Key Terms in Online Payments
This is a re-post of an original blog post of PayUmoney blog.
A payment gateway is one of the most essential element for online businesses and choosing the right one is a critical and sometimes daunting task. With the previous article, we highlighted the factors to consider while choosing a right payments partner for your business. Here are some of the key terms that come up regularly in conversations in the payments industry:
Acquirer / Acquiring bank / Merchant Bank
An acquiring bank is the financial institution which enables merchants to process debit and credit card transactions. They authorize the bank card transactions and pass it to the right issuing bank. Moreover, acquirers take the risk liability and do clearing and settlement of transactions
Authentication
It is the verification of the card owner. This is equivalent to a wet signature check at point of sale in the physical world. In India, Two Factor Authorization (2FA) is followed in which two out of the following three is used:
- Something you have
- Something you know
- Something you are
Authorization
The process of ensuring that the cardholder has adequate funds to complete the online transaction. Based on approval/decline response to the acquirer from the issuer, the transaction either goes ahead or gets terminated
Average Ticket Size
The average size of transactions your portal. This is used to understand the expected business volume from a merchant and also to assess the risk limit
Issuer / Issuing bank
The financial institution authorizes or itself issues cards to a Consumer and is liable for the use of the card
Card Not Present
A card not present transaction is any card transaction without a physical card being presented to the merchant. Online payment transactions are an example of CNP where only the card details are provided to process the transaction. The customer never produces their card to make the payment
Card network
Visa, MasterCard, American Express or other networks that acts as an intermediary between acquirers and issuers to authorize card transactions
Card Verification Value (CVV)
It is a 3-digit numeric code on VISA/MasterCard and 4-digit numeric code on American express card. Providing your CVV number to an online merchant means that you are in possession of the physical card and helps in while reducing fraud
Chargebacks
A transaction that is disputed by a cardholder or card issuing bank and is sent to the acquirer for resolution. Chargebacks are meant to protect consumers from unauthorized transactions and in cases where consumers are dissatisfied with the product/service
Interchange fees
This is the fees paid to the issuer by the acquirer to compensate for transaction-handling costs, fraud and risk liability in approving payments. The Card networks like VISA/MasterCard establish interchange fee rates
Merchant Discount Rate / Transaction Discount Rate / Merchant Service Fees
It is a charge the merchant pays to the acquirer every time a card is used for making payment on his portal. It is usually expressed as a percentage of the transaction amount. The rate is determined based on factors such as transaction volume, average ticket size, risk and industry
Payment Gateway
A service provider service that facilitates and authorizes payments for online businesses. It transmits transaction information to acquirers and responses from issuers. It is equivalent to a physical point of sale terminal in retail outlets
PCI DSS Compliance
The Payment Card Industry Data Security Standard is a set of security guidelines to ensure that companies that accept, process, store or transmit sensitive card information maintain a highly secure environment
Settlement
It is the process through which the merchant receives the fund paid by his customers for a particular product/service. There are a number of entities involved in the settlement process
Tokenization
Tokenization encrypts sensitive payment data like card number and expiry date into virtually substituted credentials also known as tokens. It is tokens that is passed forward in the transaction chain and decrypted only in the secured PCIDSS environment
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