What is settlement in payment?

The final step in receiving a payment is known as a settlement. In the payment settlement process, once settlement occurs, 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.

When does payment settlement take place?

Merchant payment settlement time depends on the process:
1. Funds availability: when the acquirer makes the funds available in the merchant’s account. This happens over the acquirer’s system and occurs in real-time.
2. Merchant or external settlement: when the acquirer transfers the funds to the merchant’s business bank account(learn more at Papaya’s Academy). This occurs in batch and settlement is delayed until the entire batch is processed.

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.

Examples include:

• 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.

What are the different types of payment settlements?

There are several types of payment settlement. This variety exists because processing a transaction has different costs and parties must charge fees accordingly.

Payment settlement types include:

Issuer settlement: The issuer (the customer’s bank) transfers the amount to the acquiring bank (the merchant account) through a card network.
Merchant settlement: The acquirer transfers the transaction amount to the merchant’s business bank account, minus fees. This is also called a card-acquiring settlement or client settlement.
Scheme settlement: This is when the acquirer receives funds from issuers via the card schemes.

What is a debt settlement letter?

A debt settlement letter is a formal document between a debtor (the person or entity that owes money) and a creditor (the person or entity to whom money is owed) where the debtor proposes a negotiated settlement to address an outstanding debt. The negotiation usually requests an amount for an amount less than what is owed.