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Settlement Lifecycle

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Prerequisites

Before understanding settlement lifecycle, understand:

Every card transaction goes through distinct phases. Most people think of "the transaction" as one event, but it's actually a chain of events spread across multiple days.

The Six Phases​

Phase 1: Authorization (Milliseconds)​

The issuer approves the transaction and places a hold on the cardholder's funds. No money moves. This is just a promise.

Phase 2: Capture (Same Day, Usually)​

The merchant confirms they want to collect the payment. For most retail transactions, this happens immediately after authorization. For e-commerce, it might happen when the item ships.

Phase 3: Batching (End of Day)​

Merchants don't send each transaction individually for settlement. Instead, they bundle all the day's captured transactions into a single "batch" and send it to their payment processor.

Think of it like the mail. You don't send each letter individually. You collect them and drop them all at the post office at once.

Batch cutoff times matter. If your processor's cutoff is 9pm EST:

  • Transaction captured at 8pm → goes in tonight's batch → settles tomorrow
  • Transaction captured at 10pm → goes in tomorrow's batch → settles the day after

Miss the cutoff by a minute, and your funding is delayed by a full day.

Phase 4: Clearing (Overnight)​

This is the "paperwork" phase. The batch travels through the system:

  1. Your processor sends the batch to your acquiring bank
  2. The acquirer sends transactions to the card networks (Visa, Mastercard, etc.)
  3. The networks route each transaction to the correct issuing bank
  4. Issuers verify the captures match their authorization records
  5. Interchange fees are calculated for each transaction
  6. Everyone reconciles their records

Clearing answers the question: "Do we all agree on what happened?"

Phase 5: Settlement (T+1 to T+2)​

Now money actually moves:

  1. The issuing bank transfers funds to the card network
  2. The network transfers funds to the acquiring bank (minus network fees and interchange)
  3. The acquirer credits the processor
  4. The processor credits you (minus their fees)

Settlement answers the question: "Let's move the cash."

Phase 6: Funding (T+1 to T+3)​

The net amount (your sales minus all the fees) hits your bank account. This is what you actually receive.

The timeline in practice:

DayWhat Happens
Monday 2pmCustomer pays $100 at your store
Monday 2pmAuthorization approved, capture submitted
Monday 9pmYour terminal batches the day's transactions
Tuesday 3amClearing happens overnight
TuesdaySettlement between banks
Wednesday morning$97.30 lands in your bank account

That $2.70 difference? Fees. See Money Flow for the breakdown.

Clearing vs Settlement​

People use these terms interchangeably. They shouldn't.

Clearing is Information Exchange​

During clearing, the banks are exchanging data: transaction details, authorization codes, merchant information. They're checking that:

  • The capture matches the authorization
  • The amounts are correct
  • All required data fields are present
  • No duplicate submissions

Think of clearing as the banks comparing notes before exchanging money. "You say you authorized $50 for this card number, we say we captured $50, agreed? Good."

If there's a mismatch (maybe the capture amount is higher than the authorization, or the authorization expired) it gets flagged during clearing. The transaction might be rejected, or it might create an exception that needs manual review.

Network-specific clearing requirements:

Per Visa's Core Rules, acquirers must enter all original presentments into interchange in the exact amount of transaction currency authorized by the cardholder. This means you can't capture more than you authorized without proper handling (like tip adjustments with the right indicators).

Per Mastercard's Rules, customers using the Interchange System are required to net settle in accordance with Mastercard's settlement standards.

Transaction reversals: If you detect duplicate or erroneous data, you must reverse it. Visa requires reversals be sent within one business day of detection.

Settlement is Money Movement​

Settlement is when funds actually transfer between banks. The card network acts as the central clearinghouse:

  • Networks calculate what each bank owes or is owed
  • Banks with net debit positions send money to the network
  • Banks with net credit positions receive money from the network
  • This happens via Fed wire or other interbank transfer systems

By handling it centrally, each bank only needs one relationship (with the network) rather than thousands of bilateral relationships with every other bank.

Network settlement guarantees:

Per Visa's Core Rules, an issuer must pay the acquirer the amount due for a transaction occurring with the use of a valid card. This is the foundation of the four-party model.

Per Mastercard's Rules, if a principal or association fails to discharge a settlement obligation, Mastercard will satisfy such settlement obligation. This settlement guarantee protects the system.

Why This Matters for You​

Clearing failures don't cost you money immediately. If a transaction fails clearing, you'll get an error and can usually resubmit or investigate. No money was lost.

Settlement is harder to undo. Once funds have settled, reversing the transaction requires a refund (you send money back) or a chargeback (it's taken from you). Both have costs.

Timing differences create reconciliation challenges. A transaction might clear on Tuesday but not settle until Wednesday. Your processor report shows it Tuesday; your bank shows it Wednesday. If you don't understand this, your books won't balance.

Next Steps​

See Also​