Payment Processing Terms Explained for Business Owners 2025

In this episode, Frank covers the essential payment processing terms high-risk merchants need to understand to avoid hidden fees, bad pricing models, and costly mistakes. From interchange rates to chargebacks, PCI compliance to flat-rate pricing, Frank simplifies the jargon so you can make smarter decisions, reduce your costs, and protect your business.

In this episode, these questions and topics will be covered:

• 01:30 – What a merchant account and payment gateway actually are, and why understanding the difference matters for smooth payment processing.
• 04:00 – How fees like interchange, discount rates, and reserves work, and how to avoid getting overcharged.
• 07:17– What chargebacks really mean, how to calculate your chargeback ratio, and why banks take it so seriously.
• 11:45– How PCI compliance and fraud monitoring protect your business—and the preventable fees they help you avoid.
• 13:57 – The truth about flat rate, interchange-plus, and tiered pricing—and how to choose the right model for your business.

Understanding your payment processing terms isn't just good business, it's essential. If you need help decoding your fees, ensuring PCI compliance, or negotiating better terms, Frank and his team are here to help. If you learnt something from this episode, don’t forget to subscribe, rate, and review—this will help more business owners stop overpaying and start thriving.

Have a question about something in the episode? Send your questions to Info@PayDiverse.com and check out our FAQ page https://paydiverse.com/faq

Connect with PayDiverse:
Instagram: https://www.instagram.com/paydiverse
Website: http://www.paydiverse.com
LinkedIn: https://www.linkedin.com/in/franksena

Transcript

UNKNOWN: 0:00

Thank you.

