Payment Cards Concepts

This page defines some of the most common concepts relevant to payment card systems, as well as concepts specific to the Marqeta platform. An understanding of these concepts is foundational to working with the Marqeta platform.

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3D Secure (3DS)

The Three-Domain Secure (3D Secure) security protocol helps to protect online payments by enabling cardholders to authenticate themselves prior to card authorization.

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Account verification transactions

Account verification transactions are authorizations that enable merchants to verify a card without putting a hold on funds. Account verification transactions are also known as zero-dollar authorizations. Anticipated amount verification transactions (AAVT) are a type of account verification transaction used to ensure that a cardholder has sufficient funds for a specific transaction amount, thus increasing the approval rate of digital transactions by reducing the risk of insufficient funds. Fewer declined transactions mean a more efficient and seamless payment experience for cardholders, and can even lower the processing fees and chargeback costs incurred by merchants.

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Acquiring bank

An acquiring bank provides merchant accounts that enable legal entities to accept card payments. The acquiring bank works in conjunction with an acquirer processor. In some cases, the acquiring bank and acquirer processor are a single entity.

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Acquirer processor

Acquirer processors connect with merchants, the card network, and the acquiring bank (either directly or through a payment gateway) to facilitate payment at a merchant. They provide the means to create the system of record that communicates with the authorization and settlement entities. In some cases, the acquirer processor and the acquiring bank are a single entity.

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Address Verification Service (AVS)

A system to verify a user’s address at varying levels of detail, such as the cardholder’s ZIP code, street address, city or state.

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Advice

An advice message updates or amends an existing or ongoing transaction. The receiver of the advice message must send an advice response message to acknowledge receipt of the advice. For example, a cardholder purchases fuel at an automated fuel dispenser and the initial authorization request is for $100. However, the final transaction is only for $50. In this case, the automated fuel dispenser sends an authorization advice message to the card network with the updated amount for the final sale. The card network then sends an authorization advice message to the Marqeta platform with that same updated amount. The Marqeta platform sends an authorization advice response to the card network to acknowledge the updated authorization.

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Assessment

A fee charged by the network to both issuing and acquiring banks in addition to the interchange fee. Assessments are how the networks generate revenue, taking a fee from each bank for every transaction.

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Authorization

An authorization is requested by a merchant through their acquirer processor when a cardholder attempts to make a purchase. The authorization process determines three conditions about a card in a given transaction:

• If the card is valid
• If the card is sufficiently funded
• If the business rules for that card are being followed

If all three conditions are met, the issuer processor authorizes the transaction and places a temporary hold on the necessary funds. A clearing transaction follows a successful authorization.

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Authorization code

An authorization code is a six-digit number that serves as the record for the credit, debit or stored value card approval.

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Automated Clearing House (ACH)

ACH is the primary electronic network for money movement in the United States. It automates the movement of money between banks.

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ACH return

An ACH transaction that was disputed or rejected by the issuing bank.

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Available balance

Every payment card has an available balance that governs its purchasing power; this factors into the authorization process.

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Bank Identification Number (BIN)

The first four to six digits of a card representing the identification number of the issuing or acquiring bank.

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Basis points

One basis point, often referred to with the shorthand “bips”, is equal to 1/100th of one percent of the transaction amount. One percent, therefore, equals 100 bips.

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Capture

Capture is the process of finalizing a successful authorization, including the initiation of a money transfer by a merchant.

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Card network

A card network connects merchants to card issuers in order to approve transactions. The network connects bank computers, processors, and payment card terminals all over the world. Each network uses a proprietary encryption code that is shared only with its partners. Visa, Mastercard, and Pulse are all examples of card networks.

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Card spend controls

Parameters set on a card to limit when, where, and how often cards can be used. These controls can include purchase amount, merchant ID, merchant category code (MCC), time/date, and more.

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Card transaction types

Payment card transactions can be either single-message transactions or dual-message transactions:

• Dual-message transactions have two stages: authorization and settlement. This is the typical credit card transaction type.
• Single-message transactions combine authorization and settlement into a single stage. This is the typical debit card transaction type.

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Chargeback

A “chargeback” occurs after a successful dispute of a specific transaction and funds are returned to the cardholder.

