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Electronic Funds Transfer (EFT) Terminology

The following is a brief list of terms that are pertinent for Credit Card and other forms of electronic funds transaction processing:

Card Associations

 

These are organizations such as VISA and MasterCard that, along with the government, make the rules in regard to acceptance of Credit Cards.  These rules include fees that are charged for interchange.

American Express and Discover are different situation. They are both the Issuer and Acceptors, and Merchants must have a separate agreement with them.  (This may change as current litigation is resolved.

Interchange Fee

This is the fee that the Card Association charges the Merchant to get the funds into his Bank (Merchant Bank) and to get the billing information to the Cardholder's Bank (Issuing Bank).  Interchange fees are based on following Credit Card regulations and capturing appropriate data including card swipe, address, and electronic signature as needed. These fees are also based on the timeliness of the settlement of transactions.


Issuing Bank

 

This is the Bank from where Cardholder receives his card.  These Banks promote the use of the various branded cards and charge the Cardholders interest and fees for their use.  They share in the Interchange Fee charged by the Card Associations.  Most of the power in the Credit Card industry is seated with the Issuing Banks.  An Issuing Bank's worth is its portfolio of Cardholders.


Merchant (Acquiring) Bank

This is the Bank that stands in for all the Issuing Banks and puts up the funds to be deposited in the Merchant's account prior to it being transferred via interchange from the various Issuing Banks.  Merchant Banks provide these funds for a Discount Rate, a fee charged for the use of the money.  It's called a Discount Rate because it is usually taken away from credit card funds as they are deposited.  They also share in the Interchange Fee charged by the Card Associations.  A Merchant Bank’s worth is its portfolio of Merchants.

Processor

A Processor is a Company (often a third party) that handles Credit Card transactions for Merchant Banks.  They are usually broken down into two types: front-end and back-end -- with a gray area in between.

Front-End Processors have connections to various Card Associations and supply authorization and settlement services to the Merchant Banks' Merchants.  Back-End Processors accept settlements from Front-End Processors and, via The Federal Reserve Bank (FED), move the money from the Issuing Bank to the Merchant Bank.  In some cases, the Merchant Bank gets the settlement information from Front-End Processors and in other cases, from the Back-End Processors.  This is the gray area.

  • When you consider that some third party Processors are both Front-End and Back-End Processors the situation gets even more unclear, and even more confusing when you consider that some Merchant Banks are their own Front-End Processors, Back-End Processors, or both.

    Processors are usually paid based on a per-transaction fee basis.
     
    Merchant Services Provider

    A Merchant Services Provider (MSP) is an organization that quotes a Discount Rate to the Merchant and handles the setup with the Front-End, and Back-End Processors -- to ensure the Merchant's funds are correctly routed to his bank.  An MSP can be a Merchant Bank or an Independent Sales Organization for a Merchant Bank, called an ISO.

    In either case, the MSP is responsible for getting all the paperwork together to set up the Merchant to accept the various Cards, and to allow the Merchant to process the Cards with the Processor.  In some infrequent cases, some Merchant Banks are agents for American Express and/or Discover, and can set up the Merchant to accept their cards.  In all instances, the MSP is responsible for setting up the Merchant with the Processor to accept all Card types.

    Non-Merchant Bank MSPs are usually paid a percentage of the Discount Rate.  An MSP is basically responsible for the relationship between the Merchant, Card Associations, Processors, and Merchant Bank.

    Compliance

    The Card Associations make regulations for each industry that accepts credit cards.  These regulations are designed (according to the Card Associations) to prevent fraud. 

    Discount Rate

    This is the fee paid by a Merchant to the Merchant Bank to handle the deposit of Credit Card funds into their bank. It is usually quoted as a percentage to hundreds (or basis point).
     
    Network

    Many Merchant Banks and Processors talk about their Credit Card networks.  These can be everything from a real network owned and utilized by the Processor, to utilizing the 800 service of AT&T, Sprint, or MCI.  Some Processors use private networks such as CompuServe to move their transactions... while others use pseudo-networks put together by wholesalers of the major networks for leased lines.

    Authorization

    The Authorization process is different for each Merchant type.  Different information must be sent depending on whether your operation is a Restaurant, Retail establishment, Hotel, or Mail-Order/Telephone-Order (MoTo) Merchant.  In the case of MoTo, since the transaction does not take place face-to-face, address information is required to guard against fraud.

    The Authorization process usually takes place in the following ways:

    • Restaurant
      • Request authorization for total GuestCheck amount.  If a Referral response is received, the Voice Center must be called and a verbal authorization/decline will be issued.  If declined, request alternate method of payment.
      • Once approved, the Customer indicates a Tip (Gratuity, not Service Charge) amount.  If the Tip is within the preset Authorization Tolerance (10-15% of total bill), no additional Authorization Code is needed.
      • If the Tip amount does exceed the Authorization Tolerance, an additional authorization must be obtained prior to settlement.

