How It Works: Credit Card Settlement

So we talked about how you, as a customer, make a purchase with a credit card. But what if you’re the business owner. How do you actually collect your money from these transactions?

The settlement process starts right at your terminal. For each transaction a specific authorization number or code is generated. When you, the merchant, initiate the end of the day batch, or settlement process, your transactions along with their approval codes are grouped together and transmitted for processing. And this is how you begin the process to collect funds for the day’s transactions. It’s important to do this daily so you get your funds quickly and receive the lowest processing rate for each transaction.

Much like the credit card authorization process, there is a chain of communication the request for funds must go through before being deposited into your bank account, and it involves many of the same players. 

When you batch the day’s transactions, the request is sent to the acquirer. Remember, the acquirer handles your transactions for a fee and collects fees for the credit card network and issuing bank. The request is then passed along to the processor. Often, the acquirer and processor are the same entity.

Here’s a little refresher. Acquiring banks provide you, the merchant, with payment processing accounts and handle the acceptance and payment of credit card transactions. The processors partner with the acquiring banks to provide you with payment processing services. They are the ones who handle the authorization and settlement of your credit card transactions.

The processor then routes the transaction to the appropriate credit card network based on the method of payment that you, the merchant, accepted. The network passes the request along to the issuing bank, or issuer, and they debit the purchase amount from the your customer’s account to provide funds for the transaction.

This transaction information is sent back through the credit card network and the processor on to the Federal Reserve, who is the financial institution who funds all batch settlements using their automated clearing house. This means they are the ones who distribute the funds into to your bank account. 

And so it happens, invisible to you, as if your fairy god-person waved their magic wand, and you received your riches.

The end.

Well, not so fast. We all know dealing with this process is not always a fairy tale. That’s why it’s important to work with a payment partner who is there for you, not just making empty promises on the front end, but a partner who will be there for the lifetime of your relationship, like a friend you can call in the middle of the night. You need a payment partner who wants to watch you and your business live happily ever after and is willing to show you how it all works.    

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