How Does Credit Card Processing Work and When Will I Get Funded?

Estimated reading time: 2 min

Introduction

Credit card payments are completed in two distinct phases: authorization and settlement. In the authorization phase, the bank that issued the credit card is contacted and asked to approve an authorization request for a certain dollar amount. Additional information is supplied to the issuer, like the cardholder’s billing address and the card’s security code. These additional pieces of information usually don’t impact the approval decision of the issuer, but the issuer can confirm that the supplied information is correct as an addition form of verification. Authorizations do not cause funds to be transferred; they simply reserve funds on a cardholder’s account. In order to actually collect the funds, a settlement transaction is required. Unlike authorizations, settlement transactions are not real-time. They are collected up throughout the day and transmitted in a batch from the merchant’s system to the merchant’s acquiring bank. Once a day, at a particular time, the merchant’s acquiring bank compiles its own master settlement batch, where transactions for multiple merchants are aggregated. It then works with the card associations, like Visa and MasterCard, and the card issuers to debit and credit the correct accounts. The acquiring bank then deposits the settlement batch total into the merchant’s bank account.

Authorization and Settlement

When you authorize or charge a customer’s credit card, that authorization approval is attained in real-time, meaning that your ChargeLogic Payments software is reaching out to the payment network and finding out from the bank that issued the credit card whether the transaction should be approved. This approval step occurs for authorizations and for charges in exactly the same way. The difference between charging a card and authorizing it is in what happens next. When you charge a card, ChargeLogic Payments will add that transaction to your settlement batch. If you authorize a card, there needs to be a companion settle transaction in order for you to get funded. This settle transaction can be created automatically when an invoice is posted, making the authorize/settle pair perfect for Sales Orders, where card brand rules state that you cannot capture funds until you have shipped the order. On the other hand, charges are perfect for taking payments on posted documents, where the items have already shipped.

The Settlement Batch

By default, ChargeLogic Payments will automatically submit your settlement batch at the end of each day. The key to faster funding is to transmit your settlement batch to the acquirer before the acquirer’s settlement cutoff time. If you miss the cutoff, your transactions will end up in the acquirer’s batch for the next day, delaying your funding by an additional day. For ChargeLogic Merchant Services, the cutoff time is 9:00 p.m. Eastern Time. That means that your batch must be finished transmitting and accepted by the acquirer before that time. If you are on the West coast, that means that you might need to transmit your settlement batch before the close of business in order to make the cutoff. Any transactions settled in the software after you transmit your settlement batch will simply end up on the next day’s batch.

Funding

Next day funding is available, but your settlement batch must be received before the 9:00 p.m. Eastern Time cutoff.

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