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Getting Paid: How the Credit Card Settlement Process Works

Getting paid is critical for any type of business. But before anyone receives the funds from a credit or debit card purchase, the transaction must go through the clearing and settlement process first.

A customer making an online purchase or swiping, dipping, or tapping their card is only the first step. Once cleared, the payments provider settles the transaction. Only after a settlement is approved, does the provider issue a payout to the respective account(s). In this blog, you’ll learn how it all works.

The payment settlement process: What is it and how does it work?

While it might sound complicated, a payment settlement is simply a collection of transactions made during a specific time. As your company processes payments, your provider collects funds from each transaction and puts them into a settlement.

Your payment provider reviews and approves each settlement and then deducts all dues, assessments, and fees from the gross amount. They then transfer the net settlement amount to your business’s account, based on your payout schedule.

At Finix, we approve settlements every business day. Once a settlement is approved, we create what’s called a Merchant Payout, which is used to transfer funds to your bank account.

The nuts and bolts of the process

When a customer pays for a purchase, they consider the payment process complete. But there’s a lot more that goes on behind the scenes before any money movement actually happens. Here’s a quick overview.

Who:

  • The customer (the cardholder)

  • Your business

  • Acquiring bank (the payment processor’s bank)

  • Payment processors and/or payment providers

  • Card brand networks (Visa, Mastercard, Amex, and Discover)

  • Issuing bank (the bank that issued the customer’s card)

  • Your business’s bank

What:

  • Credit card tokenization: The payment gateway encrypts the card data

  • Payment authorization: Ensures the card or payment method is valid and has the funds for the transaction (also known as a card hold)

  • Capture: Initiates the movement of funds after an authorization

  • Clearing: The acquirer bank (your processor’s bank) receives the funds for the transaction.

  • Settlement: The payment provider collects transactions for review and approval and transfers funds to your business’s bank account.

  • Transaction reconciliation: Ensures financial transactions match banking and internal statements

Show me the money: When do I get paid?

Since transactions go through the settlement process before you get paid, it’s important to understand how long it takes. In most cases, you can expect to receive the money from sales within one to two business days from the time of the transaction.

“Day 0” refers to when a transaction is authorized and captured. On Day 1, the transaction clears and the provider deducts all processing-related fees. On Day 2, the total for transactions in that settlement transfers to your business’s bank account.

Gross vs net settlements

When estimating your potential sales and revenue, you need to account for the difference between net and gross. For example, if you had $1,000 in sales in a day, that’s your gross. For easy math, say your combined processing fees for all transactions equaled $30. Your net settlement amount would be $970, which is how much you’d receive.

Same-day and instant transfers

There are several ways businesses can get their money faster, such as same-day payouts and instant transfers. The caveat to faster payouts is higher fees. For example, same-day ACH costs more than next-day, and instant payouts incur higher fees than both options. Taking these fees into consideration is important when determining your preferred payout speed.

Card vs ACH transaction settlements

Another thing to consider is the payment method. For example, cards settle fast, but standard ACH transactions take one to five days to settle. This varies depending on your provider and agreed-upon schedule.

There are faster ACH options, including same- and next-day, but faster ACH payouts cost more in fees. They can also increase your financial risk, as it makes your business more vulnerable to returns.

Visit our blog: “Breaking Down ACH Payments: Benefits and Drawbacks” to learn more about how ACH works and if it’s right for you.

The role of pre-funded accounts

Most providers require you to have a pre-funded account for instant payouts and same or next-day ACH transactions. In the case of push-to-card or instant disbursements, pre-funding is always required.

Use case example: Settlements for software platforms and marketplaces

Settlements let software platforms and marketplaces create payout schedules for their merchants or sellers. Here’s a couple of examples:

A platform offers software management with payment processing services for multiple spa and wellness centers. Each spa has its own preferred payment schedule. The software platform can configure payout profiles for each customer. After the payments provider approves the settlement, they funnel the funds to each spa according to their predetermined schedule.

This also applies to marketplaces with many sellers, but the marketplace sets up payment profiles for each seller. At Finix, you can set up payout schedules based on each seller’s preference or use a default payout schedule for everyone.

Use case example: individual businesses

Let’s say your business sells laptops to other businesses. Since you don’t accept payments for other merchants, you only need to worry about your payout schedule. This means you’d only have one payout profile, which is determined by your payment processor based on risk. Otherwise, the process is the same.

How Finix helps streamline the settlement process

No matter who your payments provider is, all transactions go through the settlement process. However, some providers make it easier than others. At Finix, we’re all about simplifying payments.

That’s why we only require one integration for online and in-person payments and offer flexible payout options. It’s important to keep in mind, though, that if you’re working with multiple processors, they may have different payouts for card-present and card-not-present transactions.

Our dashboard makes it simple to handle payments, with access to transaction details and reports in one spot for smooth operations. This is especially helpful for the reconciliation of transactions. In other words, no more chasing down data from multiple sources.

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