The final step in receiving a payment is known as a settlement. Once the settlement has occurred, the transaction is complete.
Is settlement the same as payment authorization?
When it comes to credit or debit card payments, payment authorization and settlement are two distinct steps. First, the merchant will request the payment from the customer’s bank, and ask for payment authorization. Unless there is something suspicious found, an error or malfunction with the processing request, or the customer has insufficient funds in their account or credit, the payment will be authorized.
Settlement occurs next, once the payment has been authorized. The bank will transfer the amount of money for the transaction from the customer’s account to the payment processor, where it will be directed to the merchant account. Depending on the payment processor provider, the type of transaction, and the accounts involved, this could be settled immediately, in hours, or it may take days.
Does settlement happen immediately after authorization?
This question depends on the type of transaction. In a retail store, settlement will usually be automatically triggered by the purchase of an item, because the customer is leaving with their goods right away.
However, there are other situations where the merchant may place an authorization hold, where they authorize the transaction but do not settle immediately. During this time, the customer cannot spend the funds anywhere else, and the business can guarantee they will get their money when they settle the transaction.
- A hotel may authorize a transaction on check-on or when a room is booked, but wait to settle until check-out, knowing that additional items may be added to the bill. They may settle the transaction when the cancelation period has passed, to save on additional admin if a guest cancels their booking and needs a refund.
- An online store might authorize a transaction at checkout, but only settle the transaction once the goods have been shipped. This could avoid issues of low stock or customer cancelations.
- Businesses may use an authorization hold to ensure that the money will be available when they need to settle the transaction. Without an authorization hold, there is no way to be sure that the customer will still have the requisite funds.