SPEAKER_00: 0:05

Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Senna, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions and grow your business. Let's get started. Ever feel confused by payment processing jargon? You are not alone. Today, we're breaking down the key payment processing terms every business owner should know so that you can make better decisions about your payment strategy and avoid unnecessary fees. Understanding payment processing terms helps business owners to better manage their costs and avoid being overcharged. Now, not all of these terms are gonna appear on your monthly statement, but knowing them will certainly help you understand how payment processing works and be aware of any hidden costs a lot more easily. By understanding the language of payments, you'll be able to negotiate better terms and choose the right payment setup for your business. First, we've got the most basic term of all, which is a merchant account. Sometimes this is referred to as an MID or a MID, merchant ID. an account, a special type of bank account that allows a business to accept credit card and debit card payments from their customers. In order to get this merchant account, you have to go through a underwriting process and the merchant account is specifically for collecting payments. That's really the only function of it. Our next term is payment gateway. A lot of times I hear merchants use this term interchangeably with their merchant account, but it's important to note that the payment gateway is a completely separate thing from your merchant account. Payment Gateway is usually a third party platform. It's technology that securely connects your merchant account to your website and your website to your payment processor so that you can securely transmit payment info from the website to the processor. It plays a really important role, but it is not actually processing the payment. It's just collecting that information and passing it along to the bank in a secure way. So next, we're talking about an acquirer or an acquiring bank versus an issuing bank or an issuer. You may hear these terms thrown around. The acquiring bank is actually the merchant's bank. If you think about it, the acquiring bank is the bank that is acquiring the payments on behalf of the merchant. The issuing bank is the cardholder's bank. And if you think about it this way, they are issuing the credit or the debit card to the cardholder. So we have the acquiring bank who works on behalf of the merchant to collect payments. And then we have the issuing bank who is issuing the card to that cardholder. You may have also heard about the term payment consultant. That's me. A payment consultant is someone like me in my business, PayDiverse, who helps merchants to navigate the complex payments landscape and avoid getting ripped off, basically. We'll help you navigate the underwriting process. We help you ensure you're not getting charged hidden fees. And we really are just an advocate for you with your merchant bank to help ensure that you get your funds fast and as promised. Next, we're going to talk about the fees and cost structure terms. So the first term you've probably heard of before is an interchange fee. Interchange fee is a fee paid to the card issuing bank for each transaction, and interchange fees are set by the card brand networks. The card brand networks are Visa, MasterCard, Amex, Discover, etc. So the rate is determined by factors like the type of card that's being used in the transaction. If it's a credit card or debit card, they're going to have different interchange rates. The industry or categorization that the merchant's businesses, the size of the transaction, and how the payment is processed. If it's going to be in person versus online or over the phone, there's going to be a different interchange fee associated with that. Now, keep in mind, if you're processing a transaction in a card not present environment, which simply means that the credit card is physically not in front of you, there is inherently a large chance of risk or fraud associated with that. So it's going to be a little bit more expensive in terms of interchange fees to process a riskier transaction like that. Our next term is the discount rate, which is sometimes referred to as the merchant discount rate or the MDR. So this is the percentage that you're paying as a merchant for each transaction. And that's including the cost of interchange and then the costs that the processors have for processing these transactions. So the discount rate is that percentage that you're paying per transaction. Our next term is a reserve. A lot of merchants, especially in the high risk verticals, are going to be familiar with the term reserve. But what does it actually mean? So a reserve is when a merchant bank agrees to process payments for you. But in order to manage the risk on the bank side, they're going to withhold a percentage of your sales that they basically get custody of, which helps them to protect against chargebacks that you might incur when you're collecting payments. So the reserve funds are technically the merchant's funds, but the bank gets to hold on to them and has custody of them until there is no more risk that the bank might incur. So typically that's about$180 after the last transaction was processed on the merchant account. Now, some banks are willing to negotiate reserve terms, especially after the merchant has established some processing history with them. So keep in mind if you get assigned a reserve when your account is approved, that's just for the first couple of months in most cases and can be revisited once you develop a relationship with the bank and you demonstrate that the chance of chargebacks is going to be really low and the risk to the bank is really low. Our next term is the chargeback fee. I think a lot of merchants have heard about chargebacks, but what exactly does that mean? So a chargeback is a cardholder dispute. Basically, any of us who have credit cards, if you've ever looked at your credit card statement at the end of the month and seen a charge that you don't recognize, you can call your credit card company and say, hey, I don't recognize this charge and they say, no problem, we're going to refund you for that amount and we'll take it up with the merchant. So what happens is basically the merchant bank who has processed that transaction and already paid the merchant for the sale now has to pay the cardholder back. They have to refund the cardholder, but they've already paid the merchant for that sale and now the merchant bank just got screwed in the middle. So a chargeback fee is a penalty fee that's charged when a customer disputes a transaction. Typically, it's about$30,$35, but depending on the risk of your business as determined by the merchant bank, they could charge more or sometimes less. Now let's get into some risk and fraud terms. Just to give you guys context, each of these merchant banks, their entire purpose of underwriting a merchant to determine if they want to work with the merchant and provide them with the merchant account is to understand the risk that's gonna be associated with working with that merchant. So this is the risk to the merchant bank. Basically, it all comes down to chargebacks, right? So if the merchant bank is gonna receive a lot of chargebacks on behalf of the merchant, it's gonna cost the merchant bank money. And as most of us know, banks are not in the business of losing money. They wanna protect their bottom line So they really closely monitor chargebacks. And one of the metrics that they are constantly monitoring is called the chargeback ratio. Very simply calculated, the chargeback ratio is the total number of chargebacks within a one month period divided by the total number of transactions in that one month period. So if you're looking at your monthly statement from your processor, You can find the number of chargebacks listed on there, and you just divide that by the total number of transactions per that month, and you have your chargeback ratio. Typically, if your chargeback ratio is over 1%, then it's a red flag