Address Verification System (AVS) is a method whereby the merchant is asked to supply address information for the cardholder in all card-not-present transactions. The merchant's system sends the street address and the zip code of the cardholder's billing address to the front-end processor. The front-end processor makes a request of the Issuing Bank to verify the validity of the address and lets the merchant's system know whether the address supplied is valid.

The authorization process is different for each merchant type. Different information must be sent depending on whether you are a restaurant, retail establishment, hotel or mail order/telephone order (MOTO) merchant. In the case of MOTO, since the transaction does not take place face-to-face, address information is required to guard against fraud.

Organizations such as MasterCard and Visa, and along with the Federal government, make the rules in regard to acceptance of credit cards, including fees charged for interchange. American Express and Discover are different cases. They are both the issuer and acceptors, and merchants must have a separate agreement with them.

A customer who does not receive his goods or services, or says he did not place an order, can ask his issuing bank to charge back the merchant. The Issuing Bank sends the charge back request to the merchant bank, which forwards it to the merchant asking to validate the charge. Information such as the amount, an invoice or folio, customer signature or shipping documents, as well as the shipping address (used in AVS during the authorization), is needed to defend against a chargeback.

The Card Associations make regulations for each industry that accepts credit cards. These regulations are designed (according to the Card Associations) to prevent fraud.

The fee paid by a merchant to the merchant bank to handle the deposit of credit card funds into their bank. It is usually quoted as a percentage of the transaction.

The interchange fees are what the Card Associations charge the merchant to get the funds into the bank (Merchant Bank) and to get the billing information to the cardholder's bank (Issuing Bank). Interchange fees are based on following credit card regulations and capturing appropriate data including card swipe, address, and electronic signature as needed. These fees are also based on the timeliness of the settlement of transactions.

The Issuing Bank is the bank from which the cardholder receives his card. These banks promote the use of the various branded cards and charge the cardholders interest and fees for their use. They share in the interchange fee charged by the Card Associations. Most of the power in the credit card industry is seated with the Issuing Banks. An Issuing Bank's worth is its portfolio of cardholders.

The bank that stands in for all the Issuing Banks and puts up the funds to be deposited in the merchant's account prior to it being transferred via interchange from the various Issuing Banks. Merchant Banks provide these funds for a discount rate, a fee charged for the use of the money. It's called a discount rate because it is usually taken away from credit card funds as they are deposited. They also share in the interchange fee charged by the Card Associations. A Merchant Bank’s worth is its portfolio of merchants.

A Merchant Services Provider (MSP) is an organization that quotes a discount rate to the merchant and handles the setup with the front-end sales organization for a Merchant Bank, called an ISO.

In either case, the MSP is responsible for getting cards and to allow the merchant to process the cards with the processor. In some rare cases, some Merchant Banks are agents for American Express and/or Discover, and can set up the merchant to accept their cards. In every case, the MSP is responsible for setting up the merchant with the processor to accept all card types.

Non-Merchant Bank MSPs are usually paid a percentage of the discount rate. An MSP is basically responsible for the relationship between the merchant, Card Associations, processors and Merchant Bank.

A company (often a third party) that handles credit card transactions for merchant banks. They are usually broken down into two types, front-end and back-end, with a gray area in between. Front-end processors have connections to various Card Associations and supply authorization and settlement services to the Merchant Banks' merchants. Back-end processors accept settlements from front-end processors and, via The Federal Reserve Bank (FED), move the money from the Issuing Bank to the Merchant Bank. In some cases, the Merchant Bank gets the settlement information from front-end Processors and in other cases, from the back-end Processors.

Settlement is the process by which authorized transactions are sent to the front-end Processor to be forwarded to the Merchant Bank and/or back-end Processor. They in turn are forwarded to the Federeal Reserve Bank (FED) to move the funds from the Issuing Bank to the Merchant Bank.

Regulations relative to settlement are different for each merchant type and card type. These regulations predominantly cover what information must be sent at the time of settlement.

Note: The product or service must be delivered or performed before settlement can take place. In the case of mail order/telephone order (MOTO), this specifically means the goods must be shipped before the settlement process is performed.