How settlement works
A card payment has three stages. Authorisation reserves the amount on the cardholder's account, clearing exchanges the final transaction records, and settlement moves the money: the issuer pays through the scheme's settlement bank, the acquirer is paid, and the acquirer pays the merchant.
Most systems settle net. Each participant's payments in and out are added up over a cycle and only the difference moves, which saves liquidity and leaves participants exposed to each other until the cycle closes.
Others settle gross, one payment at a time, as central banks' large-value systems do.
What a merchant sees as settlement
The acquirer or payment service provider pays out the merchant's sales less fees, refunds and chargebacks, and sometimes less a reserve. A settlement report lists the transactions each payout covers.
The settlement currency, the delay between sale and payout and the reserve are all terms of the merchant agreement.
Why settlement matters to a platform
Between authorisation and settlement the platform has a promise, not money. A ledger books the two states separately, pending and settled, and paying out before funds have settled means lending the difference.
Funds received for others are held under safeguarding rules until they are paid on, and comparing settlement files with the ledger is reconciliation. The entries on safeguarding and on the double-entry ledger carry the duties that apply.
Settlement, clearing or authorisation?
- Authorisation
- The issuer's approval of a payment and the hold on the cardholder's funds. No money has moved yet.
- Clearing
- The exchange of final transaction records and the calculation of what each party owes.
- Payout
- The acquirer's or platform's payment to the merchant or seller: the last leg, after the institutions have settled.
Where Settlement shows up in a platform
Modules that do the work
- LedgerThe double-entry book of record behind every balance, fee and transfer.
- Card acquiringCard acceptance on the phone, in store and online, through the acquirer you choose.
- PayoutsMoney out to bank accounts, cards and wallets, on the rail that fits each payment.
- BackofficeOne console to run the platform: customers, money, risk, content and staff permissions.