Credit Card Processing Definitions

The accumulation of captured credit card transactions in the merchant’s terminal awaiting settlement.

Submission of an electronic credit card transaction for financial settlement. Authorized credit card sales must be captured and settled for a merchant to receive funds for those sales. 

The bank that issued the credit card and collects the interchange fees. 

The person who owns the credit card to purchase goods and services.

Credit card companies make it difficult for credit card transactions to settle at the lowest interchange fees by imposing stringent rules. However, they do offer a solution: credit card processors can fix the transaction—but they’ll keep 75% of the savings for themselves.

Let’s break down the math to clarify this. Suppose a merchant processes a $500 transaction that would have downgraded due to missing data. The processor inserts the missing information before submitting it to the card networks, allowing the transaction to settle at a lower interchange rate, typically saving around 85 basis points. This means the merchant saves $4.25. However, the processor takes $3.19 of that and leaves the merchant with just $1.06, claiming that without their intervention, the merchant would have lost the full $4.25.

Alternatively, third-party services can also correct the transaction for a fee of just 5 basis points. Let’s run the numbers: 0.05% of $500 is only $0.25. The third party would save the merchant the same $4.25 but take only $0.25, allowing the merchant to keep $4.00.

So, here are your options:

• Option A: Let your processor fix the problem they helped create, and you keep $1.06.
• Option B: Use a third-party service to fix your interchange, and you keep $4.00.

The choice is clear. The only complication arises when your ERP or POS system blocks third-party solutions to boost their own profits, leaving you without help.

Click here to schedule a call to learn how easy it is to fix this. 

A credit card transaction that is billed back to the merchant after the sale has been settled. The card issuer initiates chargebacks on behalf of the cardholder. Typical cardholder disputes involve product or service dissatisfaction or delivery failure. Cardholders are urged to try to work it out with the merchant before disputing the bill with the credit card issuer. Also, this can come from fraudulent card use where the cardholder’s data was stolen. 

The process of sending the batch for settlement.

Issued to businesses to cover expenses such as travel and entertainment, procurement, etc. The most common type of commercial cards are purchasing cards, business cards, and corporate cards. Visa and MasterCard require more data to be passed and charge a much higher fee for these cards if only basic data is passed. Businesses that receive commercial cards should make sure they have optimized interchange. For large companies, this can cost them millions a year in unnecessary higher interchange fees. 

Corporate cards are typically issued for midsize and larger companies with complex needs, while business cards are designed for small businesses.

A reversal is a cancellation of a sale that has not been settled. It immediately “undoes” an authorization and returns it to the open-to-buy balance on a cardholder’s account. Not all issuers support reversals.

A payment gateway that fills in missing data or corrects data in order for the credit card transaction to settle at the lowest available interchange rates. This will reduce the interchange fees by as much as .70 -1% on transactions that would have otherwise been downgraded.

Adjustments (debits or credits) made for an out-of-balance condition due to various problems in the transmittal. The merchant’s acquirer makes the correction at the time of capture. 

The merchant’s bank account is used by the processor to deposit and/or withdraw funds from the merchant at any time. Giving full bank account access to a processor is very serious, and the money they take out should be audited and validated every month. Reminder: The credit card processing industry has virtually zero oversight.

A payment card that withdraws funds directly from the cardholder’s checking account at the time of sale. If the cardholder enters a PIN, the transactions run through one of the debit networks, “Pin Debit Transactions.” However, the transaction runs through the processing networks if the cardholder does not enter their PIN. Debit processing fees are a small fraction compared to traditional credit card processing fees. Visa, Mastercard, and Discover forbid merchants from surcharging debit transactions.

Known as the “little black box,” this type of processing device is typically found in restaurants and retailers. It should never be used in a B2B environment as it cannot settle transactions at Level III, and most won’t even get Level II settlements. This means significantly higher interchange fees. Even though most of these devices are not dialing out anymore and are connected via the network/internet, the name has remained unchanged. 

The three main price points in a credit card transaction are 1) the credit card processor’s “Discount Rate,” 2) the credit card processing network’s “Interchange Fees” (which go to the card issuing bank), and 3) the “Dues and Assessments” (which go to the processing networks, i.e., Visa, Mastercard, and Discover).

