Understanding the merchant payment settlement process

Have you ever wondered what happens after a customer swipes their card or clicks “Pay Now” online? It’s not as simple as money instantly appearing in the merchant’s bank account. That’s where payment settlement comes in.

In simple terms, payment settlement is the process of transferring funds from the customer’s account to the merchant’s. It’s a crucial step in any transaction because, without it, businesses wouldn’t actually get paid for the goods or services they sell.

For merchants, fast and efficient payment settlement is essential for maintaining a healthy cash flow. The more you understand how settlement works, the better you can manage your finances and ensure smoother transactions.

Who’s involved in the payment settlement process?

A payment might seem like a quick tap or click, but several key players work together to make it happen:

• Customer (Cardholder): The person making the purchase
• Merchant: The business selling the product or service
• Acquirer: An acquirer like Ecommpay, will process the payment on behalf of the merchant
• Issuing Bank (Issuer): The customer’s bank, which approves or declines the transaction
• Payment Networks (Visa, Mastercard, etc.): The middlemen that ensure everything moves smoothly between banks
• Payment gateway: Payment gateways process credit card payments for businesses. They facilitate the transfer of information between a payment portal (such as a website or mobile phone) and the payment processor or acquirer

Each of these participants play a role in making sure the transaction gets authorised, processed, and settled correctly.

The three stages of payment settlement

Every transaction goes through three main stages: Authorisation, Clearing and Settlement. Here’s how it works:

Payment settlement flow

1. Authorisation

This is the first checkpoint where the system checks if the customer has enough funds to complete the purchase.

• The customer makes a payment using their card
• The merchant’s payment system sends the details to their acquirer
• The acquirer passes this request to the card network (like Visa or Mastercard)
• The card network asks the issuing bank (the customer’s bank) to verify if there are enough funds
• The issuing bank approves or declines the transaction
• If approved, the merchant gets an authorisation code and can proceed with the sale

At this stage, no money has moved yet. But we have the green light that the payment is good to go.

2. Clearing

Once a payment is authorised, it needs to be processed in batches.

• The merchant groups all approved transactions into batches
• These batches are sent to the acquirer
• The acquirer then forwards them to the card network
• The card network sorts everything out and sends the transactions to the appropriate issuing banks

This step ensures that each transaction is accounted for and prepared for the final settlement.

3. Settlement

This is the moment merchants have been waiting for - the money finally lands in their account!

• The issuing bank (the customer’s bank) sends the money to the acquirer, minus interchange fees
• The acquirer deposits the remaining amount into the merchant’s account, after deducting any processing fees
• The funds are now available to the merchant, completing the transaction

Security and fraud prevention during settlement

One of the most critical aspects of the payment settlement process is security. Both merchants and customers need to know that their data is safe and that transactions are protected from fraud.

During settlement, sensitive information like credit card details and bank account numbers are involved, which can be a target for fraudsters. This is why it’s so important to ensure all steps of the process are secured.

Here's how Ecommpay helps keep the payment process secure:

Encryption & Tokenization
All sensitive data is encrypted to ensure that hackers cannot access it during the transaction. Tokenization is also used to replace sensitive information with unique identifiers, making it nearly impossible to steal actual card details.

Fraud Detection Tools
Ecommpay offers advanced fraud prevention tools that monitor transactions for any suspicious activity. This can include checking for patterns of unusual behaviour, verifying the customer’s identity, and using machine learning to flag potential threats in real-time.

PCI-DSS Compliance
Ensuring that your payment process meets PCI-DSS (Payment Card Industry Data Security Standard) requirements is crucial for preventing data breaches. Ecommpay is fully compliant, providing merchants with a secure environment for their transactions.

To protect both the customer and merchant, there are some additional legal and compliance obligations that must be taken into consideration when processing and settling a payment:

• Anti-Money Laundering (AML), Know Your Customer (KYC) and Counter-Terrorist Financing (CTF) measures must be in place to help combat fraud
• Compliance with Data Privacy and Data Protection regulations
• A control framework must be in place to handle disputes and reconciliation

How long will the settlement take?

Settlement isn’t always instant. Some payments take longer to process depending on a few factors:

• Batching frequency: If a merchant submits transactions in batches multiple times a day, they’ll get paid faster
• Payment processor policies: Different payment processors have different settlement times. Some offer same-day payouts, while others take a few days
• Banking hours & holidays: Transactions processed on weekends or holidays might be delayed
• Merchant account agreements: Some agreements include specific settlement terms, which may impact how quickly payments are received
• Cross-border restrictions: International payments require more time to process compared to domestic payments. This is due to different international banking policies, terms of card schemes, public holidays and business hours

On average, most merchants receive their funds within 1-3 business days, but it depends on these factors.

Simplify your payment settlement process

The bottom line? The more you know about payment settlements, the more control you have over your money, and your business runs a lot smoother because of it.

As an acquirer, Ecommpay simplifies this entire process. With our seamless payment solutions, merchants can enjoy faster settlements, reduced transaction fees, and a hassle-free payment experience.

Learn how your business can optimise its payments performance. Let's chat!