Reference

Payment Processing Glossary

Every payment processing term U.S. merchants meet on a merchant statement, a processor pitch, or a compliance form, defined in plain language with the number that matters: interchange and assessments, effective rate, tiered versus interchange-plus pricing, rolling reserves, chargeback ratios and the VAMP thresholds, MCC codes for high-risk verticals, and settlement terms. Each entry links to the guide or comparison where the term does real work. 42 terms so far, expanding monthly.

Pricing models

Effective rate: Effective rate is the total payment-processing cost expressed as a percent of card volume. Calculated as total monthly fees divided by total monthly card volume. The most useful single metric for comparing processor cost across pricing models.
Flat-rate pricing: Flat-rate pricing is a payment-processing model where every transaction carries a single all-in rate plus a fixed per-transaction fee, regardless of card type. Common for Stripe, Square, and PayPal. Simplicity-optimized; usually more expensive above $25,000 monthly volume than interchange-plus.
Interchange(interchange fee, interchange rate): Interchange is the wholesale fee paid by a merchant's acquiring bank to the cardholder's issuing bank on every card transaction. Set by Visa and Mastercard and revised semiannually, interchange is the largest component of the effective rate and is not negotiable.
Interchange-plus pricing(IC+, IC++, interchange-plus-margin): Interchange-plus pricing is a payment-processing model where merchants pay the wholesale interchange rate set by the card networks plus a fixed, transparent processor markup. The model exposes the cost structure, which makes it easier to audit and benchmark than flat-rate or tiered pricing.
Tiered pricing(bundled pricing): Tiered pricing is a payment-processing model where transactions are bucketed into qualified, mid-qualified, and non-qualified tiers, each charged at a different rate. Notorious for opaque fee escalation as the processor reclassifies transactions into higher-cost tiers without explanation.

Infrastructure

Acquirer(acquiring bank, merchant acquirer): An acquirer is the bank or financial institution that holds a merchant's account and processes its card transactions through the card networks. The acquirer assumes the financial risk of chargebacks and merchant default.
Card network: A card network is the rails that connect issuing banks to acquiring banks on every card transaction. Visa, Mastercard, American Express, and Discover are the four primary U.S. networks. Networks set interchange schedules and chargeback rules.
Gaming merchant account(esports merchant account, video game merchant account): A gaming merchant account is a payment processing account underwritten for businesses that banks classify as high-risk gaming: video game studios, esports platforms, in-game purchase systems, and licensed real-money iGaming operators. Standard processors routinely decline these merchants, so approval runs through high-risk specialists that underwrite chargeback exposure, regulatory status, and monthly volume.
ISO(Independent Sales Organization): An ISO (Independent Sales Organization) is a third-party reseller of merchant accounts on behalf of an acquiring bank. ISOs set their own markup and contract terms within limits set by the acquirer.
MCC(Merchant Category Code): An MCC (Merchant Category Code) is a 4-digit number assigned by the acquirer that classifies a merchant's business type. The MCC governs interchange rates, reserve requirements, surcharge eligibility, and whether the merchant qualifies for certain card programs (e.g. Visa Business).
MCC 4722(Travel Agencies and Tour Operators MCC): MCC 4722 (Travel Agencies and Tour Operators) is the merchant category code card networks assign to businesses that arrange flights, hotels, packages, and tours on behalf of travelers. It covers retail agencies, OTAs, and tour operators, and it flags an account for travel-specific high-risk underwriting before a human reads the application.
MCC 5816(Digital Goods: Games MCC): MCC 5816 (Digital Goods: Games) is the merchant category code assigned to merchants selling electronically delivered games and in-game content. Per Visa's Merchant Data Standards it explicitly covers games of skill and excludes games of chance, which places video game and esports merchants outside gambling-specific registration and licensing requirements.
MCC 5968(Direct Marketing Continuity/Subscription MCC): MCC 5968 (Direct Marketing: Continuity/Subscription Merchants) is the merchant category code commonly assigned to card-not-present subscription merchants. Acquirers treat the code as high-risk regardless of what is being sold, because continuity billing produces a predictable dispute pattern.
MCC 7995(Betting MCC, gambling merchant category code): MCC 7995 (Betting) is the merchant category code Visa's Merchant Data Standards assign to wagers, lottery, and casino-style gambling, including casino gaming chips. It is treated as high-risk by every major card network and requires an acquirer registered to process gambling, with state licensing verified in underwriting.
Merchant account: A merchant account is a bank account that allows a business to accept card payments. Issued by an acquiring bank (often through an ISO or payments aggregator), the merchant account is the legal counterparty for chargebacks, reserves, and settlements.
Merchant of record(MoR): A merchant of record is the business whose merchant account accepts the customer's card and carries the chargebacks, refunds, and card-network obligations for that sale. In travel, whether the merchant of record is the agency or the supplier decides whose acquirer carries the exposure, which is the distinction that sets the reserve.
Payment gateway: A payment gateway is the technology layer that transmits card-not-present transaction data from a merchant's website or terminal to the acquirer for authorization. Examples: Authorize.net, Stripe, Braintree (which is both processor and gateway).
Payment processor: A payment processor handles the technical movement of funds between the merchant, acquirer, card network, and issuer on each transaction. Sometimes synonymous with acquirer (Stripe, Square); sometimes separate (a merchant's bank acquirer + Authorize.net gateway).