If a business is set up correctly, the Discount Rate should make up the smallest fee. However, that’s not always the case. Also, don’t be duped by the word “Discount.” It is not a discount; it is an upcharge/markup. Below is a chart that shows the impact of each fee.

A downgrade credit card transaction happens when a transaction settles at a higher rate than it could have. This can occur for several reasons, including, but not limited to:

• The batch isn’t settled within 48 hours of authorization. 

• A transaction isn’t authorized within the allotted time frame. 

• A transaction is categorized as stale. 

• There is an address verification system (AVS) error. 

• The correct customer code isn’t supplied. 

• The terminal software is outdated. 

• The authorization and settlement amounts differ. 

• The settled amounts don’t match the original amounts. 

• A business, corporate, or purchasing card gets processed in a B2C processing gateway.

Dues and Assessments are fees charged by the processing networks, i.e., Visa, Mastercard, and Discover, on credit and debit card transactions. Dues are a general term for all of the various fees charged by card networks, including per-item transaction fees. Assessments are flat-rate percentages charged against the total gross monthly sales. See below for the impact these fees have.

A device used for cash sales which can also be integrated to accept credit cards.

Process of electronically authorizing, capturing, and settling a credit card transaction.

The rejection of a sales draft by Visa or MasterCard before a transaction runs through Interchange, but after it has been paid by the acquirer.

A technology and payment method designed to limit fraud by using embedded computer chips on credit and debit cards. Businesses not using point-of-sale systems accepting EMV cards may become liable for certain fraudulent card transactions.

Many of the hidden credit card processing fees are difficult to detect without detailed analysis, which often overwhelms most merchants. However, this particular hidden fee is easier to highlight. It involves a bit of math, but nothing too complex.”

Divide the “Processing Fees” charged to the merchant $1,559.41 by the “Amount of Net Sales” $326,194.08 and you get .48%. However, when you look at the “Discount Rate,” it shows .35% not 48%.

The credit card processor shows the 35% (which is already six times more than any merchant should ever pay for a discount rate) and hides the extra 13%. This one is not only hidden, it’s deceptive.

This is a fee that credit card processors add to accounts. However, to be clear, this fee is not a bonafide fee recognized by the processing networks, nor is it charged to all merchants or by all credit card processors. It would appear to be an extra profit center for the credit card processors. By adding these types of fees, the processor can offer a lower discount rate while still maintaining high-profit margins. In the example below, the merchant thinks they are paying a .15% “Discount Rate.” However, when you add back in the “Interchange Clearing Fee,” the merchant is paying .50% which is over ten times what the merchant should be paying. To be clear, this is just one example, and when you ask the processor to remove it, they will add a different fee to take its place.

An ISO (Independent Sales Organization) is a third-party entity that resells merchant processing services. ISOs are required to disclose their affiliation at the bottom of their website. For example, “ABC Processing is a registered ISO/MSP of Any Bank, Cincinnati, OH.”

The one who issues the Credit Card, which is Bank of America in the example below. 

In order to be competitive and offer lower discount rates, credit card processors can get creative and charge fees that are unique to them. This gives the merchant a false perception of what they are truly paying.

Below, the merchant has a .15% discount rate, which is about three times more than they should be paying. However, the credit card processor has added an “Interchange Clearing Fee” for .0035 (.35%), taking the actual rate the merchant is paying to .50%, which is over ten times what they should be paying.

A strip of magnetic tape affixed to the back of credit cards containing identifying data such as account number and cardholder name.

A batch close that the merchant initiated. 

A business that accepts credit cards.

This number is generated by a processor/acquirer and is specific to each individual merchant location. This number is used to identify the merchant during the processing of daily transactions, rejects, adjustments, chargebacks, end-of-month processing fees, etc.

Private label credit cards are designed mainly for repairs, maintenance, and fueling of business vehicles.

The footer is the text printed at the bottom of a sales draft. A merchant can customize the footer (e.g., “Have a Nice Day,” “No Refunds,” “Thank You for Shopping With Us,” etc.).

A bank that is a member of Visa or MasterCard, etc., that gives banks access to their processing networks. Only banks may join; therefore, processors must have an MSP in order to gain access to the processing networks. 

