The idea of accepting online payments seems pretty simple. The eCommerce website places a shopping cart, attaches a payment method, and has funds magically coming to its bank account. However, an online payment processor is not as straightforward as it sounds. Online payment processing is complex, especially for those new to the game.
Things might become easier by understanding standard terms used in the process. Here is a breakdown of some payment processing terms (placed alphabetically) a merchant must learn before getting started.
- 3-D Security
- Account Updater
- ACH Payments
- Acquiring Bank
- AVS (Address Verification Service)
- CNP (Card-Not-Present)
- Level One Data
- Level Two and Three Data
- Merchant Account
- Merchant Identification Number
- Monthly Processing Limit
- Multi-Currency Processing
- Payment Gateway
- Payment Processor
- Payment Provider
- PCI DSS (Payment Card Industry Data Security Standards)
- Recurring Bills
- SSL (Secure Socket Layer)
- Virtual Terminal
Credit card companies use this authentication method to protect customers from fraud. It is called 3-D because it provides security from three different domains: issuer domain, interoperability domain, and acquirer domain.
Payment processors offer this service to merchants, involving an updated account number, account status, cardholder contact details, and expiration date. This service benefits company offering subscription-based or recurring billing services to their clients.
ACH stands for Automated Clearing House, also known as e-Checks. In this method, the customer enters their bank details to transfer funds from their account to the merchants
A acquirer is a bank responsible for processing debit or credit payments for the merchant. When a customer makes a payment, the acquiring bank gets active to clear the transaction and deposit the money into the merchant’s bank account.
AVS (Address Verification Service)
The AVS service verifies the customer’s billing address by checking the details provided. Visa, Discover, American Express, and MasterCard support this system to prevent fraud.
Whenever a transaction occurs, the customer’s card issuer validates the availability of funds and sends this information to the acquiring bank. The acquirer then transfers the funds from the customer’s bank account to the merchant’s. If there are insufficient funds, the merchant receives a notification that the transaction is declined. All this process takes place through a merchant payment gateway within seconds.
It is a type of transaction without any physical card involved. Since a CNP transaction does not include a customer’s signature or PIN, it becomes an easy method for fraudulent activities. Credit cards have AVS at the back to monitor any fraud during a CNP transaction.
A chargeback becomes active when a customer claims a charge. While a chargeback protects customers by giving their money back if they receive inferior products, they are not so friendly to the merchants. Chargebacks come with penalties and may cause monetary loss to the business. Therefore, a merchant must offer good customer service, prevent fraud, issue refunds easily, and maintain quality to avoid chargebacks.
The customer’s transactional and personal data is encoded in the encryption process. It translates sensitive information into alphanumeric codes that a hacker cannot decode. After encryption, the customer’s data becomes secure enough to travel across the internet. That is why PCI makes encryption a crucial part of compliance
Level One Data
Card companies provide the customer’s account number, purchase amount, transaction data, supplier name, category code, address, and other details during an online transaction.
Level Two and Three Data
Level-one data is sufficient for most B2C transactions. However, if the merchant is involved in B2B or B2G transactions, they need to provide additional details to the online payment processor, including tax amounts, tax ID customer code, freight amounts, item descriptions, etc. It is called level two and three data.
A seller needs a merchant account to accept online debit and credit card payments. It is a line of credit they get from the acquiring bank. Then the bank takes responsibility for transferring money from the customers’ accounts to the merchant’s bank account.
Merchant Identification Number
An acquirer or payment processor generates a unique identification code for each merchant to identify them during an online transaction.
Monthly Processing Limit
The amount or number of transactions a merchant payment gateway permits in a month. The processor charges a processing fee based on this limit.
It enables merchants to accept payments in multiple currencies, allowing them to sell to overseas customers.
A payment gateway service receives online payment requests from the merchant’s website and sends them to the payment processing company.
A payment processor validates the customer’s card details and ensures it has a sufficient amount to make a transaction happen. It handles settlement and authorization, determines the transaction charges, and transfers funds from the customer’s account to the merchant’s.
The payment provider is the one that operates a payment processing service or gateway. Sometimes, both entities may combine to make a single payment provider.
PCI DSS (Payment Card Industry Data Security Standards)
The card industry has established these rules that each merchant must follow. For instance, a merchant must use encryption to protect their customer’s data to prevent fraud. If they do not use encryption, they are subject to penalties.
Customers often pay for a product only when they purchase something. However, in a recurring billing system, they opt for a regular service for which they have to pay recurring bills at regular intervals.
An online payment processor holds a flat amount or a percentage of the transaction amount for a certain period. It is not a fee but a retained amount meant to mitigate bank reversals or chargeback risks. If the payment clears without any issue, the processer releases the reserve and deposits it into the merchant’s bank account.
SSL (Secure Socket Layer)
A secure web protocol to encrypt data between a web server and a browser. It prevents a third party from intercepting the customer’s payment details, reducing fraud.
This is the final step involved in online payment processing. Once the merchant receives the transaction amount into their bank account, they settle the transaction and declare it complete.
Equivalent to a physical POS terminal, it is an online program where a merchant can enter its customer’s details to carry out a transaction.
Finally, these are the terms every merchant should know. Understanding them will help a lot in online payment processing. However, it’s crucial to stay updated with the latest trends and clarify the terminology.