Whether you are setting up your first merchant account or managing an established high-risk business, payment processing is full of technical terminology that directly affects your costs, compliance obligations, and processing stability. This glossary defines every key term clearly — no jargon, no ambiguity — so you can read contracts, speak with acquirers, and manage your account with confidence.
Why Every Merchant Needs to Understand Payment Processing Terminology
Payment processing agreements are dense legal documents. A merchant who doesn’t understand the difference between MDR and an interchange fee, or who mistakes a rolling reserve for a penalty, is at a serious disadvantage when negotiating account terms — or when disputing a fee that should not have been applied.
For high-risk merchants specifically, the stakes are even higher. Terms like TC40, VAMP, and chargeback ratio are not abstract compliance concepts — they are the thresholds that determine whether your account stays open. Understanding them is not optional.
| A — Acquiring Bank to Authorisation |
Acquiring Bank (Acquirer)
An acquiring bank — also called an acquirer — is the financial institution that processes card payments on behalf of a merchant. When a customer pays by card, the acquirer receives the transaction request, communicates with the card network, and ultimately settles funds into the merchant’s account.
The acquirer takes on the financial risk of the merchant’s transactions. This is why merchants in high-risk industries face higher fees, rolling reserves, and more stringent underwriting — the acquirer’s exposure is greater, and its pricing reflects that.
| Key distinction: The acquiring bank serves the merchant. The issuing bank serves the cardholder. These are two separate institutions, and both play roles in every card transaction. |
| Acquiring BankAcquirer | The bank that processes card payments for a merchant, accepts financial risk of those transactions, settles funds into the merchant’s account, and manages the relationship with Visa and Mastercard on the merchant’s behalf. |
ACH — Automated Clearing House
ACH is a US-based electronic payment network that enables direct bank-to-bank fund transfers without using card networks. Transactions processed through ACH — commonly called eChecks or direct debits — move funds directly between bank accounts and are governed by NACHA (National Automated Clearing House Association) rules.
For high-risk merchants, ACH processing is an important complement to card payments. It provides a payment rail entirely outside card-network rules — meaning no Visa VAMP thresholds, no Mastercard BRAM monitoring, and lower per-transaction costs. ACH is widely used in iGaming, subscription billing, and nutraceutical businesses.
| Feature | ACH | Card Processing |
| Transaction cost | 0.5%–1.5% | 2.5%–5.5% |
| Network | NACHA | Visa / Mastercard |
| Chargeback rules | NACHA return limits | VAMP / BRAM thresholds |
| Settlement speed | 2–5 business days | 1–3 business days |
Authorisation
Authorisation is the first step of a card transaction. When a customer presents their card, the merchant’s payment gateway sends an authorisation request to the acquiring bank, which forwards it to the card network (Visa or Mastercard), which then routes it to the cardholder’s issuing bank.
The issuing bank checks whether the card is valid, not flagged for fraud, and whether sufficient funds or credit are available. It returns an approval or decline code. An approved authorisation places a hold on the customer’s funds — but does not move money. Settlement is a separate, subsequent process.
| Important for high-risk merchants: Authorisation rates — the percentage of transactions approved at the issuing bank level — are a key performance metric. Low authorisation rates often signal card-network or issuer-level restrictions on your merchant category code (MCC). |
| C — Chargeback to Compelling Evidence 3.0 |
Chargeback
A chargeback is a forced reversal of a card transaction, initiated by the cardholder’s issuing bank on behalf of the customer. The merchant’s account is debited for the full transaction amount, plus a chargeback processing fee — regardless of whether the original transaction was legitimate.
Chargebacks exist to protect consumers from fraud and non-delivery. In practice, a large proportion — estimated at 36% in 2025 — are instances of friendly fraud, where a genuine purchaser disputes a valid transaction rather than requesting a refund through the merchant’s own process.
The Chargeback Process — Step by Step
• Cardholder contacts their issuing bank to dispute a transaction
• Issuing bank files a chargeback against the merchant via the card network
• Merchant’s acquiring bank debits the transaction amount and fee from the merchant’s account
• Merchant has a defined window (typically 20–45 days) to submit representment evidence
• If representment is accepted, funds are returned; if rejected, the loss is permanent
| Cost impact: Industry data shows that merchants lose an average of $4.61 for every $1 disputed in a chargeback — factoring in the transaction value, chargeback fee, fulfilled product cost, and internal processing time. |
| Chargeback | A forced transaction reversal where the cardholder’s bank debits the merchant’s account for a disputed amount. The merchant can contest the reversal through a process called representment by submitting documentary evidence. |
Chargeback Ratio
Your chargeback ratio is the percentage of your total monthly card transactions that resulted in a formal chargeback. It is the single most important metric your acquiring bank uses to assess the health of your account.
