Ever have this conversation?
Software vendor: “Do you know what payment provider you are going to pick to directly integrate with our software?”
Small business owner: “Not yet. Any suggestions?”
Software vendor: “You should work with Bambora. They handle transactions from different channels for merchant acquiring banks. Through their bank agnostic gateway, customers’ transactions are safely authorized, and then payments are captured and transferred to your merchant account.”
Small business owner: “Sorry, what?”
You wouldn’t actually use this industry jargon in a real conversation. While it may make sense to you, your customers would have no idea what you were talking about. So, how can you explain payment terminology to them? At Bambora, we have some ideas.
Demystifying Commonly Used Payment Terminology
You may already be familiar with some or all of the terminologies below. But if you struggling to explain them to your clients, family, and friends, you’ve come to the right place. Share the definitions below with your customers to help them understand some key payment terminology—and the benefits of partnering with you to offer payments.
Like the wolf in Little Red Riding Hood, shoppers aren’t always what they seem—which is why we have authentication. The person completing a transaction online could be your grandma (your client) or a sneaky wolf (a fraudster). Instead of having a peephole to check things out, businesses can use fraud prevention tools to help you tell the difference and avoid chargebacks.
A third party payment aggregator is a company who accepts payment on someone else’s behalf. An example would be the Apple Store. You buy apps there, and you pay Apple—but they’re not the ones who built them. They will pass along your payment to the companies who did, and they’ll keep a small commission or service charge.
When a payment is authorized, the money doesn’t show up in your merchant account until it is captured (which is automatic). Think of it like a fountain flowing into a pond. Once the landscape artists have set it up, they start the pump and all authorized payments start flowing into the pond (merchant account).
A chargeback is like a mini court case, but without the robes and gavel. The plaintiff (customer) says to the judge and jury (card issuers), “Hey! I didn’t actually make that purchase.” The card issuer will automatically issue the chargeback, and the defendant (company that made the charge) has 15 days to prove otherwise.
Similar to lawsuits, every chargeback costs business owners. In addition to losing the money you got from the “sale” (and loss of inventory if you shipped something out), you’ll have to pay fees. Think of it like a legal fee. Even if you prove your innocence, these fees may not be refundable.
Like a toll gate on a highway, a payment gateway lets a payment through if they have sufficient funds, and doesn’t if they don’t. When a transaction request arrives at the gateway, card issuers (like Visa and MasterCard) check the validity of the card and whether there are funds available to fulfill the transaction. Once the transaction is authorized, the amount of the transaction is deducted from the customer’s account, captured, and transferred to the merchant account.
Related reading: Choosing a Payment Gateway
Think of a receipt that you get after a meal at your favourite restaurant. As you skim through it, you see a breakdown of the amount you’re charged: your avocado toast plus a fixed percentage of sales tax and a tip at your discretion.
Interchange-plus pricing (IC+), also referred to as cost-plus or wholesale-plus pricing, is a type of pricing model. It separates fees imposed by credit card companies (“interchange”) and by merchant service providers (“plus”). You can’t negotiate interchange fees; they’re determined by credit card networks. This means you will have one fee for Visa, and another for MasterCard, making it hard to predict how much you will pay in fees.
The majority of card processing fees go to credit card companies’ pockets, and the remainder, or the “plus” part of the equation, becomes the service provider’s margin (like a server’s tip) and is negotiable based on sale volumes.
Most merchant accounts (definition below) are a bundled rate. That means you don’t need to worry about the specific breakdown of charges—you just pay a predictable monthly fee and everything is taken care of.
A merchant account is a pass-through account. Its sole purpose is to accept payments from credit card transactions and transfer them to the business’s repository account.
You can open one with your bank, or through a private service provider. When you partner with another company to get your merchant account, you’ll also get benefits like strong fraud tools.
Think of a virtual terminal as an imaginary (but functioning) credit card machine that gets used for online payments. When an authorized merchant keys in their customers’ credit card information, the virtual terminal authorizes and processes the transactions. Online businesses can use a virtual terminal to process payments through any internet-connected device.
Payments can be a jargon-heavy industry, and it’s easy for new business owners to get overwhelmed by all the acronyms and unfamiliar terms. We hope this guide helps you get your customers up to speed and understand why partnering with you (and Bambora!) can make life, and payments, easier.
For more ways of explaining common payment terminology, check out our related blog posts:
- Payment Facilitator vs. Payment Processor
- Electronic Fund Transfer (EFT) vs. Automatic Clearing House (ACH)
- Payment Service Provider (PSP) vs. Independent Sales Organization (ISO) Merchant Accounts