Merchant Service Definitions


Here are some general merchant account terms and definitions to help you understand the terminology for the industry. As with anything, merchant account providers often use a standard set of terms to describe various features or components of their service and you may find yourself agreeing to something when you had no idea what the terminology meant. Here are some of the more common terms used when talking about credit card processing services:

1. The cardholder: This is your customer, the person whose name is on the credit card she uses to pay for a product or service.

2. The issuing bank: This is the bank that has issued the card to the customer.

3. Merchant account holder: This is you. You are the person that has signed up for the merchant account, who wants to accept credit cards, and the one directly responsible for it.

4. Credit card processing specialist or processing company: This is the company you have retained to handle your credit card processing needs.

5. Chargebacks: This is what happens when a customer asks for his money back from a service or product provider.

6. Chargeback fees: These are the fees charged by the processor to cover the costs associated with processing a chargeback.

7. Pass-through fee: This is not a good thing, as this is the fee that you are charged when a transaction you process failed to meet a certain set of requirements, such as neglecting to verify certain information. You should choose a company that charges minimally for these types of fees.

8. Contingent liability: This is when the satisfaction of the customer dictates the business’ ability to perform a certain set of actions.

9. Magnetic and non-magnetic transactions: A magnetic transaction occurs when the card is swiped through a point-of-sale (POS) credit card machine. Non-magnetic are those transactions that occur over the Internet or on the phone; cards are not present. Rates are higher for non-magnetic transactions because the risk of fraud is much greater.

10. Net settlement: This is what is transferred into your ISO account once a sale has been completely. The money you receive is minus whatever fees you pay per transaction to the merchant account company.

10a. Gross Settlement:  This is the total transaction amount.  Fees for processing are deducted at the end of the cycle, typically monthly.

11. Reserves: This is what is required for accounts that are high-risk in nature, usually businesses that have a poor credit history or have had relationships with merchant accounts before that have soured. This is a charge that takes into account the risk associated with taking you on as a customer and usually withholds a certain percentage of the funds for each transaction you process for a pre-determined amount of time. They are held in escrow to deal with an influx of chargebacks and usually don’t span the length of an account that remains in good standing for a certain amount of time.  A credit card processing provider will investigate whether you are operating a legitimate business.  The company wants to ensure that you are financially stable - it doesn't want to become responsible for any fraudulent or unpaid debts.


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