to the bank. Most high-risk banks are okay with your chargeback ratio being maybe 2%, maybe 3%. Once it starts creeping towards 4%, it's a red flag, and the merchant bank will likely have a risk review, which means they're going to request extra documentation, ask for a chargeback mitigation plan. Basically, it's bad news. They don't want to deal with chargebacks. And there are so many merchants out there that merchant banks, they don't want to work with merchants who are going to give them chargeback headaches. So they would much rather just terminate the relationship and work with the next merchant. So chargeback ratio is a really important metric to keep in mind. Our next term is fraud monitoring. You may have heard about this in different payments related newsletters or different industry publications, but it's basically referring fraud monitoring is referring to tools and systems that monitor transactions in real time to identify any suspicious activity. So this is basically keeping an eye out for unusual transaction activity, like if you haven't used your merchant account and then all of a sudden you're processing thousands and thousands of dollars, that's going to be a red flag. So fraud monitoring will keep an eye on that. Or perhaps if you process a really large transaction amount, which is different from the previous transaction history that you've established with the bank, that would be an example of fraud monitoring where the bank would raise a red flag and maybe reach out and investigate and maybe hold your funds as a result because they want to manage risk on their end as much as possible. Our next term is PCI compliance. A lot of merchants may have heard of this because there's typically a PCI compliance fee listed on their merchant account statement. So if you have a noncompliance fee on your merchant account statement, that is actually a preventable fee that you can get rid of by becoming PCI compliant. PCI compliance, the PCI stands for payment card industry. And basically, it's a set of standards that help ensure that merchants are handling that really sensitive cardholder data in a responsible way that is not going to result in credit card numbers getting found by a fraudster, for example. So it's really just ensuring that The sensitive personal credit card data that you're collecting from your customers is being handled in a responsible way. Our next term is the match list. And if you've heard of the match list, you likely know what it is because it's pretty bad. The match list is essentially a blacklist that is shared amongst merchant banks' risk teams within the industry. And if a merchant is on the match list, that means that a merchant bank put them on there, and it's likely due to excessive fraud or excessive chargebacks. So if you're placed on the match list, it can be a huge headache to get yourself off of it. You might have to even engage attorneys, of which we could recommend a couple. But otherwise, you're on this list for five years. And every five years, they kind of scratch whoever's been on the list. But it basically prevents you from getting a merchant account or your business. So this is also sometimes called the TMF list as well, or terminated merchant file list. You don't want to be on the match list and working with a payments consultant can help ensure that you avoid that. Next, let's talk about some pricing terms and some contract terms. So we have flat rate pricing. You may have heard this. If you have a merchant account, it's basically a single percentage for all of your transactions. Basically, any fees that you have associated with your merchant account are rolled up into this percentage and then a per transaction fee. Some merchants prefer this because they don't have to do all the math. It's all lumped together into one, but there's not super transparency in what exactly you're getting charged for different fees because it's all bundled up into one. Another type of merchant account pricing model is called interchange plus pricing. So this is essentially where the merchant bank or the processor is separating the interchange fee from the processor markup. So they basically are showing you here's the cost of interchange and then anything over this is what we're collecting for our fees as the merchant bank. It's a little bit more transparent. So a lot of merchants like that, but the rate is going to be determined by lots of different factors, the interchange rate, as we discussed earlier, like if it's a credit versus a debit card, the industry of the merchant, transaction size, and whether or not the payment is processed in person or in a card not present environment. So the third type of pricing that you'll see for a merchant account in terms of the percentage, the discount rate, is called tiered pricing. And honestly, I believe that the merchant banks came up with tiered pricing in an attempt to intentionally make it confusing for merchants, because it's pretty hard to understand. But basically, the gist of it is, in a tiered pricing model, transactions are categorized into three different tiers. It's called qualified, mid-qualified, or non-qualified. And they can charge a different fee for each of those tiers. The tier is determined by different factors, like the type of transaction, the type of card used, and how the payment Another fee that you want to keep an eye out for is called the early termination fee. So this is written in the fine print of the agreement typically, and it basically says this is how much the merchant bank can charge a merchant if they decide to exit the relationship early, even if it's not the merchant's decision. So if the merchant is doing something super shady, I have seen merchant banks charge a full penalty of this early termination fee. If they're exiting on good terms, sometimes the merchant bank will completely waive the fee or they'll just charge a smaller fee, maybe$100 or something like that. But I have seen some contracts that have up to a couple thousand dollars for a termination fee. So it's really important that you're looking at that when you sign a merchant agreement. Take a look and see what is the early termination fee, how long is this contract for, and get confirmation if they're definitely going to charge this if you exit the relationship early or if they're flexible. So a couple of takeaways from this episode to hopefully help you manage your payments in a little bit better way and save you some money. You definitely want to review your merchant account statements every month. Take a look at the fees that are on there. Try to identify any avoidable fees like that PCI non-compliance fee that I mentioned. You can completely avoid that once you become PCI compliant and I can help you figure out how to become compliant. in. Work with your processor to improve chargeback ratios and implement fraud protection. Again, it's super important that you keep in mind that your bank is looking out at your chargeback ratio. If you notice that you're starting to get chargebacks, have a call with your bank. I mean, you're not going to draw their attention to it. They know. Believe me, they're looking at chargebacks all the time. So have a conversation with them. Figure out what is the reason you're getting chargebacks and figure out a plan to avoid getting more chargebacks. If you can provide your processor with a chargeback mitigation plan, if you do that proactively, they will love it and they will trust you. So it's all about maintaining your relationship with your bank is all about being proactive and transparent. Ensure that your business and your website is PCI compliant. This will help you avoid unnecessary fees and also any potential liability from some sort of breach or data breach. And keep in mind, you can negotiate better reserve terms based on your processing history and your financials. Typically, you need to wait at least three months, but some banks require at least six months, but it can be negotiated in most cases and it's worth looking into because that will also help keep your cash flow healthy. So listen, if you need help understanding your Thank you.