transactions or it may also be used in reference to the point-of-sale system that manages all point-of-sale applications for a retailer.

Processor – The company that handles credit card transactions for merchant banks and is usually paid per transaction.

Settlement – This is the process merchants must complete at the end of the day in order to be paid for the transactions from the day.