Payment Processing Glossary

Understanding your processing statement starts with knowing the terminology. Browse 60 essential payment processing terms, explained in plain English for merchants.

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Payment processing fees, terminology, and pricing models are intentionally complex. Processors profit from confusion. This glossary explains every major payment processing term in plain language — so you can understand your statement, compare processors intelligently, and negotiate from a position of knowledge.

Core Fee & Pricing Terms

Interchange Plus Pricing

A transparent pricing model where merchants pay the card network's actual interchange fee plus a fixed processor markup.

Merchant Discount Rate

The total percentage fee a merchant pays per transaction, covering interchange, assessments, and processor markup.

Interchange Fees

Fees paid to the card-issuing bank on every transaction, set by Visa and Mastercard — the largest component of processing costs.

Flat Rate Pricing

A simplified pricing model charging the same percentage on all transactions, regardless of card type or transaction method.

A pricing model that groups transactions into qualified, mid-qualified, and non-qualified tiers with different rates for each.

The true all-in cost of payment processing — total fees divided by total volume — your single best metric for comparing processors.

A unit of measurement equal to 0.01% (one hundredth of one percent), commonly used to express payment processing rates.

Processor Markup

The fee charged by your payment processor on top of interchange costs — their profit on every transaction you process.

Assessment Fees

Fees paid directly to card networks (Visa, Mastercard, Discover, Amex) on every transaction — separate from interchange and processor markup.

Cash Discount Program

A legal program that offers customers a discount for paying with cash, effectively offsetting credit card processing costs for merchants.

Adding a fee to credit card transactions to recover processing costs — legal in most states with proper disclosure and registration.

Displaying two prices at the point of sale — one for cash and one for card — so customers choose their payment method with full cost transparency.

Transaction Flow Terms

The process of verifying that a customer's card is valid and has sufficient funds or credit before completing a transaction.

The step after authorization where a merchant finalizes the transaction and initiates the actual transfer of funds from the customer to the merchant.

The final step in card payment processing where captured transaction funds are transferred from the customer's bank to the merchant's bank account.

Batch Settlement

The daily process of submitting all captured transactions to your processor at once to initiate fund transfer to your bank account.

Canceling a transaction before it has settled — the funds were never transferred, so no refund is needed.

Returning funds to a customer for a transaction that has already settled — a credit to the customer's card account.

A forced reversal of a credit card transaction initiated by the cardholder's bank, typically due to a dispute, fraud claim, or unauthorized transaction.

Chargeback Ratio

The percentage of transactions in a month that result in chargebacks — a key metric card networks use to identify at-risk merchants.

Retrieval Request

A request from a cardholder's bank for transaction documentation before a chargeback — an early warning that allows merchants to resolve disputes without a full chargeback.

Account & Business Terms

Merchant Account

A specialized bank account that allows businesses to accept credit and debit card payments and receive settled funds.

Payment Processor

A company that handles the technical and financial infrastructure for processing card payments between merchants, banks, and card networks.

The bank that maintains a merchant's account and processes card payments on their behalf — the merchant's bank in the transaction flow.

The bank that issued a customer's credit or debit card — the cardholder's bank in the payment transaction flow.

Payment Gateway

The technology that securely transmits card data from a merchant's website or terminal to the payment processor for authorization.

An Independent Sales Organization (ISO) or Merchant Service Provider (MSP) is a company registered with card networks to sell payment processing services.

An ISO that is directly registered with Visa and Mastercard — able to independently underwrite merchants and take on direct card network liability.

Payment Facilitator

A company that aggregates many merchants under a single merchant account, simplifying onboarding but with less customization and account stability.

The key difference between payment facilitators (aggregated, instant setup) and ISOs (dedicated accounts, negotiated pricing, higher volume).

Risk & Compliance Terms

Payment Card Industry Data Security Standard — the mandatory security requirements all merchants must follow to protect cardholder data.

The state of meeting PCI DSS requirements — validating annually that your business properly protects cardholder data.

High-Risk Merchant

A business that processors classify as having elevated chargeback or fraud risk — requiring specialized merchant account solutions.

Reserve Account

Funds held by a processor as security against future chargebacks or financial losses — common for new or high-risk merchants.

Rolling Reserve

A reserve type where a percentage of each batch is withheld for a set period, then released on a rolling basis — the most common merchant reserve structure.

The process by which a payment processor or acquiring bank evaluates a merchant's risk level before approving a merchant account.

The Mastercard Alert To Control High-Risk Merchants list — a shared database of merchants whose accounts were terminated for fraud, chargebacks, or violations.

Velocity Limits

Processing limits that restrict the number or dollar amount of transactions a merchant can process within a given time period to prevent fraud.

Equipment & Technology Terms

The microchip embedded in modern credit and debit cards that generates a unique code for each transaction, dramatically reducing counterfeit card fraud.

NFC Contactless Payment

Near Field Communication technology that allows tap-to-pay transactions from cards, phones, or wearables without physical contact with the terminal.

Point of Sale system — the combination of hardware and software used to process sales, accept payments, and manage business operations at the point of transaction.

Virtual Terminal

A web-based interface that lets merchants manually enter card details to process payments — ideal for phone orders, invoicing, or remote transactions.

Payment Terminal

The physical device used to accept credit and debit card payments at the point of sale — supports chip, swipe, and contactless payment methods.

A small mobile device that connects to a smartphone or tablet to accept card payments on the go — the entry-level payment hardware for mobile businesses.

Replacing sensitive card data with a unique, non-sensitive token that can be used for transactions without exposing the actual card number.

The process of encoding payment card data during transmission and storage so it cannot be read without the proper decryption key.

Interchange Categories

The lowest rate tier in a tiered pricing model — applied to basic credit card transactions that meet all processor-defined criteria.

Mid-Qualified Rate

The middle tier in tiered pricing — applied to transactions that partially meet qualification criteria, such as rewards cards swiped in person.

Non-Qualified Rate

The highest tier in tiered pricing — applied to complex card types, card-not-present transactions, and any sale that doesn't meet standard qualification criteria.

Interchange Downgrade

When a transaction doesn't meet criteria for the best interchange rate and is processed at a higher, less favorable rate.

A transaction where the physical card is used at the point of sale — the most secure transaction type with the lowest interchange rates.

Card Not Present

Transactions where the physical card isn't used at the point of sale — including online, phone, and mail orders — carrying higher interchange rates due to increased fraud risk.

Manually typing a customer's card number into a terminal or virtual terminal — the most expensive card-present transaction type due to higher fraud risk.

Industry-Specific Terms

The process of adjusting a card transaction after the initial authorization to add a tip — common in restaurants and service businesses.

Recurring Billing

Automatically charging a customer's card on a regular schedule — monthly subscriptions, memberships, and service plans.

A stored, tokenized card credential that allows merchants to charge a customer for future transactions without re-entering card details.

Level 2 / Level 3 Data

Enhanced transaction data fields for B2B and government card payments that qualify merchants for significantly lower interchange rates.

Automated Clearing House payments — electronic bank-to-bank transfers commonly used for payroll, bill pay, and business-to-business payments.

The National Automated Clearing House Association — the organization that governs and sets the rules for the US ACH payment network.

Passthrough Pricing

Another term for interchange plus pricing — the processor passes through actual card network costs and charges only a transparent markup on top.

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