If you're a merchant accepting credit and debit payments for your business, then batches and settlements are an important part of your day-to-day. Settling the day's transactions is what gets the money you earned from your customers 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 merchant bank account is not a real-time process. That's where batches and settlements come in.
What is a Batch?
A batch is a group of transactions that have been processed but have yet to be settled. When a transaction is approved, it is added to your batch. 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 is less costly and time-consuming than refunding a transaction.
How Batch Credit Card Processing Works
Once you've finished processing for the day and you're ready to close up shop, you can close a batch and trigger what's called a settlement (see below).
For most merchants, settlement 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.
Pro Tip: You don't want to let your batches expire if you want to get paid! Having a payment processor that automatically resolves any outstanding batches for you can be a great benefit so you never miss out on any of your earned income.
Why Batch Credit Card Processing is Used
The reason credit cards are processed in batches is because credit card transactions are a two-step process. If you've ever looked at your credit card statement in your online banking app for example, you'll notice pending and posted transactions, right? Well, those transactions are all tied to this two step process. When you tap your credit card, you and the merchant both see an "approved" message flash across the screen. This means the merchant's terminal has communicated with your issuing bank to determine that there are enough funds on that card to pay for whatever it is you're buying. So far so good!
But while this means you've been approved to make this purchase, the funds haven't actually "left" your account. This second step, whereby the funds leave your account and get transferred to the merchant, is the settlement of the transaction, or when the purchase is "posted" to your credit card balance.
The merchant sends the batch off to their payment processor, who in turn ensures the merchant is paid for all of the transactions submitted. Due to fees that are typically associated with submitting batches, merchants submit all of their transactions for the day in one batch.
What is a Settlement?
Once a batch is closed and submitted, the business's credit card processor receives the processed funds from each issuing bank whose credit cards were part of the batch (in other words, retrieving the money from every customer's account). The total batch amount will then be transferred via bank-transfer to the merchant's bank account.
How fast a closed batch is settled is up to your processor, as processors will sometimes place hold times on settlements to mitigate 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 might offer same-day deposits, but for a higher fee.
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 payment processor.
- The processor 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 processor (funds which come from the issuing bank).
- The issuing bank posts the transaction to the cardholder's monthly credit card statement.
Batches and Settlements History
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 cover all major credit card types in one service.
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.