Instead of processing each transaction as they occur, a batch settlement involves processing all of the transactions a merchant handled within a set time period — usually 24 hours — at the same time. The card is still processed at the time of the transaction, so merchants can rest assured that the funds exist and the transaction is approved. But the funds don’t actually get issued to the merchant until that batch of transactions is settled at the end of the day (or whichever time period is used). Learn more about batch settlements and how they work below.
How Does a Batch Settlement Work?
When a card is swiped at your store or input into your online shop, the transaction is processed in real-time. Once approved, the details of that transaction are added to the group of other transactions you’ve processed in that time period.
Before it’s settled, that group is known as an “open batch.” At the end of the day, merchants can manually or automatically “close” the batch and that will trigger a settlement. At this point, each card issuer sends all of the funds from every transaction in the batch to your payment processor.
Your payment processor then transfers those funds into your merchant account. In most cases, it takes about 24 to 48 hours for those funds to show up in your account. However, this all depends on which payment processor you use. Some will hold funds for as long as 10 days before letting merchants access them.
Should You Do Automatic or Manual Batch Settlement?
Merchants often have the choice between manually closing a batch when they’re ready or setting it up to automatically close at the same time each day. In many cases, automatic is the way to go because it eliminates the risk of accidentally forgetting to a close a batch.
If you did leave a batch open, some processors would automatically close it themselves after waiting a set time period—anywhere from two to six days. Others will simply let those unsettled transactions expire, which means the funds don’t get transferred and the merchant just loses all of that money. So automation is a great way to make sure you never lose a single transaction.
With that said, manual settlement is preferred in some industries, especially restaurants, service providers, and other industries where tips or payment adjustments are common. It’s a lot easier to adjust for tips or a change to services provided before the transactions have settled.
If you do work in an industry that requires frequent adjustments, stick with manual settlements but make sure to carve out a set time each day to make those changes and close the batch so you don’t leave it open too long. If you rarely make adjustments, use automated batch settlement so you have one less thing to worry about when running your business.
What’s the Difference Between Gross Settlement and Net Settlement?
These terms refer to how your merchant account is configured. Gross settlement means that the full amount of funds from the transactions you processed that day are deposited into your merchant account after being settled. Then, all of the processing fees you were charged for those transactions are withdrawn in one lump sum from your account at the end of the month.
Net settlement means that the processor deducts any merchant fees from the funds being deposited as each batch settled. Either way, you’re paying merchant fees. But with net settlement, the fees are deducted right away so that the amount deposited in your account is the final amount you actually get to keep.
While you typically can’t choose which version you prefer, it’s important to know how your account is configured so that your business accounting is accurate. If you assumed your merchant account is showing a net settlement but it’s actually gross, you’ll be unpleasantly surprised at the end of the month when a big chunk is taken out for fees.
The Pros and Cons of Batch Settlement
While it’s generally done just to improve efficiency for card issuers and processors, there are also some perks to batch settlement for merchants. There are also some challenges that are important to keep in mind. Here are some of the key pros and cons:
Pro: Amend Payments
As mentioned earlier, in industries where tips or changes to purchases are common, batch settlement gives you the flexibility to make those changes before any funds are transferred.
Pro: Void Transactions as Needed Before Settling
While you ideally would never get a refund request, they’re bound to happen. Batch settlement gives merchants a window of time to process voids or refunds quickly, before the funds leave the customer’s account. This flexibility can help merchants cut down on chargebacks and improve customer service.
If the transaction had already settled, it could days for the money to appear in the customer’s account. Even more frustrating, the fees you paid on the original transaction are typically not returned to you in a refund. That’s because this transaction type is processed like a “negative” purchase, rather than a transaction reversal.
With batch settlements, you can skip the refund and process it as a voided transaction. This stops the funds from ever leaving the customer’s account so the refund is essentially instantaneous and you get to avoid paying the transaction fee.
Pro: Batch Processing Can Be Cheaper
If you settled every transaction in real-time, you’d be paying fees on each individual transaction. With batch processing, some fees, like the network connection fee, will only be assessed on a per-batch basis rather than per transaction.
However, whether or not you see the difference depends on your payment processor. If you’re paying a flat fee, for example, it’s unlikely to make a difference because you’re paying the same flat rate per transaction no matter what.
Even in that case, though, batch settlement can still save you money simply by avoiding chargebacks and giving you the ability to make payment amendments before settling so that you’re processing the full and correct amount. Once settled, you won’t be able to adjust the transaction.
Con: Leaving Batches Open Can Be Risky
While the ability to void or adjust a transaction before settling can help reduce chargebacks, leaving a batch open can end up increasing your risk of chargebacks. The longer it takes for approved funds to actually leave your customer’s account, the higher the risk that they’ll be surprised by the withdrawal and request a chargeback.
As mentioned earlier, leaving a batch open too long can also put you at risk of expired transactions—meaning you end up losing those funds altogether.
Con: Funds Take a Little Longer to Reach Your Account
With real-time transaction settling, the funds would be sent to you right after the transaction was approved. With batch settlement, that transfer of funds doesn’t happen until you close the entire batch. This is just a slight delay since most merchants will close batches at least once a day. So it’s the difference between settling a transaction right away or settling it 24 hours later when you close the batch.
