As more customers take the online route for buying things of daily needs, payment gateways have emerged as a necessity for merchants to guarantee customer satisfaction. Simply put, a payment gateway acts as a middleman between the customer and the merchant. It authorizes and handles payments made for goods and services by the customer, and then pays it forward to the merchants.

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? or  in other words let me frame it as – 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.

Payment settlement refers to the final settlement in the merchant’s bank account – after the deduction of compensatory charges charged by the payment gateway. Payment gateways generally have multiple models for merchant settlements.

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.

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 process: A business’s perspective

Settlement, being a process of merchants receiving money by their customers, is an extremely important part of an online platform. It takes into account a number of steps for successful, safe, convenient and quick receipt of payment every time a customer of the merchant makes payment for goods/services purchased.

To simplify the understanding, let us go through the segregated steps:

  •  Cardholder inserts card details or the bank details on the checkout page of the website/ merchant.
  • After the merchant’s verification, the money gets shifted to the business, and the customer gets a confirmatory notification. If the customer does not have enough service hiring amounts, or card information was wrongly provided, then the online payment gets automatically rejected. Still, he will receive a notification for disapproval of that service.
  •  Once the purchase was approved, the funds shift from the cardholder’s credit or debit card and is channeled through the payment gateway to the bank acquiring bank.
  • The acquiring bank then communicates with the Card networks (Visa, MasterCard, Amex, JCB or others) and the Issuing bank, so as to complete the transaction.
  • Once this process completed, the Payment gateway receives the settled funds in their bank account and they can now proceed with merchant statement generation and settlement of funds post fee deduction.

The complete process takes a time of T+2* or T+3* business days for domestic transactions, T being the date of capture of payment.

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.
  • On-demand when end-of the day settlement message is received.

Generally, no or minimum information is required from a merchant to use host capture. Terminal capture is usually done by sending a settlement message\settlement file with the full information about the transactions that need to be settled. Terminal capture puts all the responsibility for the settlement logic upon the submitter (merchant).

While terminal capture does provide more control over the settlement process, it is easier to deal with host capture whenever it is possible, because it is easier to implement and support.

From the global perspective all types of settlement can be viewed as belonging to one or two groups: merchant-initiated or time-initiated. Terminal capture and on-demand host capture are merchant-initiated. Settlement, performed daily at fixed time, or several times a day within fixed settlement windows, we are talking about time-initiated host capture.

When choosing the settlement approach, every business needs to consider, what the best option is: merchant-initiated versus time-initiated, and host capture versus terminal capture.

All Settlements Can Be Categorized into Two Groups
  • Merchant initiated – for example, terminal capture, on-demand payment settlement.
  • Time initiatedfor 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.

Here Are Two Examples

Example 1 : Merchant perspective

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 each particular case it is important for a merchant to consider all the business needs while making a choice between terminal capture and host capture mechanisms, as host capture may not support certain features needed by the merchant.

For instance: A fitness club, that works 24 hours, has three shifts of employees changing during the day. There is a common practice of settling out all of the transactions that were authorized during a shift when a shift is closed. In a situation like this, the scheduled settlement (without end-of-day message) is unacceptable for the merchant, as it has to be performed several times during the day, not necessarily at a specific time. Consequently, dealing with a processor\payment gateway, which supports only scheduled settlement, will be problematic for the fitness club.


While the preference is usually on the host capture side, merchants need to check if it fits their business model, and, at the same time, whether all the necessary features can be accommodated by the host capture system (as some features might be supported by payment gateways only under terminal capture). If all of the features necessary can be accommodated by the host capture mechanism, it is really the preferred way of settlement.

Example 2 :Reseller perspective

As in the cases of other payment gateway selection criteria, while choosing a settlement mechanism, a reseller must carefully analyze the needs of the merchants it is dealing with. 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.

For instance: One of the potential problems to be addressed by a reseller may be that each merchant might need some business specific logic. Particularly, if a payment gateway can perform settlement for a merchant at the same predefined time during the day, and merchants are situated in different time zones, it might be difficult to adjust time settings for each merchant individually to ensure proper settlement time for each time zone. Consequently, in such cases it may be easier for the reseller to delegate control of the settlement process directly to the merchant (terminal capture), than to adjust time settings to every merchant’s time zone (host capture) with the payment gateway.


While making a decision concerning settlement mechanism selection, a reseller should consider all the aspects, which are critical for a merchant. However, if resellers accept some limitations in order to simplify the integration process, they need to understand that any problems resulting from these limitations will be multiplied by the number of the merchants the resellers are dealing with.

