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Terms of payment by POS

Knowing how card payment systems work is not complicated if you are familiar with the financial terms used in this sector. In this complete guide you will learn basic concepts of payment systems that range from what a terminal number is to more complex concepts such as Tokenization.

What is an acquiring bank and its functions?

An acquiring bank is a regulated financial entity with the ability to open and provide merchant accounts in order for the commerce to collect credit or debit cards payments. The acquiring bank is responsible for receiving the funds from the card issuing bank, and then paying them by wire transfer to commerce.

The role of the acquiring bank in payment processing is to receive a payment. If the merchant has only integrated a payment gateway, without connecting it to a merchant number, it cannot accept card payments. In order for the acquiring bank to credit sales made by card to a merchant, the payment gateway must receive an authorization number from the acquiring bank, once received, the bank will credit the money from the sale.

Many people confuse t

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What is a merchant account and its purpose?

Merchant account number is a financial account with the unique ability to collect online payments made with cards (Visa, MasterCard, Amex, Discover, JCB, Union Pay or Diners Club). In order for a payment gateway to charge credit or debit cards online, the commerce needs to have a merchant account number.

Merchant accounts can only charge cards and cannot receive wire transfers, make wire transfers, accept direct receipts or pay interest for having a deposit.

The only banks allowed to open and provide the commerce with the merchant account are acquiring banks. Generally, acquirers and commercial banks are associated to facilitate the process of contracting the merchant accounts by customers.

As a general rule, when a commerce de

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What is a reversal transaction?

Reversal transaction or payment retrocession can be defined as the claim made by the cardholder to his issuing bank against a merchant number.

Reversal transaction is also known as chargeback and its objective is to recover the total or partial amount of money that the client has paid for a service or product. There are several types of reversal transactions according to their nature:

Legitimate transaction reversals: Take place when a cardholder files a claim to the issuing bank against the merchant number and argues that the product or service that he has purchased has not been delivered. This type of legitimate transaction reversal occurs when the merchant has forgotten to process your order or has had an oversight without intendi

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What is PCI DSS compliant?

PCI DSS (PCI Data Security Standard) arises from the collaboration of Visa, MasterCard, Amex, Discover and JCB card brands united to combat online scamming. The goal of PCI DSS is to create a fraud-free environment for the merchants and the cardholders who are willing to make their purchases online.

What are the security policies of PCI DSS?

PCI DSS regulations affect all merchants that process, transmit or store card data. Security policies affect the following credit card payment methods:

  • Face-to-face payments through PIN pads, mobile Pin pads and Smartphones.
  • Non-face-to-face payments made via virtual POS terminals integrated on websites, MOTO, recurring and mobile payments.

Security p

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What is a high risk business?

To carry out high risk businesses means additional controls and problems for its owner. When trying to open a corporate bank account or contract virtual POS, it is very often to hear that the financial entity doesn't offer its services to high risk businesses and therefore can not provide you with necessary tools to develop your commercial activity. In general, the level of risk is measured by the percentage of chargebacks and refunds, years of impecable banking history, possibility to use the company for money laundering and country of incorporation.

Having a high risk business doesn't mean carrying out illegal commercial activity, even though some people confuse these two definitions viewing them as the same concept. What it actually means is tha

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What is SEC or 3D Secure protocol?

SEC in card payment systems means that your merchant account works under “Safe Electronic Commerce” protocol. What does it mean? This means that when your customer makes a payment by credit or debit card, he will have to validate the operation using a PIN code that the card issuing bank will send to his phone number or the customer will introduce a security PIN that was provided by the bank together with a card.

The advantages of SEC protocol are the following:

  • The number of chargebacks or refunds decreases significantly.
  • The payment gateway can carry out better anti-fraud controls.
  • Having a POS terminal under SEC protocol creates favors trust relationships with clients, since it considers that
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What is MOTO payment system?

MOTO stands for Mail Order Telephone Order and it is one of the most used and most difficult to obtain non-contact payment methods on the market.

Charging your clients by MOTO virtual terminal has its advantages and disadvantages. First of all this payment system doesn't operate under SEC protocol and therefore does not request the security PIN code. The biggest disadvantage of using the MOTO terminal is that if the merchant uses this type of terminal for fraudulent purposes, it can make successive charges to any card in the world.

The MOTO terminal is one of the terminals with the highest rates of fraud and claims, therefore the acquiring banks do not usually grant the opening of these terminals to commerces. The operation of MOTO is very simp

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What is a contractual merchant number?

A contractual merchant number is a merchant number provided by the acquiring bank, but with the condition that the contract can be terminated at any time.

The contractual contracts signed between the banks and online commerces contain some logical and other abusive clauses. It can be explained by the unwillingness of the bank to deal with the negative issues that can affect its relationships with card brands and by making a commerce to sign this contract they keep a right to cancel the collaboration at the minimum risk or possibility for a fraud and money laundering activities to take place.