Fees

Downgrade(downgrade category): A downgrade is the reclassification of a transaction by the acquirer into a higher-cost interchange or pricing tier. Common causes: missing AVS, late batch settlement, foreign card, business-card transaction without Level 2 data. Downgrades raise the effective rate without changing the headline rate.
Monthly minimum(minimum processing fee): A monthly minimum is a contractual floor on the processing revenue an acquirer collects from a merchant each month. If the merchant's variable fees fall below the floor (typically $25-35), the acquirer charges the difference.
Statement fee: A statement fee is a flat monthly charge of $5-25 tied to producing the merchant's monthly processing statement, whether paper or PDF. Origin is the 1990s mail-statement era; the fee remains in most acquirer contracts.

Settlement

Reserve(merchant reserve, rolling reserve, capped reserve): A reserve is funds withheld by the acquirer or processor to cover potential future chargebacks and merchant default. Reserves can be rolling (a percentage of every settlement, held for a defined window) or capped (a fixed dollar amount held until the merchant earns release).
Settlement batch(batch): A settlement batch is the daily bundle of authorized transactions a merchant submits to the acquirer for funding. Late or missing batches downgrade the transactions to a higher interchange tier and delay payout.
Settlement time(payout window, funding time): Settlement time is the period between transaction authorization and funds arriving in the merchant's bank account. Standard U.S. settlement is next business day for in-person and 1-2 business days for online; same-day and instant options exist for additional fees.