Why don’t payment gateways settle instantly? 

Payment settlements may look like a very straight-forward process, but they are not. The primary reason why settlements are not instant is that money movement at every step of the process is not immediate.

Also, the underlying complexities of reconciliation is an additional challenge that stands in the way of instant settlements.

Well, reconciling transactions can be a nightmare for accountants, and here’s why:

  • Every bank has or offers a different settlement cycle. Hence, the time-frame for the acquirers can vary. For example, Bank A may usually settle within a day, whereas Bank B may take two days to pay. Keeping track of these timelines and consolidating it all in a single sheet does take time
  • Bringing along a whole new level of complexity are refunds and chargebacks. In case of refunds, a customer expects them immediately. But refunding the money without reconciliation puts the business at risk
  • The business owner can end up paying back an amount that was never received. Also, it would be a disaster when the bank statements and reconciliation documents would fail to show a clear picture
Payment Gateway Reconciliation


Reconciliation is the method of ensuring that the amount in the Accounting Systems represents the amount in the Payment Gateways and Commercial Transactions Statement-along with any relevant account details that may be needed. The irrelevant details could also be in the form of income tax.

Reconciliation lets the user’s finance departments ensure that the sums listed in the document are included in their account book and will include a concise description of any unacknowledged things.

The reconciliation includes the mechanism to verify that the transfers are still being handled, but that they’ve been handled appropriately.

By putting all details into a common database and comparing purchases at each stage in the time frame, the clients can immediately gain visibility into any anomalies somewhere along with the transaction lifespan. They also have the means to cope with any issues directly, and the leverage to go back to third entities and force them to change their conduct and/or reduce their prices.

What could be the issues with reconciliation?

For merchants with a huge amount of invoices and orders issued regularly, the payments are produced from online and offline channels and handled through the portal. The gateway passes the full balance (as a lump sum) at the end of the day.

The full balance is also passed over a few weeks, depending on the gateway, without any reference to the initial invoices or orders on which transactions are collected.

How to reconcile your Merchant account

You can follow several ways of reconciling the merchant account. The reconciliation process could be formal or informal. You will have to monitor and review your transactions from each source. The sources could be the bank record or your record.

After reviewing the transactions, you will have to check and match the payments with the balance available in your account. The merchant environment plays a significant role in reconciling your merchant activity.

Real-time payment reconciliation 

The Cloud factors API integration interface is utilized to enable real-time reconciliation of money transactions with Netsuite, Quickbooks, or any other enterprise systems, which may include a history of transactions with transaction ID recorded on the gateway. Merchant clients will need to choose the information they require and the genre they have to integrate better with their preferred financial statements.

Then, as normal, after all, expenses and returns are consummated with the Gateway bank account and Statements, the total balance remaining for transfer to the Gateway Report will be moved to the actual Bank Account.


Payments Reconciliation may not have to be that difficult. These days a set of tools have been put in place to make reconciliation as painless for accounting professionals to fit the various statements. However, the concerns mentioned above are still a difficult task.

To make reconciliation genuinely simple, the investors have to assist their merchants effectively deal with these challenges by removing the fundamental complex issues of reconciliation.

Settlement is the process through which a merchant receives money paid by their end users for a particular product/service. There are a number of entities involved in the settlement process.

The settlement functions are always designated and done by the banks. What the card-schemes and processors do is that they provide the documentary evidence that leads towards a settlement, they are not the primary party who is settling or even a secondary party. The primary parties in the settlement are the issuing and acquiring bank.

The processors/PSPs are then given the funds as per their fees, etc. For PSPs, the funds are handled by their acquiring bank as FBO (for benefit of) of their sub-merchants.

Settlements usually depend on the multiple intermediary hops. In the case of cards, the acquiring bank, card network and issuing bank are involved.

In case of a payment method like UPI, along with the acquiring and issuing bank, NPCI also plays a role. This is why the amount of time taken to process the settlements also depends on the mode of payment used to make the transaction.

The entire money movement process in online payments happens via nodal accounts. This means that payment gateways cannot earn interest from the money they hold or move on behalf of their customers.

The two fundamentals of this process are the following:

  • Transactions or online payment that the online customers/ cardholders perform.
  • Profit or return that the merchants/ website owners get following the transactions made by online users through their websites.

That’s it for now.

Thank you so much for taking the time to read my article! Really appreciate the continued support!

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Thanks and Regards,
Neha Sahay


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