If your business accepts credit cards, it’s vital to understand how batch settlements work and what they mean for your business.
What is a “Batch?”
A batch is much like it sounds: a batch of payments. For example, let’s assume that your restaurant processes 200 credit card payments on Friday. Your business is thriving, and it would be very labor-intensive to receive 200 different deposits from the merchant.
You might assume that credit card processing is instant, and it is, but merchants won’t receive their funds immediately.
The funds are removed from the customer’s account, but the money isn’t dispersed to the merchant’s bank account just yet. There may be holds on the payment or chargebacks, which can complicate the payment, too.
Merchants have a “batch,” or group of pending payments waiting to go into their account.
As a merchant, you can check your open “batch” at any time to:
- View details for each transaction
- Void a transaction
- Reverse a transaction
Voiding a transaction can occur for a lot of reasons, and it’s cheaper than a reversal. For example, if the cashier charged the customer the wrong amount, you could void the charge and recharge the person’s card for the right amount.
What is a Batch Settlement?
A batch settlement is standard with credit card transactions because the batch is closed out and the merchant will then receive the amount from the issuing bank. Once the funds end up in the merchant service provider’s account, they’ll initiate an e-transfer to your account.
Batch payments lump multiple transactions into one so that you receive numerous payments in one. For example, let’s assume that you received one hundred $20 payments during a lunch rush. Instead of receiving 100 payments, the batch of payments totaling $2,000 can be deposited into your account at the same time.
Both the payment processor and merchant can initiate a batch settlement.
In most cases, a merchant service provider will automate the batch settlement and do so within 24 hours. Restaurants and retailers will often handle the closing of their own open batches at the end of the day.
However, if an open batch remains open for too long, the MSP will close the batch and disperse the funds.
Settlement times can vary from 1 to 10 days, depending on the processor.
You should discuss the settlement time with the MSP to determine how long it will take for the batch settlement to take place.
Are Batches Grouped by Card Network?
No. Card networks do not play a role in the batch settlement process. Instead, you can have MasterCard, Visa and other network payments all within a singular batch. Merchants will provide details for every single transaction so that you can monitor payments from customers.
From a merchant standpoint, it’s more convenient to receive lump payments rather than hundreds of separate transactions in your account per day.
Understanding the Settlement Process
Now that you understand what a batch and settlement are, it’s time to look at the process at a deeper level to understand the entire settlement process. Four main steps occur in the settlement process that you must know about:
- Payment processors receive all of the transactions in a single batch for a specific timeframe (for example, 24 hours).
- When initiated, the payment processor sends the funds to the merchant’s account.
- The card brand is notified, and the batch is settled.
- Transaction details are added to the cardholder’s statement.
In the past, each credit brand would demand batches only include their specific card, such as all Visa transactions, instead of mixing transactions from all card issuers into one.
The end result was multiple bank deposits into a merchant’s account each day.
When there are hundreds of transactions per day for a single merchant, splitting the transactions and not batching multiple card issuers into one can cause an undue burden on the payment processor.
It takes a lot of time and resources to batch settlements and pay funds.
However, laws have since changed and merchant service providers can now batch all card issuers into a large settlement to make it easier for both the merchant and the payment processor.
Why Batch Processing Makes Sense
When credit cards are used to make purchases, a two-step process occurs. The first step is the charge “pending,” and the second is “posted.” Customers assume that if their card is approved when paying for your goods or services, the money leaves their account and enters the merchant’s account.
However, this isn’t the case.
The approval indicates that there are funds on the account to cover the charges. Funds leave the issuing bank and are sent to the merchant through the payment processor. Batching payments is the responsibility of the payment processor, which is responsible for ensuring all of the transactions in the batch end up in your account.
If you have to question a chargeback, you can quickly go back to the date and look at the entire batch payment for the day.
Gross and Net Settlements
Depending on the merchant service provider, a batch settlement may be a “gross” or “net” settlement. The difference can have a significant impact on your business operations.
- Gross settlements mean that you’ll receive the entire amount charged to the cardholder’s account and there are no fees deducted. Processing fees are taken out the following month.
- Net settlements already reduce the fees from the account, so you’ll receive the charged amount minus any fees that are assessed with the transaction.
Net settlements have less risk for the merchant service provider because they’re paid for each transaction. It makes more sense to have a net settlement from a business standpoint because you don’t have to worry about funds coming out of your account the following month.
From an accounting standpoint, it makes sense for many businesses to use net settlements.
Depending on the merchant service provider, you may have the option to customize your batch settlement in a way that makes the most sense for your business.