Complete Payment Processing Terminology Guide

Whether you’re applying for your first merchant account or negotiating better rates, understanding payment processing terminology is essential. This glossary explains the key terms you’ll encounter when working with payment providers, processing transactions, and managing your merchant account.

A

Acquirer (Acquiring Bank)

Definition: The bank or financial institution that processes card payments on behalf of a merchant. The acquirer receives transaction data from the payment gateway, validates it with the card networks (Visa, Mastercard), and deposits funds into the merchant’s bank account.

Example: Barclays, Worldpay, and Lloyds are major acquirers in the UK.

Also known as: Merchant acquirer, acquiring bank, merchant bank

Authorization

Definition: The process where a card issuer approves or declines a payment transaction. Authorization confirms the cardholder has sufficient funds and the card is valid. An authorization code is generated for approved transactions.

Example: When a customer enters card details, authorization happens in 2-3 seconds. The response is either “approved” or “declined”.

AVS (Address Verification Service)

Definition: A fraud prevention tool that compares the billing address provided by the customer with the address on file at the card issuer. Mismatches may trigger transaction decline or manual review.

UK note: AVS is less reliable in the UK than the US due to different address formats, but still used as part of fraud checks.

B

Batch / Batch Settlement

Definition: The process of submitting a group of authorized transactions to the acquirer for settlement. Most merchants batch transactions at the end of each business day.

Example: A shop processes 50 transactions during the day, then batches them at 11pm for settlement.

Basis Points (BPS)

Definition: A unit of measure for transaction fees. One basis point equals 0.01%. Used to describe small differences in processing rates.

Example: A rate of 1.5% is 150 basis points. A 0.25% difference is 25 basis points.

C

Card Not Present (CNP)

Definition: Transactions where the physical card is not present at the point of sale, such as online payments, telephone orders, or mail orders. CNP transactions carry higher fraud risk and typically have higher processing fees.

Opposite: Card Present (CP) – when the physical card is swiped, inserted, or tapped.

Chargeback

Definition: A forced reversal of a card payment initiated by the cardholder through their bank. Chargebacks occur when customers dispute transactions due to fraud, non-delivery, dissatisfaction, or billing errors. Merchants lose both the product and the payment, plus incur a chargeback fee (£15-£30).

High-risk threshold: Chargeback ratios above 1% are considered high-risk and may trigger account reviews or termination.

Example: Customer claims they never received peptide order, files chargeback. Merchant loses £100 product + £100 payment + £25 fee = £225 total loss.

Chargeback Ratio

Definition: The percentage of transactions that result in chargebacks. Calculated as (number of chargebacks ÷ total transactions) × 100.

Industry standards: Under 0.65% = excellent, 0.65-1% = acceptable, 1-2% = high-risk, over 2% = likely account termination.

CVV / CVC (Card Verification Value)

Definition: The 3-digit security code on the back of Visa/Mastercard (or 4-digit on front of Amex). Required for card-not-present transactions to verify the customer has physical possession of the card.

Important: Merchants cannot store CVV codes after authorization – this violates PCI-DSS rules.

D

Descriptor (Statement Descriptor)

Definition: The text that appears on a customer’s bank or card statement describing the transaction. Should clearly identify your business to prevent confusion and chargebacks.

Example: “WETRANXACT LTD” or “ACME SUPPLEMENTS UK”

Best practice: Use your recognizable trading name, not your registered company name if they differ.

Discount Rate

Definition: The percentage fee charged by the acquirer/processor for each transaction. Includes interchange fees, card network fees, and the processor’s markup.

Example: 2.5% discount rate means on a £100 sale, you pay £2.50 in fees and receive £97.50.

E

EFT (Electronic Funds Transfer)

Definition: The electronic transfer of money from one bank account to another. Includes direct debits, bank transfers, and payment processing settlements.

Ecommerce Payment Gateway

Definition: Software that securely captures and transmits card details from your website to the payment processor for authorization. Essential for online businesses.

