How Card Payments Work: Authorization, Clearing, Settlement

Who is involved

Your customer is the cardholder. The issuer is the bank behind the card; Regulation II defines an issuer as any person that authorizes the use of a debit card to perform an electronic debit transaction. The acquirer is your side: Visa defines it as a member that signs a merchant or payment facilitator and enters transactions into interchange, and Regulation II defines it as a person that contracts directly or indirectly with a merchant to provide settlement, not a person that acts only as a processor. A processor processes or routes transactions for issuers, acquirers or merchants. The network, such as Visa's VisaNet, is the platform that delivers authorization, clearing and settlement services.

The three stages

Each stage has a defined meaning in the card network rules. The table uses Visa's glossary; other networks use similar concepts with their own rules.

Authorization is not payment

Visa defines an authorization request as a merchant or acquirer request for an authorization, and the authorization code as the code an issuer or its processor provides to indicate approval, usually recorded on the receipt as proof of authorization. An approval does not move money to you. Visa's rules also set maximum timeframes for processing a completed transaction after a valid authorization, which vary by transaction type, and Visa says an incremental authorization request does not extend them. That is one reason a sale left in an open batch can cause problems. Check your processor's batch settings and the current Visa rules for your transaction types.

Clearing: when you can submit

Visa's rules say a merchant or payment facilitator must not submit a deposit for a transaction until the transaction is completed, the goods or services are shipped or provided, or it has met the conditions of its agreement with the cardholder for installment, recurring or unscheduled credential-on-file transactions. In practice, clearing is what happens when your terminal closes its batch or your gateway captures an authorized sale.

Settlement: getting paid

Visa's rules say an acquirer must pay or credit its merchant's account promptly after deposit, and the payment must equal the transaction totals less credits, applicable discounts, disputes, other agreed fees or merchant reserve funds, where applicable. The exact funding schedule is in your merchant agreement, which is why two providers can pay out the same sales on different days. If money is held back, the reserve and hold terms in your contract explain why.

Where the fees come in

Visa's US interchange document says merchants do not pay interchange reimbursement fees directly; merchants pay a merchant discount to their financial institution. Visa's rules describe the US merchant discount rate as including the interchange rate, network fees and the acquirer's processing fees. Interchange is set per transaction by program, so the way a sale is authorized and cleared, such as card present or keyed, can change which program it qualifies for. For debit cards, the Federal Reserve says Regulation II also prohibits issuers and networks from restricting debit transactions to fewer than two unaffiliated networks and from inhibiting a merchant's ability to route a debit transaction over any network the issuer has enabled.

How ACH differs

ACH is a separate bank-to-bank network with its own rules from Nacha. Nacha says ACH payments can be processed in a matter of hours on the same business day, or scheduled the following day or two business days away, and that the ACH Network settles payments four times a day. There is no card authorization step, so if you take large invoices, compare the two rails on cost, timing and dispute rights.