Operations

Card-not-present(CNP, online transaction): Card-not-present (CNP) is any transaction where the card is keyed, entered online, or captured through a phone order. CNP transactions carry interchange 0.50-1.20% higher than card-present because fraud risk is higher.
Card-present(CP, in-person transaction): Card-present (CP) is any transaction where the card and cardholder are physically at the point of sale and the card is dipped, tapped, or swiped. CP transactions carry lower interchange than card-not-present because fraud risk is lower.
Chargeback: A chargeback is a forced reversal of a card transaction initiated by the cardholder's issuing bank, usually because of a customer dispute, fraud claim, or processing error. Each chargeback costs the merchant the transaction amount plus a fee of $15-100.
Chargeback monitoring program(VAMP, ECM, excessive chargeback program): A chargeback monitoring program is a card-network program, such as Visa VAMP or Mastercard ECM, that identifies and penalizes merchants whose fraud and dispute numbers exceed published thresholds. Merchants that stay in a program face escalating enforcement and, ultimately, account termination.
Chargeback ratio(dispute ratio): Chargeback ratio is the percentage of a merchant's transactions that result in chargebacks within a given period. Visa and Mastercard place merchants exceeding 0.9% or 1.0% (network-dependent) into monitoring programs that can lead to reserve requirements or account termination.
Early Termination Fee(ETF): An Early Termination Fee is a penalty charged when a merchant cancels a processing contract before its end date. Standard ETFs run $295-595; liquidated-damages clauses can multiply ETFs into the thousands. Negotiable at signing in most cases.
Future-delivery risk(delayed delivery risk): Future-delivery risk is the exposure an acquiring bank carries between the day a card is charged and the day the product or service is actually delivered. The longer the gap between charge and delivery, the bigger the exposure, which is why future-delivery categories like travel carry rolling reserves and high-risk underwriting.
Level 2 data: Level 2 data is additional card-not-present transaction information (tax amount, customer code) that, when submitted, qualifies B2B and commercial card transactions for lower interchange rates. Savings typically run 0.50-0.80% per qualified transaction.
Level 3 data: Level 3 data is line-item transaction detail (item descriptions, quantities, SKUs, ship-to ZIP) submitted with commercial-card transactions to qualify for the lowest interchange tier. Common in B2B, government, and large-ticket verticals.

Fraud & risk

3-D Secure(3DS, 3DS2, Verified by Visa, Mastercard SecureCode): 3-D Secure (3DS) is an authentication protocol that shifts liability for fraudulent card-not-present transactions from the merchant to the card issuer. 3DS2 is the modern frictionless variant; it triggers a step-up challenge only on transactions the issuer flags as risky.
AVS(Address Verification Service): AVS (Address Verification Service) matches the cardholder's billing address (or its numeric component) against the issuer's record during a card-not-present transaction. Mismatches typically result in higher interchange (downgrade) and elevated fraud risk.
CVV(CVV2, CVC, CID, card verification value): CVV (Card Verification Value) is the 3- or 4-digit security code on the back of most cards. Required for card-not-present transactions under most acquirer contracts; failure to capture or validate elevates chargeback risk and may downgrade the transaction.
VAMP ratio(Visa Acquirer Monitoring Program ratio): The VAMP ratio is the metric of the Visa Acquirer Monitoring Program: reported fraud (TC40) plus non-fraud disputes, divided by settled card-absent transactions. Merchants at or above the published Excessive threshold expose their acquirer to enforcement fees, which is why acquirers underwrite and monitor to it.

Compliance

Cardholder data(CHD): Cardholder data is the set of personally-identifiable information on a payment card (PAN, expiration date, cardholder name) that PCI DSS treats as sensitive. Storing CHD requires encryption, tokenization, or scope reduction via a hosted payment field.
Negative option billing(negative option, automatic renewal billing): Negative option billing is a billing arrangement where the customer's silence or inaction is treated as consent to recurring charges, as in automatic renewals and trial offers that convert to paid subscriptions. It is regulated federally by ROSCA and FTC Act Section 5 and by state automatic renewal laws such as California's ARL.
PCI DSS(Payment Card Industry Data Security Standard): PCI DSS is the security standard maintained by the Payment Card Industry Security Standards Council, governing how merchants handle, transmit, and store card data. Compliance is required by every card brand contract. Annual SAQ (Self-Assessment Questionnaire) is the minimum requirement for most SMBs.
Tokenization: Tokenization is the replacement of card data with a non-sensitive token that maps back to the real card only inside the processor's vault. Reduces PCI scope, enables saved-card billing, and is required for modern subscription, marketplace, and recurring use cases.
VIRP(Visa Integrity Risk Program): VIRP (Visa Integrity Risk Program) is Visa's program governing high-integrity-risk merchant categories such as gambling, requiring acquirers to register merchants in those categories before processing. It replaced the Global Brand Protection Program in May 2023, and registration carries fees paid through the acquirer.