Credit Card Industry Terms

One of the first things that needs to be accomplished when looking at a new area, is to become familiar with the associated terminology. As with any other area, the credit card industry has its own vocabulary which needs to be understood to fully comprehend what is taking place.

Terminology:

• Acquiring Bank - A bank that has a business relationship with a merchant and receives all credit card transactions from that merchant [Rosenberg, 93]. I have also seen the term merchant bank used to describe acquiring banks.
• Authorization - Approval of a credit card transaction for a merchant by the card-issuing bank [Rosenberg, 93].
• Authorization Code - A code assigned by the card issuing bank to a credit card sale to show that the transaction is authorized [Rosenberg, 93].
• Bank Card - A credit card issued by a bank [Rosenberg, 93]. Visa and MasterCard are bank cards. American Express and Discover are not.
• Chargeback - A credit card transaction that is billed back to the merchant who made the sale. This happens when a credit cardholder disputes a charge on their bill by claiming the product was never delivered or the cardholder was dissatisfied with it in some way. Cardholders are suppose to try to obtain satisfaction from the merchant before disputing the bill with the credit card issuer [Attard, 93].
• Electronic Data Capture - Entering and processing the sales drafts by electronic means, (see ICVerify home page). When I worked briefly in a retail store, I remember that we would get a credit card sale authorization at the time of the purchase, and then at night capture the sale draft by sending the sales draft data from the Point of Sale terminal to be processed. In online payment schemes, capture is used to denote the electronic deposit of the sales draft with the acquiring bank.
• Independent Sales Organization (ISO) - Independent sales organizations play a role in many business fields. In the credit card industry ISOs act as a third party between the merchant and the acquiring bank. Many businesses are unable to obtain merchant status through an acquiring bank because the bank views them as too large a risk, and need to go through an ISO to obtain merchant status [Attard, 93].
• Interchange - The transaction that takes place between the acquiring bank and the credit card-issuing bank [Rosenberg, 93].
• Interchange Fee - A fee the acquiring bank pays to the credit card-issuing bank in order to process a credit card transaction involving a card holder's account [Rosenberg, 93]. This fee is regulated by MasterCard and Visa, and is a percentage of the total transaction amount [Baughn, 88].
• Merchant Discount - A percentage of the retail sale the merchant pays as a fee to the acquiring bank for processing the credit card transaction [Rosenberg, 93]. You can bet that this fee is always higher than the interchange fee the acquiring bank pays.
• Merchant Status - A business is considered a "merchant" once they have authorization from an acquiring bank, ISO, or other financial institution to accept credit cards [Attard, 93].
• Sales draft - An instrument showing an obligation on the cardholder's part to pay money, (i.e.. the sale amount), to the card issuer [Rosenberg, 93]. This is the piece of paper that you sign when making a purchase with your credit card. Sales draft data can be "captured" electronically and sent to be processed over the financial networks, (see ICVerify home page).

The terminology defined above is only a small amount of the vocabulary of the credit card industry. However, these are the terms you should know to be able to understand this report. Simply reading the definitions above starts to provide you with a little insight into the credit card industry.