Examples: Stripe, PayPal, Worldpay, SagePay

F

Fraud Screening

Definition: Automated systems that analyze transactions for fraud indicators such as unusual purchase patterns, geographic mismatches, or velocity checks. Suspicious transactions may be flagged for review or automatically declined.

I

Interchange Fee

Definition: The fee paid by the acquirer to the card issuer for each transaction. Set by the card networks (Visa, Mastercard). Interchange fees vary by card type, transaction type, and industry.

UK regulation: EU/UK interchange caps are 0.2% for consumer debit cards and 0.3% for consumer credit cards.

Issuer (Issuing Bank)

Definition: The bank that issues cards to consumers and approves or declines transactions. The issuer pays the merchant (via the acquirer) and bills the cardholder.

Example: Barclays issues a Visa card to a consumer. When that consumer makes a purchase, Barclays is the issuer.

M

Merchant Account

Definition: A type of bank account that allows businesses to accept card payments. Funds from card transactions are deposited into the merchant account, then transferred to the business bank account.

Types: Standard merchant accounts (low-risk businesses) and high-risk merchant accounts (high-risk industries).

Merchant Category Code (MCC)

Definition: A four-digit number assigned to businesses by card networks to classify the type of goods or services sold. MCCs determine interchange fees and identify high-risk industries.

Examples: 5411 = Grocery stores, 5912 = Pharmacies, 7995 = Gambling/betting

MOTO (Mail Order / Telephone Order)

Definition: Card-not-present transactions taken over the phone or by mail. Typically processed through a virtual terminal. Common in B2B, hospitality, and service industries.

P

Payment Gateway

Definition: The technology that securely transmits transaction data between your website/terminal and the payment processor. Acts as the “bridge” connecting merchants to the payment network.

Function: Encrypts card data, sends to processor, receives authorization response, returns result to merchant.

PCI-DSS (Payment Card Industry Data Security Standard)

Definition: Security standards required for all businesses that accept card payments. Designed to protect cardholder data from theft and fraud. Compliance is mandatory – failure to comply can result in fines and account termination.

UK requirement: All UK merchants must be PCI-DSS compliant regardless of size or transaction volume.

Payment Processor / Payment Service Provider (PSP)

Definition: The company that handles the technical aspects of processing card payments. Connects merchants to acquirers and card networks. May also provide payment gateway, fraud tools, and merchant services.

Examples: Stripe, Worldpay, Adyen, Checkout.com

R

Refund

Definition: The return of funds from merchant to customer for a disputed or returned purchase. Unlike chargebacks, refunds are initiated by the merchant voluntarily. Refund fees are typically lower than chargeback fees.

Best practice: Process refunds quickly to prevent chargebacks.

Retrieval Request

Definition: A request from the card issuer for transaction evidence, often preceding a chargeback. Merchants must provide proof of purchase, delivery confirmation, or other documentation.

Response time: Typically 7-14 days to respond with required documentation.

Rolling Reserve

Definition: A percentage of each transaction (typically 5-15%) held by the payment provider for a set period (usually 90-180 days) to cover potential chargebacks and refunds. Common in high-risk merchant accounts.

Example: 10% rolling reserve with 180-day hold. £10,000 monthly processing = £1,000 held each month. After 6 months, you have £6,000 in reserve. Month 7 onwards, you receive Month 1’s £1,000 back while Month 7’s £1,000 is held.

S

Settlement

Definition: The process of transferring funds from the acquirer to the merchant’s bank account after transactions are batched and processed. Settlement typically occurs 1-7 days after the transaction date.

Settlement period: Standard accounts: 1-2 days. High-risk accounts: 2-7 days.

Strong Customer Authentication (SCA)

Definition: EU/UK requirement for two-factor authentication on online card payments. Requires at least two of: something you know (password), something you have (phone), something you are (fingerprint).

Implementation: 3D Secure (3DS) is the most common SCA method for card payments.

T

3D Secure (3DS)

Definition: An authentication protocol that adds an extra security layer to online card transactions. Cardholders verify their identity through their bank (usually via SMS code or banking app) before the payment is authorized.

