This is a very brief outline of some commonly used terms that are used when inquiring about a merchant account, online payment processing and online payment gateway services. Understanding what each of these terms mean will help you on your way in determining which merchant account provider is best for you, and what all that jargon means on your merchant account application form!

Merchant Account: This is an account setup buy the underlying bank which transactions are cleared through. Not to be confused with a bank account, the merchant account identifies you as the merchant, and allows the institution accept transactions from the payment gateway (see below), which get transferred to your merchant account. Typically funds that are accrued in your merchant account will then be transferred to your bank account by electronic fund transfers (EFT) or however you set it up with your merchant account provider. Most merchant accounts carry some form of monthly fee, and that fee will vary from institution to institution. Moreover, merchant accounts charge a discount rate on each sale.

Payment Gateway: This is the conduit (fancy word for connection) between your website’s secure payment page and the merchant account payment authorization server. When a customer clicks submit on a payment form on an e-commerce site, the information gets posted to the payment gateway, and after a some validation at the gateway (valid expiry, valid credit card numbers etc), that information then gets posted from the payment gateway to the merchant account payment authorization server to see if the payment is accepted or declined. The authorization server sends the info back to the gateway, and the payment gateway then talks back to your e-commerce site. Think of the payment gateway as the ‘middle man’ in making an online payment. Typically there is a per transaction charge every time someone sends a transaction through the payment gateway which is called a Transaction Fee.

Discount Rate: The discount rate is the percentage the merchant account deducts from each sale as payment for their service. This percentage will vary greatly from institution to institution, but will also vary based on the type of e-commerce store you have as well as your credit worthiness. Some low-risk e-commerce stores can get away with 2.0% if they maintain a good volume of transactions, while other higher-risk stores enjoy a 8-10% discount rate! To make things even more complicated, there are different rates for each transaction type (Qualified,, Semi-Qualified, Non-Qualified), which assigns a ‘risk value’ for each transaction if the card is present (swiped), not present by with address information, or card not present and no address information available. Let me be clear that discount rates are negotiable. Don’t take the first rate your merchant account provider gives you, ask if it’s the best they can do, shop around, and report back them with your findings. That said, it’s a lot easier to negotiate discount rates when you have an established track record in e-commerce and are not an upstart with a bad credit score.

Chargeback: A chargeback is when the cardholder disputes the transaction completed on your online store. The dispute can happen for a number of reasons, whether it be due to unshipped items, fraudulent use of their card, or them just trying to rip you off! As a merchant, you typically have 10-15 days to dispute the chargeback, and provide proof that you confirmed the order, and the items were shipped and signed for. Most merchant account providers will charge a chargeback fee whether you are successful in appealing the chargeback or not.

Rolling Reserve: While some merchant accounts will require deposits, sometimes substantial, others opt for a rolling reserve system to ensure chargebacks are covered. A rolling reserve is when a percentage of your transfer from your merchant account to your bank account is held by the merchant account provider as a deposit. This money is held typically for 1-2 weeks, and is then funded with your next transfer in the form of a Reserve Release. It’s called a rolling reserve because for every transfer you get, you will have some of it held, but your previous reserve released. So, if you are doing consistent sales numbers, you will barely notice the hold back of the funds because payments being held back is covered by what is being released.

Hosted Payment Page: Some payment services require you to redirect your customers to their payment page in order to complete the transaction. PayPal and 2checkout are good examples of these types of payment services. While PayPal does offer direct payment processing to their US customers, they have not extended this service to Canadian accounts just yet. Once the payment is made on the payment services page, the client is redirected back to your site, most of the time, and your e-commerce engine is notified from the payment service that the payment was successful. While perfectly acceptable for hobby or smaller sites, most e-commerce sites like to keep their customers on their own site, so they prefer to use a secure direct payment processing page right within their own site.

Direct Payment Page: In contrast to the hosted payment pages I discussed above, most professional e-commerce sites are developed with a secure payment page right within the e-commerce site. The site owner must register a Secure Socket Layer certificate (SSL) to ensure that when the customer sends their credit card information, the channel is encrypted as well as the certificate ensuring the information is posted to the correct server identity. This method gives website developers the most flexibility and control to process transactions directly within the e-commerce engine, without having to wait for the hosted payment page to report back successful or declined payments. Moreover, it eliminates the shock factor the customer might experience when suddenly redirected to another site to make the payment.

Address Verification Service: The address verification service (AVS) offered by most merchant accounts gives merchants the tools to determine if the addresses entered at the time of checkout are the same, or similar, to those on file with the credit card company. For example, lets say I purchase something online with my VISA card and the merchant is using AVS, if I were to enter an address in another city, province and postal code, the AVS will return a fail because the address information does not match. Now, most AVS systems are smart enough to show partial matched information, giving merchants even more leverage to determine if a transaction is good or not. For example, let’s say I entered my work address and the AVS failed on the address, and postal code, but the city was matched, I might be inclined to call the customer to see what the issue was. In contrast if everything fails, and the IP address of the customer is from a totally different country, the merchant is more likely than not going to delete the order because nothing matches.

Credit Card Verification Value 2 (CVV2): this is the 3-4 digit code on the back of VISA/Mastercard cards, and on the front of AMEX cards. It is independent of the credit card number and provides another level of verification for merchants to determine if the person making the transaction actually has the card in their hand when ordering.