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Clearing

Clearing is the process by which the acquirer processor and issuer processor exchange financial transaction details, but not actual funds, to facilitate the posting of that transaction to a cardholder’s account. In the clearing process, the issuer processor posts an authorized transaction to a cardholder’s account and determines the amount of money the issuing bank must send to the acquiring bank to settle the transaction. Money does not move in the clearing process, but rather in the settlement process.

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Closed-loop

A type of payment card that is typically restricted to use at one single company and is not tied to a card network (Visa, Mastercard, etc.).

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Credit card

A type of payment card typically attached to a line of credit that a user can make purchases against.

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Debit card

A type of payment card typically tied to funds held in a deposit account.

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Digital wallet

Also known as a mobile wallet, digital wallets are typically phone-based apps that store digital payment credentials and can be used to make purchases online and in-store.

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Discount rate

Also referred to as the add on rate, the discount rate refers to the interest that the acquiring bank adds on top of the interchange fee and assesses to the merchant. The discount rate is generally tiered and falls in the range of 40-50 basis points though can be as low as 20-30 basis points.

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Dispute

A situation where a card owner, either a consumer or a business, is challenging the validity of a transaction, including an unauthorized purchase, or goods and services that were not delivered. Disputes are commonly handled between the cardholder, the issuing card program, card network, and merchant.

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Enterprise partners

Payment programs built for business-to-business applications (for example, for expense payment).

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Fees

Charges assessed by one entity to another.

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Fee transfers

When working with the Marqeta API, fee transfers move funds from a user’s general-purpose account (GPA) into a partner account.

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For benefit of (FBO) cardholder funds

For benefit of (FBO) funds are held in an issuer bank account for stored value card programs.

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Gateway

Special purpose software platform that provides an interface between merchants and acquiring institutions.

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General Purpose Account (GPA)

The general purpose account (GPA) holds the money that cardholders access when transacting with their cards. Every user and business on the Marqeta platform has an associated GPA. Funds in a GPA are “open-loop” funds that can be used at any merchant, subject to authorization controls. Most Visa and Mastercard accounts access GPA funds.

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GPA order

On the Marqeta platform, a GPA order refers to the direction of funds into the GPA of a user or business. It is used to load funds into a GPA from a funding source.

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Idempotency

Refers to an operation that has no additional effect if it is called more than once with the same input parameters; in the payment world, idempotency is important because it prevents requests from being processed repeatedly in the case of multiple, inadvertent submissions.

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Interchange fee

Payment networks like Visa and Mastercard determine the interchange fee for processing payment cards transactions. Interchange fees are typically paid by the merchant’s bank (the acquirer) to the customer’s bank (the issuing bank). In the United States, interchange fees average between one and two percent of the transaction (100-200 bips).

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Issuer processor

The issuer processor connects directly with card networks and issuing banks to provide a system of record for payment card data, manage the issuance of cards, authorize transactions, and communicate with settlement entities. Marqeta is an issuer processor.

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Issuing bank

The issuing bank fills three primary roles in payment processing:

• It is a network sponsor, which means it can issue cards on a given network
• It is a holder of prepaid funds for non-credit instruments such as gift cards
• It is a settlement point, managing a cardholder’s account and paying out to the merchant’s account after a purchase

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Just-in-Time (JIT) Funding

Just-in-Time (JIT) Funding is a method of automatically funding a GPA in real time during the transaction process. With JIT Funding, GPAs do not need to carry a balance. Instead, the Marqeta platform automatically moves funds from your funding source into the appropriate GPA at transaction time.

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Know Your Customer (KYC) verification

To comply with regulatory requirements and as a protection against fraud, issuer processors can run a “know your customer verification” to verify the identity of potential cardholders.

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Ledger

The ledger is the system of record that keeps track of credits and debits for a given account. On the Marqeta platform, each GPA has a ledger to track its credits and debits.

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Ledger balance

When using standard funding: The funds that are available to spend immediately, including funds from any authorized transactions that have not yet cleared. When using Just-in-Time (JIT) Funding: Authorized funds that are currently on hold, but not yet cleared.