Brands: Visa Secure, Mastercard Identity Check

Benefit: Shifts chargeback liability from merchant to issuer for authenticated transactions.

Transaction Fee

Definition: The total cost to process a card payment. Usually a percentage of the transaction value plus a fixed fee.

Example: 2.5% + £0.20 per transaction. On a £100 sale, fee = £2.50 + £0.20 = £2.70 total.

U

Underwriting

Definition: The process of evaluating a merchant application to determine risk level and approval. Underwriters review business model, financials, processing history, website, and industry classification.

Timeline: Standard accounts: automated (instant-24 hours). High-risk accounts: manual review (3-10 days).

V

Velocity Check

Definition: Fraud prevention tool that monitors the frequency and volume of transactions. Flags unusual patterns such as multiple transactions from same card in short period, or sudden volume spikes.

Virtual Terminal

Definition: Web-based interface that allows merchants to manually enter card details to process MOTO (mail order/telephone order) transactions. No physical card terminal required.

Use cases: Phone orders, mail orders, invoice payments, recurring billing setup

Payment Processing Glossary FAQs

What is the difference between a payment gateway and a payment processor?

A payment gateway is the technology that securely captures and transmits card data from your website or terminal. A payment processor (PSP) is the company that handles the actual transaction processing, connecting to acquirers and card networks. Many modern providers offer both services integrated together.

What is the difference between an acquirer and an issuer?

An acquirer (acquiring bank) works with merchants to process card payments and deposit funds into merchant accounts. An issuer (issuing bank) provides cards to consumers and approves or declines transactions. For each transaction, the acquirer represents the merchant and the issuer represents the cardholder.

What does PCI-DSS compliance mean for my business?

PCI-DSS compliance means following security standards to protect customer card data. Requirements include secure networks, encrypted data storage, regular security testing, and documented policies. All UK businesses accepting card payments must be compliant. Non-compliance can result in fines up to £500,000 and account termination.

What is a chargeback and how is it different from a refund?

A chargeback is a forced transaction reversal initiated by the cardholder through their bank, usually due to disputes or fraud. A refund is a voluntary return of funds initiated by the merchant. Chargebacks incur fees (£15-£30) and negatively impact your merchant account standing, while refunds typically have lower or no fees.

What is a rolling reserve and why might I need one?

A rolling reserve is a percentage of your transaction value held by the provider for 90-180 days as security against chargebacks. It is common in high-risk merchant accounts but not always required. Whether you need one depends on your industry, processing history, and risk profile.

What does 3D Secure mean?

3D Secure (3DS) is an authentication protocol requiring cardholders to verify their identity with their bank during online purchases, usually via SMS code or banking app. It reduces fraud and shifts chargeback liability from merchant to issuer for authenticated transactions. Required for SCA compliance in UK and EU.

What is interchange and why does it vary?

Interchange is the fee paid by the acquirer to the card issuer for each transaction. Set by card networks, it varies based on card type (debit vs credit), transaction type (online vs in-person), and business category. UK consumer card interchange is capped at 0.2% for debit and 0.3% for credit.

What does settlement mean in payment processing?

Settlement is when funds from authorized transactions are transferred from the acquirer to your merchant account and then to your business bank account. Standard accounts typically settle in 1-2 days, while high-risk accounts may take 2-7 days. Settlement timing affects your cash flow.

Related Payment Processing Resources

• High-Risk Merchant Accounts UK
• High-Risk Merchant Account Application Checklist
• High-Risk Merchant Account Costs
• High-Risk vs Standard Merchant Accounts
• Standard Merchant Accounts

UK Payment Industry Resources

• PCI Security Standards Council
• Visa UK
• Mastercard UK
• UK Finance
• Financial Conduct Authority – Payment Services

Understanding Payment Processing Terminology

Whether you’re a new merchant applying for your first payment processing account or an established business negotiating better rates, understanding payment processing terminology is essential for making informed decisions.

This glossary covers the most important terms you’ll encounter when working with payment providers, processing transactions, managing chargebacks, and ensuring compliance with industry regulations.