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What is a meaning of MID number?

MID number or “Merchant Identification Number” is a unique number assigned by the acquiring bank to a merchant when applying for a Virtual POS terminal. When you request the opening of a POS Terminal to process payments from your online store, the acquiring bank verifies the nature of your business, and depending on the type of your commercial activity, the MID number will start with one digit or another. Regardless of the country where you have contracted the terminal, MID number may contain more or less digits or even letters.

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What is anti-fraud risk management?

Anti-fraud risk management is a combination of actions and procedures that make it possible to avoid credit card fraudulent transactions. The ones in charge of managing the risks against fraud are the brands of the cards and the payment gateways. For this purpose card brands created the PCI DSS system to combat fraud and implement secure environments on the server where the gateway is hosted.

The payment gateways following the PCI DSS anti-fraud security protocols have created Fraud Scrubbing tools, with the aim of creating processing rules to decline and avoid fraudulent transactions.

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What is a transaction authentication number (TAN)?

Transaction Authentication Number, TAN, is the authorization number of a transaction notified by the acquiring bank, indicating that an operation has been successfully completed and will be paid to the bank account of the POS.

TAN number is unique, which means that the combination of numbers can never be duplicated and it consists of 8 to 12 digits. There are acquiring banks that mix numbers and letters to identify the authorization number.

Transaction authentication number can be used to locate any transaction and used in case of dispute between the merchant and the bank as a proof of a payment.

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What is velocity check?

Payment gateway velocity check consists of applying anti-fraud filters to the payment gateway so that automatic operations cannot be performed in a certain time, that is, what is intends with these filters, is that between one transaction and another an optimal period of time should take place to successfully charge the client from the same IP. Otherwise, the system will decline the operation and will not authorize it. When the payment gateway detects automatic operations in the system, rules are created to compare the history of transactions that a particular merchant had in the same period of time. These rules also detect any irregulation in the repeating patterns within a defined time period.

Velocity Check anti-fraud rules that users should consider

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What is fraud in payment systems?

Fraud in payment systems can be defined as, illegal activities that are carried out to achieve a product or service without paying the debt, for example:

  • The most widespread fraud in cash, is counterfeit money
  • The most typical fraud that occurs in wire transfers is to impersonate the bank account holder to transfer the money to another account.
  • The most typical fraud in WU and MoneyGram takes place when you send the money and but don't receive any product or service in return.
  • The most widespread fraud when paying by checks is counterfeit.
  • The fraud that affects crypto-currencies is to try to steal the e-wallet from the owner and then transfer crypto to another account.
  • The typi
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What is KYC process?

KYC stands for "Know Your Customer" and means a process of verification and identification of the clients. All financial institutions, including acquiring banks, are required to know its clients. Knowing the client means analyzing the product or the service he sells, sales territory and target client. The main reason behind knowing the client is to avoid fraud and money laundering of illicit origin.

In a sector of online payments KYC process is usually more lax. As a general rule, once the client manages to open a bank account in a financial entity, it means that he has passed the controls of Compliance department. However, if it is detected that the client is using a Virtual POS to process the amounts of money whose origins are unclear or that are invol

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What is an offline POS terminal?

An offline POS terminal or offline PIN pad is a non-face-to-face payment method used to charge credit and debit cards in an unsecured mode. That is, generally the usages of POS terminals requires the presence of the cardholder to be able to swipe it through the machine or introduce the PIN code manually to validate the operation. Offline POS terminals and offline PIN pads do not require the physical presence of the cardholder since the card brand, card number, expiration date and CVC code can be entered without the client.

Offline POS terminals or offline PIN pads are very difficult to contract since they involve a high fraud rate. In order to apply for one for your business make sure your business has an impeccable reputation and you are ready to leave

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What is a POS terminal? Types of POS.

Point of Sale Terminal(POS) is a physical or virtual device used to charge debit or credit cards. Point-of-sale terminals are issued and controlled by banks with the approval of an acquiring bank authorized by the Vista, MasterCard, Amex, JCB and Diners Club card brands.

POS terminals can be classified into 2 types:

Physical Point of sale terminal

This type of face-to-face payment terminals are also called PIN Pads and are usually used in stores, restaurants and other businesses that have a physical location.

POS terminal

Virtual Point of sale terminal

Virtual POS is a terminal for non-face, virtual payments. As its own name says, these terminals are used to accept online payments through a payment gateway.

Virtual POS for credit cards

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What is a refund?

A refund is a compensation that has to be re-invoiced to the cardholder equal to the amount that he paid for a product or service at a POS terminal. The merchant is not obliged to return the money to the customer's card if there is no justification for filing a refund.

Many customers think that the commerce is obliged to make a refund of the money but there has to be a legal nature and clear reasons for that. Due to a large amount of buyers who try to ask for refunds in order to not to pay for the goods or services that the merchant has provided, all the refunds have to be justified and defective goods returned.

