Understanding the online payment settlement process is valuable if you are a merchant and are curious to know how it all works. This is how a customer’s funds gets transmitted into the merchant’s account.
What is a payment gateway?
The payment gateway is the platform in which e-commerce merchants can receive online payments from their customers.
The online payment gateway process
1. Cardholder inputs their card details on your checkout form (or uses a bank card terminal if payment is in-person).
2. There is a merchant verification for adequate funds. Funds get moved to the business and the cardholder receives a confirmation of their transaction.
3. Payment is rejected if cardholder inputs the wrong card information or doesn’t have adequate funds.
4. The funds are then channeled through the payment gateway to the merchant’s acquiring bank.
5. The acquiring bank communicates with card networks and the cardholder’s issuing bank.
6. The payment gateway receives the settled funds into the merchant’s bank account.
7. This can take two to three days after the cardholder initiates the transaction, but it can vary depending on the payment settlement mechanism and cycle.
The difference between terminal and host capture
There are two settlement mechanisms depending on who handles the settlement and which process is preferred.
Terminal capture
The responsibility for the settlements lies with the merchant. The merchant stores the details of the transaction and builds a batch of transactions at the end of the day, all that need to be settled. They are typically settled a few hours after midnight. With terminal capture the merchant has more control over the settlement but it can be a tedious process which is why some merchants prefer host capture.
Host capture
In this scenario, everything is done by the payment gateway. The host capture stores the settlement batch files on the credit card terminal. As the host is storing the transactions, they can be picked throughout the day and begin the settlement process. Host capture is easier to implement as the merchant doesn’t need to store any information between the authorization and the settlement.
Choosing a settlement approach
As a merchant you then need to decide your settlement approach, what will work the best for your business. A merchant should choose a settlement mechanism where all its functions will work for your business structure and needs. The approaches can be broken down into two main categories, merchant-initiated and time-initiated.
Merchant-initiated
This is typically a terminal capture, where the merchant is responsible for the settlement. Or can be an on-demand settlement.
Time-initiated
For example, when payment settlement is done multiple times during the day but there is a fixed number of settlements.
Why aren’t payment gateways settled instantly?
Any movement of funds doesn’t happen instantly, it’s a longer and more slow process than imagined. That’s why when things can complicated, it can make the process even longer, such as reconciling transactions or chargebacks. If you are a business owner you should learn how to reduce chargebacks to avoid the hassle that comes along with it.
Still confused?
Our team at Penni understands that the payment process can get confusing and sometimes overwhelming. You can reach out to one of our team members if you have any questions about the online payment settlement process.
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