In the previous instalment of Payment Processing 101, we explained how the key players in this process interact with each other at different stages of any transaction. The issuing banks, the acquirer, the card banks, the merchants and the cardholders all have their own specific function.
The story doesn’t end with placing your card over the point of service or making an online payment. That’s actually just the beginning of a different set of processes, all of them related to the transaction you’ve just made. So, how does the transaction cycle work? What needs to happen in order for the system to function smoothly?
Here are the payment card industry basics.
Everything in batches
Do you think you’ve finalized your purchase once the teller hands you the voucher and receipt? Think again! There are several processes within the card transaction cycle that you won’t see. What goes behind the scenes is just as important, as it involves the transfer of funds for the amounts due. This is known as the settlement process.
In any business, merchants conduct multiple transactions per day. The authorization process is implemented numerous times during the business day to process approved sales. All of these sales, known as a batch, are stored in the merchant’s point of sale or POS.
The batch holds all the merchant’s transactions. To collect the transactions due, the merchant must settle the amounts due and determine the fees owed to the other key players. A merchant may settle a batch by using a series of buttons on the point of sale system, which electronically communicates with the acquirer.
The settlement process begins when a merchant settles their batch.
The Settlement Process in Payment Processing
The settlement process begins at the end of every business day, once the merchant concludes processing transactions. The point of sale transmits the batch data to the acquirer. This data includes items such as total number and total amount of daily transactions. It also features individual transaction information such as date, card number and time of the transaction.
At that moment, the acquirer pays the merchant for the batch total or the amount of settled transactions. This deposit is not immediate. Actually, acquirers have different funding time frames based on the merchant’s account. Each funding program offers different wait periods. Thus, it is common for merchants to receive deposits one or two business days after the settlement.
While the acquirer is in process of paying the merchant, these key players are also interacting with the card brands and issuing banks. Do you remember that, during the authorization process, card brands determined the fees on each transaction? The acquirer pays these fees to both the card brands and the issuing banks to cover associated costs.
The settlement process ends when the issuing banks reimburse the card banks for cardholder transactions.
The Final Step: Fees
We mentioned earlier the use of association and interchange fees, which are essential to the settlement process. Association fees are paid to the card brands. These organizations use money generated from fees for activities such as risk and fraud detection, brand advertising, implementation and enforcing industry regulations and protections.
On the other hand, issuing banks pay the interchange fees. Interchange fees cover risks and additional costs of a transaction. Who’s responsible for funding these transactions? The issuing banks. In doing so, the bank assumes additional risk and financial liability if fraud or errors occur. During the settlement process, funds more from one key player to another. At the end, four out of five receive payment for each transaction.
You may now ask how these fees break down. Well, actual fees vary per merchant and this variation depends on a number of factors. It is important to consider that all fees are not collected at the end of each transaction or settlement. The acquirer collects the fees all at once, in a monthly statement.
Payment Processing 101: The Role of the Acquirer
It’s interesting to notice that most of the roles mentioned in this process seem self-explanatory. But many aren’t still sure what the acquirer does. The acquirer acts as a middle man, which is responsible to pay the merchant for all settled transactions. If done by the issuing bank, it could take several business days to pay the funds.
The acquirer manages those individual payments so that the merchant receives a single deposit instead of numerous ones. Finally, this role also pays the card brands and issuing banks for the fees assessed on settled transactions.
Payment Processing 101 is a series about everything related to payments. This is the second in three instalments about the payment process. Please stay tuned to learn more.