Submission, Clearing and Settlement of Credit Card Transactions
We have written at length about best practices on verifying the validity of the card and the cardholder, as well as the authorization of the payment in other posts. In this one I will go over the final three stages of the transaction process: the submission, clearing and settlement of the transaction.
The diagram below represents the stages of the credit card transaction process:
Transaction Submission
Credit card payments are not completed until the transaction information is submitted to the processing bank. Typically transactions are submitted electronically and all point-of-sale (POS) and virtual payment processing systems are programmed to automatically do that at pre-defined intervals, usually at the end of the business day. Exceptions are made for merchants who cannot connect to the processor at the time of the transaction, for example taxis and limousine services, street fairs, etc. In such cases, merchants can submit their transactions on paper.
You should submit all payments accepted during a given day at the end of it, so that if for some reason one of them does not go through, you can contact the customer and request an alternative form of payment within no more than twenty-four hours of the transaction.
Clearing
Clearing is a process through which a card issuing bank exchanges transaction information with a processing bank and occurs simultaneously with the settlement. You don’t have any influence over it, once you have submitted your transactions. Clearing is only present in Visa and MasterCard transactions, as American Express and Discover are both issuers of the cards bearing their logos and processors of the payments made with them.
Settlement
Settlement is the exchange of funds between a card issuer and a processing bank to complete a cleared transaction and the reimbursement of a merchant for the amount of each card sale that has been submitted.
Merchant accounts are typically funded daily and the settlement total is calculated as from the face amount of the submitted charges are subtracted all applicable deductions, which may include the following:
- Discount fees. These are the fees your processor charges you for each card transaction. They are specified in your merchant agreement.
- Amounts you may owe to your processor.
- Any chargeback amounts.
- Any credit amounts you may have submitted.
Funding is typically done through ACH transfers into your designated bank account. Most processors can now fund your account as soon as on the day following the transaction, however time frames can vary.
There are two main payment options and yours should be specified in your merchant agreement. These are:
- Net pay – you are paid the full amount of the submitted charges minus the discount and other applicable amounts.
- Gross pay – you are paid the full amount of the submitted charges, and then a second adjustment is applied to deduct the discount and other applicable amounts.
Typically you have ninety days to dispute any errors regarding discount or other fees or payments for charges, credits or chargebacks. You should be reviewing your settlements daily, or at the very least you should be spending some time on your monthly statements, although errors are much more difficult to see there, especially for larger-volume merchants.
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