In order to be competitive and offer lower discount rates, credit card processors can get creative and charge fees that are unique to them. This gives the merchant a false perception of what they are truly paying.

Below, the credit card processor added a fee called “Network & Processor Access Fee” for .07%. This is not to be confused with the actual fee named “Network Access Fee” charged by the processing networks and is a dollar amount, not a percentage.

In order to be competitive and offer lower discount rates, credit card processors can get creative and charge fees that are unique to them. This gives the merchant a false perception of what they are truly paying.

Below, the credit card processor is charging the merchant .48% for a “Risk Fee.” This fee is imposed by the credit card processor, not the processing networks. It is not charged to all of their merchant agreements; only some merchants have to pay this fee. We have only found this fee being charged by one credit card processor. To put this in perspective, this added fee is almost ten times what a merchant should be paying the processor, and this does not include the “Discount Rate.”

In order to be competitive and offer lower discount rates, credit card processors can get creative and charge fees that are unique to them. This gives the merchant a false perception of what they are truly paying.

Below, the credit card processor is charging the merchant .15% for a “Settlement Funding Fee.” This fee is imposed by the credit card processor, not the processing networks. It is not charged to all of their merchant agreements; only some merchants have to pay this fee. This little added fee is three times what the merchant should be paying their processor, and that’s before the discount rate gets added in.

A website shopping cart is software that allows customers to select and purchase products online. It mimics the experience of shopping in a physical store, where customers can browse, add items to a cart, and then check out. If a merchant sells to businesses, it must have a shopping cart that will connect to a data-enhanced payment gateway. If not, then the merchant will pay anywhere from .70 to 1% in interchange fees. A shopping cart will collect the minimum data needed to process a credit card transaction. However, business, corporate, and purchasing cards require much more data in order to get lower interchange fees. A traditional payment gateway will only pass the data it receives, allowing the transaction to downgrade to a higher credit card interchange rate. A data-enhanced gateway will fill in the missing data to ensure the merchant pays the lowest available credit card interchange rate. Credit card processors will often tell merchants that their gateway will auto-populate that missing data. Be sure to get that in writing on official letterhead and signed by an authorized officer, so you don’t end up learning the hard way and having to pay to fix it later.

The fee charged to the merchant is passed back to the issuing bank. The fees fluctuate based on industry, card type, processing network, method of entry, and data passed. The interchange fees are updated every April and October. It is best to use a Data Enhanced Payment Gateway that will fill in missing data or correct the data to ensure the transactions settle at the lowest interchange fees. This can reduce interchange fees as much as .70 – 1%.

Caution—Processors have been caught inflating/padding the interchange. For example, Visa charges 2.2%, and the credit card processor charges the merchant 2.95%, creating an extra .75% profit for the credit card processor.

A credit card surcharge occurs when a merchant passes their processing fees onto the customer. This can be done in a couple of ways:

A) The credit card processor can charge all the merchant’s customers a flat 3% fee. However, the processor will also raise the merchant’s debit fees, which cannot be passed back to the consumer. A bigger concern is that the credit card processor is fully indemnified, meaning the merchant is 100% responsible for any fines or penalties from the card networks. Even worse, the merchant risks losing the ability to accept credit cards and could face legal consequences in states where surcharging is prohibited or strictly regulated. It’s not a simple “one size fits all” solution; it’s a complex process. Review your merchant agreement carefully—you’ll find an indemnity clause stating that the processor cannot be held accountable, leaving the merchant with all the risk.

B) Partnering with a third-party expert can offer advantages:

• Both the merchant and their customers will likely pay less.

However, even with this option, ensure you are not liable for any legal or regulatory violations, and that the third party assumes 100% of the liability.

Credit cards used by businesses for travel and entertainment expenses.

Also referred to as a VAR sheet, a document given to a gateway provider that provides merchant account information, bank account information, processor information, etc., to aid in setting up communication between the payment gateway and the credit card processor.

A unique number assigned to each POS terminal, Virtual Terminal, or Gateway.

A third-party vendor that enhances or modifies existing hardware or software, adding value to the services provided by the processor or acquirer, e.g., a payment gateway.

A document given to a gateway that provides merchant account information, bank account information, processor information, etc., to aid in setting up communication between the gateway and the merchant account provider.