When it comes to online payment processing, one of the common word merchants sees from time to time is ‘settlement’.

Vaguely put, payment processing takes place in two steps, first is the authorization and second is the payment settlement. Authorization is where verification of various things like cardholders details, balances left for online payment is done.

The second stage is the payment gateway settlement where the said transaction amount is debited from the cardholder’s bank account and gets credited in the merchant’s bank account.

So, what is the payment gateway settlement? What is “Settlement” in the Payment Processing World?

Simply put, payment gateway settlement is when the bank transfers funds immediately with no waiting. It is the process where the money is transferred or routed from the customer’s bank to the merchant’s bank.

The payment gateway settlement is just another way of saying that as soon as the customer initiates and completes the payment, the amount will get credited to the merchant’s account right away. Instant settlements for merchants are needed to ensure that businesses get paid right away.

How Does a Payment Gateway Settlement Work?

When the cardholder initiates the payment, the card gets processed and based on the amount available in the card holder’s account the transaction is either approved or declined. A disapproved status means the cardholder does not have enough funds in the account to go through the payment.

Once the payment initiation is done, the issuing bank transfers the funds to the payment processor. The payment processor then transfers these funds to the acquiring bank and then the transaction amount gets debited in the merchant’s account.

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Steps Involved in the Payment Gateway Settlement Process

The customer initiates the payment by inputting the account details or swiping the card to pay for goods.
After successful authentication of customer’s and customer’s bank details, the said amount is debited from the customer’s bank account.

The debit amount gets transferred to the acquiring bank visa card networks.
The acquirer then debits this amount in the merchant’s account.

The term ‘settlement’ is also used to refer to the amount transferred by an acquirer to a merchant for the acceptance of online payments.

Generally, this can take T+2 or T+3 days where T is the day customer initiates the transaction. But this period can vary based on the payment settlement mechanism and settlement cycle.

Settlement Mechanisms

There are two settlement mechanisms. These mechanisms are based on who handles the settlement file.

1) Terminal capture:

The merchant is solely and fully responsible for this type of settlement. This is generally done by sending a settlement message along with the settlement file with information about transactions to be settled.

The merchant is required to store the details. At the end of the day, these details are used to build a batch of transactions that need to be settled. The files are usually in a queue and are marked as settled a few hours after midnight.

Though terminal capture settlement gives the merchant more control over the settlement, this type of settlement requires storage and management of sensitive data and thus can be a high maintenance process.

2) Host capture:

In this type of settlement, everything required to settle the transaction like authorization etc. is done by the payment gateway. Host capture stores the settlement batch files on the processor.

Payment transactions throughout the day are selected at random periods of time.

Host capture allows the merchant to authorize the transactions without storing the information between the authorization and settlement. Host capture is easier to implement.

The time of settlement may vary. The settlement can be done,
once a day at a fixed time
Multiple times a day with a fixed number of settlements.

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All Settlements Can Be Categorized into Two Groups

Merchant initiated

for example, terminal capture, on-demand payment settlement.

Time initiated

for example, Payment Settlement is done multiple times a day with a fixed number of settlements.

Choosing a Payment Gateway Settlement Approach

While choosing the settlement approach, every business needs to consider the best option: merchant-initiated / time-initiated and host capture/terminal capture.

While choosing a payment gateway settlement approach for your business it is necessary to consider the business structure and business needs.

As both mechanisms have their selected features, it is a business structure that can help to choose the payment settlement mechanism best suited for the business.

A merchant needs to choose a settlement mechanism where all of its functions can be accommodated according to the business needs.


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Here Are Two Examples

Example 1 – For a business that works in shifts or is a 24×7 facility, payment settlement may be needed to be done several times during the day and not at any specific time. In such cases, a processor or a payment gateway that supports scheduled settlements may not be suited.

Example 2 – consider the example of the reseller. In this case, a reseller should consider all the aspects critical for his merchants. All merchants will work on their respective business models. If merchants belong to different time zones or if merchants have drastically varying business structures, it is difficult to adjust the payment settlement time for every individual merchant. In this case, merchant capture settlement may work best.

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