| Threshold | What It Means |
| Below 0.3% | Best-in-class — maximum account stability |
| 0.3%–0.5% | Clean — acquirer early-warning zone for some processors |
| 0.5%–0.75% | Acquirer informal review threshold — expect account scrutiny |
| 0.75%–0.9% | Approaching Visa VAMP enforcement threshold |
| Above 0.9% | Visa VAMP monitoring tier — scheme fines apply |
| Above 1.0% | High risk of account termination |
Formula: Chargeback Ratio = (Total Chargebacks in Month ÷ Total Transactions in Month) × 100
Compelling Evidence 3.0
Compelling Evidence 3.0 (CE3.0) is Visa’s updated framework for chargeback representment, introduced to address the significant rise in friendly fraud disputes. It allows merchants to contest certain chargeback categories by submitting specific documentary evidence that proves the cardholder authorised, received, and engaged with the transaction.
Under CE3.0, merchants can submit evidence including device fingerprints, IP addresses, previous undisputed transactions from the same customer, and post-purchase activity logs. When accepted, CE3.0 representment shifts the liability back to the issuing bank and recovers the disputed funds.
What Counts as Compelling Evidence
• Customer’s device ID or fingerprint linked to the disputed transaction
• IP address matching the customer’s account or previous undisputed purchases
• Proof of prior undisputed transactions by the same cardholder on the same device
• Post-purchase login records, content access logs, or download history
• Delivery confirmation with signature or tracking events
| I — Interchange Fee to Issuing Bank |
Interchange Fee
The interchange fee is paid by the merchant’s acquiring bank to the cardholder’s issuing bank on every card transaction. It is set by the card networks — Visa and Mastercard — and varies based on card type (debit, credit, corporate, premium rewards), transaction method (card-present or card-not-present), and the merchant’s category code (MCC).
Interchange is the largest component of the total processing fee a merchant pays. The MDR (Merchant Discount Rate) charged by the acquirer is built on top of interchange — it includes interchange plus the acquirer’s own margin. Merchants cannot negotiate interchange directly; it is a card-network-set cost that flows through to every transaction.
| For high-risk merchants: Card-not-present transactions (online, telephone) carry higher interchange rates than card-present (in-person) transactions. International cards and premium rewards cards also incur higher interchange, which is relevant for businesses with a high proportion of international customers. |
| Interchange Fee | A per-transaction fee paid from the acquirer to the issuing bank, set by Visa or Mastercard. It varies by card type, MCC, and transaction method. Interchange is the primary cost component built into a merchant’s MDR. |
Issuing Bank (Issuer)
The issuing bank is the financial institution that issued the cardholder’s payment card. When a customer makes a purchase, their issuing bank authorises the transaction, temporarily holds the funds, and — if the transaction is settled — transfers those funds through the card network to the acquirer.
In a chargeback scenario, the issuing bank is the entity that initiates the reversal on the cardholder’s behalf. The issuer is the primary point of contact for the customer; the merchant never deals with the issuer directly — all communication routes through the card network and the acquirer.
| M — MDR to MCC |
MDR — Merchant Discount Rate
The Merchant Discount Rate (MDR) is the all-in percentage fee charged to a merchant on every processed transaction. It is the headline rate in a merchant account agreement. MDR is made up of three components: interchange (paid to the issuing bank), scheme fees (paid to Visa or Mastercard), and the acquirer’s own margin.
| MDR Component | Who Receives It |
| Interchange (largest portion) | Issuing bank |
| Scheme fee | Visa / Mastercard |
| Acquirer margin | Your acquiring bank |
For high-risk merchants, MDR typically falls between 2.5% and 5.5% per transaction — significantly higher than standard-risk rates of 1.5%–2.5%. This premium reflects the additional risk the acquirer takes on by underwriting a high-risk merchant category.
MCC — Merchant Category Code
A Merchant Category Code (MCC) is a four-digit number assigned to every merchant by their acquiring bank and registered with the card networks. It classifies the primary business activity of the merchant and has far-reaching consequences for fees, processing rules, and risk classification.
