Know about the Term “Settlement” in the Payment Processing World?
When it comes to online credit card payment processing, there are common words that merchants and consumers see on their credit card and bank statements. These terms include pending, processed, or settlement. Here is a detailed explanation of these terms to help you get a better understanding.
A pending transaction is when an online credit card is swiped, or its details are entered online, and the transaction is waiting on the consumer’s bank to transfer the funds from one account to another.
A processing transaction indicates that the bank has verified the transaction and adjusted the funds between the banks used. For instance, you purchase a product from your credit card, and your bank transfers the funds from your credit card to another's bank account.
A settlement transaction is nothing but a statement. It shows that the credit card issuer or the bank has transferred the funds from your credit card account to the merchant’s account. There is no waiting time for settled transactions.
So, what is the term Settlement in the payment processing world, and how does it work?
The payment gateway settlement situation arises when your bank transfers the funds immediately without waiting. It is a process through which the money is transferred from the customer’s online credit card account to the merchant’s bank account.
When the credit card holder initiates a payment, the payment gets processed, and based on the amount available, the transaction is either approved or declined. A declined card means that there is not a sufficient amount available in your account to make the payment.
After initiating the payment, the issuing bank transfers the funds to the payment processor. The funds then go to the acquiring bank for verification. After that, the amount gets transferred to the receiver’s bank account by the acquiring bank.
Steps involved in the credit card Settlement Process
The online credit user initiates the payment by entering the account details.
After proper authentication of the credit card details, the required amount is debited from the customer's bank account.
The amount is then transferred to the acquiring bank visa card networks.
The acquiring bank transfers the amount to the merchant’s bank account.
Settlement in the payment processing world is also utilised when the acquirer transfers the funds to the merchant’s account to accept online payments.
What are the payment gateway settlement mechanisms?
Generally, there are two credit card settlement mechanisms. These settlement mechanisms depend on who handles the mechanism file.
In this mechanism, the merchant is responsible for the settlement. The merchant sends a settlement message, the settlement file, and the information about the transactions to be settled.
The merchant stores the details which are used to build a batch of transactions. The stored transactions are settled at the end of the day. The settlement files are in a queue and are marked as settled a few hours after midnight.
Terminal Capture gives the merchant more control over the settlement process, but it requires more storage and management of customers’ sensitive data. Therefore, it is a higher maintenance process.
In this settlement process, the transactions are settled through the payment gateway. Host capture stores the transaction details and settlement batch files on the processor. Payment transactions are selected randomly throughout the day. It allows the merchant to authorize the transaction without storing information between authorization and settlement.
Compared to terminal capture, it is easier to implement. The settlement can be done once a day, multiple times a day, or on-demand, depending on the business structure and its needs.
Categorization of settlements
All payment gateway settlements can be categorized into two groups. It is imperative to assess your business needs before choosing a settlement approach.
Merchant initiated settlement - It refers to terminal capture and on-demand payment settlement.
Time Initiated settlement - it refers to payment settlement performed multiple times in a single day. However, the settlement number is fixed.
While choosing a payment settlement, you will need to consider all the settlement categories to make the best decision for your business. A golden piece of advice would be to factor in your business needs and approach to identify the best payment gateway settlement for your business.
Both the credit card settlements come with a host of features. However, your business structure can help you choose a mechanism that best fits your business needs. For instance, if you do not have enough storage or maintenance capacity, it is better to opt for a Host Capture Payment Settlement mechanism for your business.