When a merchant makes a return of payment to the cardholder he is obliged to do it by the same method of payment that was used by the

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What is a recurring subscription?

Recurring subscriptionor recurring credit card payment is a payment regularly debited from the cardholder in a limited time interval. Recurring payments are widely used in businesses that offer services where the payments should be made on regular basis, such as software services, insurers, donations, call centers, fixed telephone plans etc.

Recurring payments are considered as secure since the holder decides when the business relationship begins and ends. On other hand, for merchants, working with recurring payments involves high level of risk, since if the customer does not use the service or has a discrepancy in the billing, he will charge the merchant with a chargeback.

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What is a limit for payment gateway processing?

Limits for payment gateway processing is not a ver common practice. Generally, payment gateways don't set any limits on payment processing, but when it comes to businesses whose commercial activities involve fraud risks, some payment gateways may create anti-fraud rules to limit the transactions. The limits that are usually set are the following:

  • Maximum daily amount per card and per IP
  • Maximum amount of transactions per country from where the operation is carried out
  • Maximum weekly amount
  • Maximum monthly amount
  • Maximum annual amount
  • Restriction by card brand
  • Country Restriction
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What is a retrieval request?

A retrieval request or, so called pre-chargeback, is a notification sent by the acquiring bank to a merchant with the request to present an invoice or relevant documentation about a particular transaction. If the documentation submitted by the merchant satisfies the requirements of the bank, the retrieval will not reach the chargeback, but if the response is not satisfactory, the retrieval will become a formal chargeback.

The difference between retrieval and chargeback is that the retrieval is a warning without economic consequences and the chargeback is an economic claim to trade.

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The role of a bank in payment systems.

Bank is a financial entity regulated by a central bank of a county that manages funds of third parties, shareholders and customers. Banks play the most important role in all payment systems and without its participation money processing services could never be offered to online businesses.

The types of banks used the most by businesses:

  • Acquiring banks
  • Commercial banks
  • Investment bank
  • Mortgage banks
  • Consumer banks for credit or debit cards
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What is Tokenization of data?

Tokenization means encrypting the actual data, credit card information for example, into a nonsense combination of numbers and letters so that hackers cannot read and take advantage of the data.

Tokenization is widely used among all of the payment methods, online and offline, where the client has to provide its personal data, card number, expiration date and CVC in order to make a purchase.

The primary purpose of the tokenization is to hide the sensitive information when sending it to the bank for authorization of the transaction. Also it is used to store the data of a credit card on a secure PCI DSS server and then use it automatically each time a client uses his card in a virtual payment gateway to make a recurring payment.

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What is rolling reserve?

Rolling reserve is a monetary deposit in favor of the payment processor to cover possible chargebacks filed in the future by the clients of a business.

Withholding an amount in favor of the payment processor is a common practice when providing a new or high risk business with payment processing services, such as MOTO, payment gateway and merchant.

Depending on the nature of the business and the monthly billing, the payment processor can withhold a larger or smaller amount. We recommend our clients to provide the required amount since the financial institution knows better the exact level of the risk of fraud and can refuse you the requested payment processing method.

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What is a credit card pre-authorization?

Credit card pre-authorization means verifying that the credit or debit card has a positive balance on it without charging a cardholder for an operation that will be performed in a near future. Credit card pre-authorization is a very common practice in businesses related to reservations, such as hotels, restaurants, plane tickets etc. Its characteristics are the following:

  • The pre-authorizations are free which means that the cardholder does not get charged any extra commissions. At the same time, for the payment gateway there are some expenses related to pre-authorization but they are very insignificant.
  • The merchant does not charge the cardholder at the moment of the reservation of a service, instead he uses pre-aut
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What is anti-fraud "Fraud scrubbing" tool?

Fraud scrubbing rules are a set of programmed conditions that can be applied to a payment gateway to eliminate the risk and percentage of frauds in card payments.

Anti-fraud rules are the most essential part of the card payment system as it guarantees a safe environment for online payments and makes the cardholder to feel secure when providing his banking information.

The most effective fraud scrubbing rules to combat fraud are:

  • Activation or deactivation of the 3D Secure protocol
  • Creation of blacklists of countries considered to be high risk
  • Limit payments from the same IP
  • Checking newly created e-mails and domains
  • Fake billing address detection
  • Limita
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What is a chargeback? Types of chargebacks

A chargeback is a claim of a transaction made by the issuer of the credit card against the merchant number that has been provided by the acquiring bank. There are three types of chargebacks and they can be classified as legitimate, illegitimate and fraudulent.

Types of chargebacks

Legitimate chargebacks

Legitimate chargebacks are those caused by merchant error, without intentions to commit fraud. For example:

  • the merchant forgot to send the product or service;
  • the product that was sent arrived defective;
  • the merchant has charged twice the same transaction;
  • the product description from the website does not match reality;
  • th
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