Card Payments - Part 2 (Clearing and Settlement)

 

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In my previous article, I have explained Step 1 i.e., Authorization. In this article, I am going to explain Step 2 – Batching, Step 3 – Clearing, Step 4 – Settlement.

The Authorization process does not complete the transaction. After Authorization, the Merchant must request formally its Bank (Acquiring Bank, the Bank that has provided the POS Machine to the Merchant) to cover the fund for the sale. Now let us understand the further process.

Step 2: Batching – In general words, the shopkeeper asks his bank that the POS Machine provided by you has x number of Authorized transaction and now you fund me for those.

#1. The merchant stores all the day’s authorized sales in a batch.

#2. The merchant sends this batch to the Acquirer to receive payments. The batch can be sent many times as per the agreement between Merchant and Acquiring Bank. Generally, it takes place at the end of Business Day. 

Step 3: Clearing

#1. The Acquirer Bank distributes the transactions to respective Payment Schemes (Visa / Mastercard / Amex / UnionPay etc.)

#2. Using the BIN number (Bank Identification Number) the Payments Schemes (Card Networks) distributes each transaction to their respective Issuing Bank.

#3. Issuing Bank charges the Cardholder’s account for the amount of each transaction.

#4. The Issuer subtracts the Interchange Fee and transfers the amount to the Payment Scheme (Settlement Bank). The Interchange Fee is shared with the Payment Schemes (Card Network)

#5. The Payment Scheme (Card Network) routes this amount to the Acquirer Bank.

Step 4: Settlement / Funding

Till Step 3, the fund has not reached the Merchant Account. The Settlement will happen when Cardholder is billed for the Transaction amount and the Merchant will receive it at his account.

#1. Acquirer Bank transfers the amount received by the Payment Schemes to the Merchant’s Account after subtracting the Merchant Discount Rate.

#2. The Cardholder is billed by the Issuer Bank for the Transaction Amount he has swiped on the POS Machine.

Use Case

#1. Neeraj used his AXIS Bank Credit Card at Big Bazar for INR 100. The Transaction gets authorized and Neeraj received the Product or Service.

#2. Issuer deducts the INR 100 from the credit limit, subtracts INR 2 as Interchange Fee and transfer the INR 98 to the Mastercard. From this INR 2, some part goes to the Mastercard, and some are retained by the Issuing Bank as per agreement.

#3. Mastercard transfers this INR 98 to the Big Bazar’s Bank i.e., HDFC Bank.

#4. The HDFC Bank deduct the MDR of INR 0.50 and transfers the INR 97.50 to the Merchant’s Bank Account. 

What will happen if Neeraj claims that he has not received the Product or Service for which he has paid INR 100 to the Big Bazar. We will see this in the next article of Chargeback Lifecycle.

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Next article on

1) Chargeback Lifecycle

2) Tokenization