A Glossary of Payment Processing Terms Every Small Business Owner Should Know

If you own a small business, understanding how payment processing works can feel like learning a new language. There are many tricky terms like “interchange fees” and confusing acronyms like “PCI DSS.” It can all be pretty overwhelming, especially when you are just trying to focus on running your business. 

At AdaptMS, we understand how helpful it is to know the basics, even if you’re not an expert. We will walk you through the most important payment processing terms so you can make better decisions for your business and feel more in control.

Merchant Account
A special bank account that lets businesses accept credit and debit card payments. This account is needed to handle transactions from your customers’ cards. Without a merchant account, you won’t be able to take payments from credit or debit cards, which is essential for most businesses today.

Interchange Fee
The fee that your merchant account provider pays to the customer’s bank for processing a card payment. This fee is a big part of your overall processing cost. Interchange fees can vary based on the type of card used, such as credit or debit, and whether the card is present in the transaction. It’s important to understand interchange fees because they make up a large part of what you pay to process payments.

Payment Gateway
A technology that safely sends payment information from your customer’s credit card to the payment processor. It’s like a digital cashier that makes sure the payment goes through securely. Payment gateways are especially important for online businesses because they protect sensitive customer information and make sure payments are processed smoothly. Choosing a reliable payment gateway is crucial to keep transactions secure.

PCI DSS Compliance
The Payment Card Industry Data Security Standard is a set of rules to keep card information safe during and after a transaction. Being compliant with PCI DSS is important to protect your customers and avoid fines. If your business handles card payments, you need to follow these rules to make sure customer data is protected. Non-compliance can lead to serious penalties and can put your customers’ information at risk.

Chargeback
A chargeback happens when a customer disputes a transaction, and the money is returned to them from your account. Knowing how to prevent chargebacks can help you avoid extra fees and losses. Chargebacks can happen for many reasons, such as fraud, customer dissatisfaction, or misunderstandings. It’s important to have a plan in place to manage chargebacks effectively and reduce their impact on your business.

Authorization
The step where the customer’s bank checks if their card has enough money for the transaction. It’s the first part of processing a payment and makes sure the payment can go ahead. Authorization is key because it ensures that the funds are available before the transaction is completed. If the authorization fails, the payment cannot go through, and you’ll need to ask your customer to use another form of payment.

Settlement
The last step in the payment process where the money from a transaction is moved to your merchant account. Settlement is how you get paid for your sales. After a transaction is authorized, it still needs to be settled to make sure the money actually gets to you. Settlement times can vary depending on your payment processor, but it is usually done within a day or two. Faster settlements mean quicker access to your funds, which is always a plus for cash flow.

Acquirer
The bank or financial institution that processes card payments for your business. The acquirer works with card networks (like Visa or MasterCard) to move the money from the customer’s bank to you. The acquirer is an important partner in the payment process, as they ensure that transactions are processed smoothly. When choosing an acquirer, you want to find one that has good rates and reliable service.

Batch Processing
The process of settling multiple card transactions all at once. Usually, transactions are grouped at the end of the day to make processing easier and save on fees. Batch processing is a way to make things more efficient, especially if you have a lot of transactions each day. By grouping them, you can minimize processing fees and make sure everything is handled in one go, making it easier to keep track of your payments.

Payment Processor
A company that handles transactions between your business, the customer, the customer’s bank, and your bank. The payment processor makes sure the money moves safely. They play a big role in making sure everything works smoothly, from authorizing the payment to settling the funds. Choosing the right payment processor can have a big impact on your business, especially when it comes to fees, reliability, and customer service.

Point of Sale (POS) System
A system or device that lets you take payments in person. POS systems can be single devices or part of a larger system that tracks sales, inventory, and other business data. Modern POS systems often include features that help you run your business more efficiently, like tracking customer purchases, managing inventory, and even creating reports. Having a good POS system can make a big difference in your day-to-day operations.

Tokenization
A security method that replaces sensitive card information with a random set of characters (a token) to keep customer data safe during processing. Tokenization helps protect customer data from hackers by making it useless if it’s intercepted. This extra layer of security is important for keeping transactions secure and giving customers peace of mind when they use their cards at your business.

Knowing these terms can help you feel more confident about managing your payment process and choosing the right options for your business. This knowledge can also help you understand your charges better and negotiate better rates.

If you need help or want to learn more about how these services can benefit your business, reach out to AdaptMS. We are here to guide you through the options so you can take control of your payment processing and make it work for you. Let’s connect. AdaptMS makes payment solutions simple for small businesses, helping you grow, save money, and provide a better customer experience.