    • Retail

      • All Retail transactions are considered Sale transactions -- which means they can be immediately settled to the Bank upon receiving an Authorization Approval.

    • Lodging
      • Request an authorization for the Check-In amount (usually an estimate based on Room Rate and length of stay).  If a Referral Response is received, the Voice Center must be called and a verbal authorization/decline will be issued.  If declined, request an alternate form of payment.
      • As additional charges are incurred during a Guest's stay, Incremental Authorizations are made when additional charge amounts exceed the preset Authorization Tolerance (usually 10-15% of the Check-In amount).  If additional charges do not exceed the Authorization Tolerance, they are considered to be under the authorization "ceiling" and covered by the previous Authorization Code.
      • Upon Check-Out, a final authorization is made to ensure full payment of any incidental charges.  A Lodging transaction is considered an Authorization-Only transaction until Check-Out time, at which time it becomes a Sale transaction.  Only Sale transactions can be settled to the Bank.

      • It is important to note that a Lodging Merchant's Credit Card software must be able to capture all data pertaining to each and every authorization that was made throughout the stay.  This will ensure adequate Charge-Back defense in the event that a Guest disputes a particular charge... and lower possible discount rates.  In order for a Lodging Merchant to enjoy the lowest possible Discount Rate, Card companies require that Extended Data be captured and sent with the settlement.  This data includes information such as Check-In & Check-Out dates, special codes for no-show or delayed charges, etc.  By tying all transaction data to a Guest's unique Invoice/Folio number, the Credit Card Processing system can significantly enhance and simplify a Lodging Merchant's reporting and researching process.

    • Mail-Order or Telephone-Order

      1. Check the Cardholder's billing address (Address Verification System).  If the address passes go to step #2.  If the address verification fails, then stop.

      2. Perform an Authorization request.  If the transaction is Good (Authorized), ship when ready.

        If the transactions is Declined, do not ship, and ask for another form of payment.  Return to step #1.

        If the transaction is a Referral, call the Voice Center to get an authorization, and ship when ready, or Decline the transaction, ask for another form of payment, and return to step #1.

    Address Verification System

    Address Verification System (AVS) is a method whereby the Merchant is asked to supply address information for the Cardholder in all non face-to-face transactions.  The Merchant's system sends the numbers of the street address and the zip code of the Cardholder's billing address to the Front-End Processor.  The Front-End Processor makes a request of the Issuing Bank to verify the validity of the address and lets the Merchant's system know whether the address supplied is valid.

    While this does lower discount, and is supposed to prevent fraud, most credit cards are stolen along with a wallet or purse, which usually have address information in them.  This just may be another way of increasing the Interchange Fee.

    What is interesting is that half of the Issuing Banks are not ready to handle AVS.  Those that are may only have accurate zip codes in their systems, as there is some Industry confusion as to which numbers the street address should be included with AVS (e.g., should 1123 32nd St. be 1123 or 112332, or should 12591 Main St. Apt. 12 be 12591 or 1259112). W ith this still up in the air, many Issuing Banks are sticking with zip and zip+4.  The Merchant is given the option of what they want to accept as a valid address: zip, zip+4, address plus zip, or address plus zip+4.

    The good news is that because the Issuing Banks are not yet with the program, in order to qualify for the best rate, all you have to do is attempt address verification.

    Settlement

    Settlement is the process by which the already authorized transactions are sent to the Front-End Processor to be forwarded to the Merchant Bank and/or Back-End Processor.  They in turn are forwarded to the FED to move the funds from the Issuing Bank to the Merchant Bank.

    Regulations relative to Settlement are different for each Merchant Type and Card Type.  These regulations predominantly cover what information must be sent at the time of Settlement.

    There is one Settlement regulation to note: The product or service must be delivered or performed before Settlement can take place.  In the case of MoTo, this specifically means the goods must be shipped before the Settlement process is performed. Shipped is a loose interpretation of products being delivered.

    Charge-Back Defense

    A Customer who does not receive his goods or services , or says he did not place an order, can ask his Issuing Bank to Charge-Back the Merchant. The Issuing Bank sends the Charge-Back request to the Merchant Bank, which forwards it to the Merchant asking to validate the charge.  Information such as the amount, an Invoice or Folio, Customer signature, shipping documents, and the shipping address (used in AVS during the authorization) are needed to defend against a Charge-Back.

    Signature Capture

    Electronic capturing of the Cardholder's signature is becoming a powerful tool for Charge-Back Defense.  At the Point-of-Sale, the Customer is asked to sign the GuestCheck, Ticket, Receipt, Folio, or Charge Slip over a special digital device that turns the signature into a manageable set of digital events -- so that the POS (or Transaction Authorizing System) reproduce the signature faithfully.  A capture of the swipe and an electronic signature at the Point-of-Sale virtually assures that the Customer and Card were physically there and an authorization was obtained for the purchase of goods and/or services.  Certain POS and Authorizing Systems can retain the signature in an encrypted form to be reproduced when requested for Charge-Back Defense.

     

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