Why MCC Matters for High-Risk Merchants
• Determines interchange rate: Different MCCs carry different interchange rates — some significantly higher
• Triggers high-risk classification: Certain MCCs — including gambling (7995), adult content (5967), and digital goods (5816) — are automatically classified as high-risk by card networks
• Affects chargeback rules: MCC influences which card-network monitoring programmes apply to your account
• Limits processor availability: Many mainstream processors explicitly block specific MCCs in their terms of service
| R — Rolling Reserve |
Rolling Reserve
A rolling reserve is one of the most important — and most commonly misunderstood — features of a high-risk merchant account. It is a percentage of your monthly card processing volume that your acquiring bank withholds as a financial buffer against future chargebacks, refunds, and regulatory liabilities. It is held in a separate reserve account and returned to you on a fixed rolling schedule.
| The rolling reserve is your money. It is not a fee. It is a deferred payment — held temporarily by the acquirer to cover any chargebacks filed after settlement, then released to you after the agreed hold period. |
How a Rolling Reserve Works — Illustrated
Example: 7% rolling reserve, 90-day hold period, processing £100,000/month
| Month | Processed | 7% Withheld | Reserve Released |
| Month 1 | £100,000 | £7,000 | £0 (in hold) |
| Month 2 | £100,000 | £7,000 | £0 (in hold) |
| Month 3 | £100,000 | £7,000 | £0 (in hold) |
| Month 4 | £100,000 | £7,000 | £7,000 (Month 1 released) |
| Month 5+ | £100,000 | £7,000 | £7,000 (rolling) |
Rolling Reserve Rates by Industry
| Industry | Typical Rate | Hold Period |
| iGaming & Online Gambling | 7.5%–12% | 120–180 days |
| Adult Content | 7.5%–10% | 90–180 days |
| Nutraceuticals & Supplements | 5%–10% | 90–120 days |
| Travel & Tourism | 7.5%–12% | 120–180 days |
| Forex & CFD Trading | 7.5%–10% | 90–120 days |
| CBD & Hemp Products | 5%–10% | 90–120 days |
| Subscription Services | 5%–7.5% | 90 days |
| S — Settlement |
Settlement
Settlement is the process by which the funds from approved card transactions are transferred from the cardholder’s issuing bank, through the card network, to the merchant’s acquiring bank, and ultimately into the merchant’s settlement account — net of processing fees and any rolling reserve deductions.
Settlement does not happen instantly. The authorisation hold is placed at the time of purchase, but actual settlement — the movement of funds — occurs on a daily batch cycle. For most card-present transactions, settlement takes 1–2 business days. For card-not-present (online) high-risk transactions, settlement cycles of 2–5 business days are standard, with some high-risk categories extending to T+7.
Settlement Timeline — Card-Not-Present High-Risk Transaction
• Day 0: Authorisation approved, funds held at issuing bank
• Day 1: Merchant submits daily batch for settlement
• Day 2–3: Card network processes the interchange flow
• Day 3–5: Acquirer receives funds and credits merchant account (net of fees and reserve)
| T — TC40 |
TC40 — Fraud Notification Signal
TC40 is a fraud reporting signal used within the Visa network. When a cardholder reports a transaction as fraudulent to their issuing bank, the issuer submits a TC40 notification to Visa. This signal flags the transaction as suspected fraud — even if no formal chargeback has yet been filed.
TC40 signals matter enormously to high-risk merchants because they are included in Visa’s VAMP combined ratio calculation alongside formal chargebacks. A merchant whose formal chargeback ratio looks acceptable may still be in a VAMP monitoring tier if their TC40 fraud signal rate is elevated — and they will often not know it until their acquirer notifies them.
| Action point for merchants: Standard chargeback monitoring dashboards do not show TC40 counts. You need TC40 data access — through your acquirer or a specialist tool — to know your true VAMP ratio. Merchants who monitor only formal chargebacks are measuring the wrong number. |
| TC40Fraud Signal | A Visa network notification submitted by an issuing bank when a cardholder reports fraud. TC40 signals count toward the merchant’s VAMP combined ratio before a formal chargeback is ever filed. Monitoring TC40 data is essential for high-risk merchants managing their Visa compliance threshold. |
| V — VAMP |
VAMP — Visa Acquirer Monitoring Programme
VAMP is Visa’s unified compliance framework for monitoring merchant dispute and fraud rates, which replaced the older Visa Dispute Monitoring Programme (VDMP) and Visa Fraud Monitoring Programme (VFMP) with a single combined programme. Full enforcement began in January 2026.
Under VAMP, Visa monitors a combined ratio — TC40 fraud signals plus TC15 non-fraud disputes — divided by total settled Visa transactions in the same month. The enforcement threshold is 0.9%. Merchants whose combined ratio exceeds this threshold enter a formal monitoring tier subject to scheme-level fines.