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Merchant

A merchant simply refers to any business that accepts card-based payments via a physical swipe (at the POS in the real world), by entering payment data manually or via a virtual swipe online.

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Merchant rewards

Refers to funds allocated by merchants to power rewards programs (and accounts) that promote their brands (and partners’ brands) and to encourage brand loyalty.

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Modern card issuing

Card issuing and processing delivered via an open API platform that enables card issuers to create custom, flexible, and scalable payment card products.

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NACHA

The National Automated Clearing House Association, NACHA is a not-for-profit organization that manages and governs the ACH Network, the backbone for the electronic movement of money and financial data in the United States. NACHA represents nearly 11,000 financial institutions across the United States.

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One-time use virtual card

To combat fraud, many processors generate one time use virtual card numbers good for only one transaction (the number then becomes inactive).

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Originating Depository Financial Institution (ODFI)

The ODFI functions as the interface between the ACH network and the originator of the transaction, confirming that transactions comply with the rules.

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Originator

Any institution or person initiating a debit or credit transaction through ACH.

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Peer-to-peer transfer

A peer-to-peer transfer occurs when two users transfer money between two different accounts on the Marqeta platform. These are also known as “peer transfers.”

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Pending credits

A pending credit is unavailable for use by the card or account holder and does not affect purchasing power; typically, a pending credit results when an ACH load that has been accepted but the funding hasn’t yet cleared.

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Prepaid card

A type of payment card that holds a finite amount of funds and is not directly tied to a bank account or line of credit.

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Primary Account Number (PAN)

A primary account number is a multi-digit number used to identify a primary account. Also called payment card numbers, it can be found printed on credit and debit cards.

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Private label card

A card that is accepted by only one merchant.

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Program manager

Businesses that manage a card program on behalf of the issuing bank. The program manager is responsible for defining the program, operating the program, and managing its profitability. The program manager typically is responsible for establishing relationships with processors, banks, payment networks and distributors and for establishing pooled account(s) at banks.

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Receiver

An organization or person that authorizes the originator to initiate an ACH transaction, either as a debit or credit to an account.

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Receiving Depository Financial Institution (RDFI)

The corollary to the ODFI, the RDFI receives the ACH transaction from an operator and credits or debits funds from their appropriate accounts.

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Reconciliation

An accounting process to compare two sets of records to ensure the figures are in agreement and are accurate. Reconciliation is the key method for determining whether the incoming or outgoing funds in an account match the amount spent/returned and that the two values are balanced at the end of a given recording period.

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Refund

A refund occurs when a cardholder requests that the merchant return funds from a previous transaction after the clearing process has completed.

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Reversal

A reversal occurs when a merchant cancels a transaction after the authorization succeeds, but before the clearing process begins.

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Security & PCI compliance

A key requirement for every participant in the payment system is information security, which for the vast majority of users takes the form of the Payment Card Industry Data Security Standard (PCI DSS). This is a proprietary information security standard for merchants and card issuers handling credit cards branded with the major card network players: Visa, Mastercard, American Express, Discover (plus JCB in Japan). The standard was established to tighten security around cardholder data to reduce the potential for fraud.

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Settlement

Settlement is the process by which a merchant’s bank and a cardholder’s bank exchange both financial data and money with each other.

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Standard funding model

In the standard funding model on the Marqeta platform, GPAs must be funded before the account holder can perform any transactions. You must manage each account balance to avoid under-funded or over-funded accounts.

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Store

In the world of payment technology, a “store” refers to any place a merchant accepts payments. For example, a retailer might have a chain of (physical) stores plus one or more online “stores” and can accept card payments at each of them. There may be many stores (both real-world physical locations and e-commerce sites) to a given merchant.

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Terminal Identifier (TID)

The TID is used to uniquely identify a terminal originating a transaction, which can be a device with a card swipe capability or an e-commerce site.

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Tokenization

The process of protecting sensitive data, such as the personal account number (PAN), by replacing it with more secure, surrogate data, called a token.

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Users

Broadly defined as a Marqeta account holder.

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Virtual card

A digital counterpart to a payment card, generated with a unique card number to settle a particular transaction by an authorized user. These are often used for one-time, business-to-business payments.