If you accept credit and debit payments for your business, then batches and settlements will be an important part of your day to day because it is the settlement that gets the money you earned from your transactions into your business’s bank account.
It’s important to understand that while credit card transactions are processed in real time – meaning that when a transaction says it has been approved, it has been approved by the customer’s bank almost instantly – actually receiving those funds to your bank account is not a real-time process. That is where batches and settlements come in. The batches will reconcile all your transactions in a given time frame and combine them into a total, while the settlement of that batch is the process that deposits the money into your bank account.
What is a Batch?
When a transaction is approved, it is added to your batch. A batch is a group of transactions that have been processed but have yet to be settled. When a batch hasn’t been settled yet, it is called an open batch, and transactions in the batch can still be voided and reversed if needed. This is important to know because voiding a transaction will be less costly and time-consuming than refunding a transaction. Once you’re ready, you can close a batch and trigger a settlement. For most merchants, this is typically done automatically at a set time each day. However, some merchants, like retailers and restaurants, prefer to manually settle their batches during their end-of-day cash-out.
If batches are left open for too long (typically 48 hours to 6 days), some processors will choose to automatically close and settle the batch, while others will let the unsettled transactions expire.
Here is an example of what a batch might look like:
What is a Settlement?
Once a batch is closed, the business’s credit card processor receives the processed funds from each issuing bank whose credit cards were part of the batch. The total batch amount will then be transferred via bank-transfer to your bank account. How fast you receive a closed batch is up to your processor, as processors will sometimes place hold times on settlements to manage risk. Without holds, funds should appear in your bank account within 1-2 business days. Some processors have longer wait times and might make you wait 7-10 business days to receive your funds, while others may offer same-day deposits for a higher fee.
In the earlier days of credit card processing, each card-brand (Visa, Mastercard, etc.) would require a separate processor and financial arrangement. This required individual batches and settlements for each type of card, resulting in multiple bank deposits. Changes in laws have since allowed banks to issue and process multiple card types, letting processors offer merchant account arrangements that covered all major credit card types in one service. It is now very rare to see a processor that separates deposits by card type. The exception to this is for merchants who have accounts directly with Amex, in these cases their deposit will come directly from Amex.
Understanding Gross Settlements vs. Net Settlements
Some merchant accounts are configured for gross settlements, meaning that the total batch amount you processed will be deposited into your bank account for that day. The actual processing fees that applied to those transactions, and all other transactions that month, are then withdrawn from your bank account on the 1st day of the following month.
Other processors will choose to place merchants on a net-settlement configuration. This means that instead of receiving their full batch amount, they will receive the full amount minus their processing fees.
An example of a Net Settlement:
|Total Batch Amount||Processing Fee (2.9%)|
Bank Deposit Amount
How does the settlement process work?
Settling a batch triggers the process of delivering funds to the merchant and charging the customer's account. Here are the steps involved in a batch settlement:
- Several transactions, usually within a 24-hour time frame, are aggregated together into a batch and all the transaction information is sent to the acquiring bank from the credit card processor.
- The acquiring bank then transfers the funds to the merchant’s account and submits the transaction data to the card brand.
- The card brand settles the batch by issuing funds to the acquirer from the issuing bank.
- The issuing bank posts the transaction to the cardholder’s monthly credit card statement.