VAMP Thresholds and Consequences
| Tier | VAMP Ratio | Consequence |
| Standard | Below 0.9% | No monitoring action |
| Early Warning | 0.4%–0.5% | Acquirer-level internal flag (not Visa formal) |
| Monitoring | 0.9%–1.5% | Scheme-level fines begin; acquirer oversight increases |
| High-Risk | Above 1.5% | Elevated fines; acquirer may terminate relationship |
| Critical distinction: VAMP measures TC40 + TC15 combined — not just formal chargebacks. Merchants targeting below 0.5% are managing to their acquirer’s internal early-warning threshold, which is the correct operating target for account stability. |
Quick Reference: All Glossary Terms at a Glance
| Term | One-Line Definition |
| Acquiring Bank | The bank that processes card payments for a merchant and settles funds into their account. |
| ACH | US electronic bank-to-bank payment network used as a card alternative for high-risk businesses. |
| Authorisation | Issuing bank approval that confirms a card is valid and places a fund hold — not a completed payment. |
| Chargeback | Forced transaction reversal debited from the merchant’s account; contestable through representment. |
| Chargeback Ratio | Percentage of monthly transactions resulting in a chargeback; Visa VAMP threshold is 0.9% combined. |
| Compelling Evidence 3.0 | Visa’s representment framework allowing merchants to prove cardholder authorised a disputed transaction. |
| Interchange Fee | Per-transaction fee from acquirer to issuing bank, set by Visa/Mastercard; the core cost within MDR. |
| Issuing Bank | The bank that issued the cardholder’s card; authorises purchases and initiates chargebacks. |
| MCC | Four-digit code classifying merchant business type; determines interchange rates and risk classification. |
| MDR | All-in percentage fee charged to the merchant per transaction; includes interchange + scheme + acquirer margin. |
| Rolling Reserve | Percentage of monthly processing volume withheld by acquirer and released after 90–180 days. |
| Settlement | The transfer of funds from issuing bank to merchant account, net of fees; takes 1–5 business days. |
| TC40 | Visa fraud notification signal counted in VAMP ratio before a formal chargeback is filed. |
| VAMP | Visa’s combined fraud + dispute monitoring programme; 0.9% threshold triggers scheme-level fines. |
| Frequently Asked Questions |
| Q What is a rolling reserve in a merchant account? |
| A A rolling reserve is a percentage of your monthly card processing volume — typically 5%–10% for high-risk merchants — that your acquiring bank holds as a security buffer against future chargebacks and disputes. It is not a fee: it is your money, held temporarily and released on a rolling 90–180 day schedule. From Month 4 onward (on a 90-day hold), you receive both your current month’s settlement and the release of the reserve from 90 days prior. |
| Q What is an acquiring bank? |
| A An acquiring bank (acquirer) is the financial institution that processes card payments on behalf of a merchant. It underwrites the merchant’s transactions, manages settlement, and handles the relationship with card networks like Visa and Mastercard. The acquirer takes on financial risk — which is why high-risk merchant accounts are subject to higher fees, rolling reserves, and stricter underwriting. The acquiring bank is distinct from the issuing bank, which serves the cardholder. |
| Q What is the difference between MDR and interchange? |
| A Interchange is the fee paid by the acquiring bank to the issuing bank on every card transaction. It is set by Visa or Mastercard and is not negotiable by merchants. MDR (Merchant Discount Rate) is the all-in percentage fee the merchant pays to the acquirer — it includes interchange, card network scheme fees, and the acquirer’s own margin. MDR is the headline rate in a merchant account agreement; interchange is one component within it. |
| Q What is TC40 and why does it matter for my chargeback ratio? |
| A TC40 is a fraud notification signal submitted by an issuing bank to Visa when a cardholder reports a transaction as fraudulent. It is reported to Visa before a formal chargeback is filed. TC40 signals are included in Visa’s VAMP combined ratio calculation alongside formal disputes. A merchant can have a formal chargeback ratio below 0.9% but still be in a VAMP monitoring tier because their TC40 fraud rate pushes the combined ratio over the threshold. High-risk merchants must monitor TC40 data — not just formal chargebacks — to know their true VAMP exposure. |
| Q What is the difference between authorisation and settlement? |
| A Authorisation is the approval step: the issuing bank confirms the card is valid and places a temporary hold on funds. Settlement is the completion step: the actual transfer of funds from the issuing bank through the card network to the acquiring bank and into the merchant’s account. Authorisation happens in seconds; settlement typically takes 1–5 business days for card-not-present transactions. |