By Casey Scheer, Director of Marketing at BHMI
The settlement of card-based transactions is the process of finalizing financial transactions between merchants, acquiring banks, issuing banks, and card networks. This ensures that funds are correctly transferred after a card payment is made.
For decades, batch settlement has been the backbone of card payment processing. Batch settlement involves grouping transactions and processing them at scheduled intervals—typically at the end of a business day. During this process, banks and payment processors reconcile transactions in bulk with a delay of one to three business days to settle funds.
However, faster settlement has become increasingly important with evolving consumer expectations, technological advancements, and regulatory shifts. Payment processors must adapt to this paradigm shift or risk falling behind in an increasingly competitive landscape.
Innovations Driving Change
With evolving payment processing technology, traditional settlement cycles of one to three business days are replaced by faster options, including real-time settlement. Here are some key innovations that are driving faster settlement:
- Real-Time Payments: Studies show a significant shift toward real-time payments. A recent study by pymnts.com shows that as of early 2024, more than half of US companies have adopted real-time payment systems. Also, according to statista.com, real-time payment transactions in the US are projected to grow at a compound annual growth rate of 31.7% from 2023 to 2028. Services like RTP® by The Clearing House and FedNow® by the Federal Reserve are growing rapidly because they allow instant fund transfers between banks, enabling merchants to receive payments almost immediately instead of waiting for batch settlements.
- Same-Day ACH: While ACH traditionally takes two to three days, Same-Day ACH by NACHA allows merchants to receive settlements within hours.
- Push-to-Card: Programs like Visa Direct and Mastercard Send enable instant money transfers to cards from any source using existing payment rails. The money usually hits the recipient’s card in minutes.
- T+0 and Intraday Settlement by Card Networks: International card networks such as Visa, Mastercard, and American Express now offer intraday settlement options. Traditional settlement is based on a T+1 or T+2 cycle, but T+0 (same-day) settlement is gaining traction for high-volume merchants. This reduces liquidity constraints for businesses needing immediate access to funds.
The Importance of Continuous Processing
Most companies have evolved their front-end authorization systems to support both card-based and account-to-account real-time payments. However, back-office systems that perform the reconciliation and settlement functions after a transaction is authorized are lagging and lacking because they are batch-oriented and not designed for continuous processing.
A continuous processing system allows payment processors, banks, and merchants to settle transactions faster by eliminating traditional batch-based processing delays. Unlike legacy systems that operate on set settlement windows, continuous processing systems handle transactions in real-time or near real-time. Here’s how they contribute to faster settlement:
- Real-Time Transaction Processing: Traditional settlement systems process transactions in batches at scheduled intervals such as end-of-day or every few hours. However, continuous processing systems begin settlement processing immediately upon authorization, reducing the delay between approval and settlement. This enables instant or intraday settlement.
- 24/7 Operation Without Cutoff Times: Batch-oriented systems have end-of-day processing cutoffs, meaning transactions initiated late in the day may not be settled until the next business day. Transactions on the weekend may also not be settled until the next business day. Continuous processing systems operate 24/7, ensuring that transactions settle at any time. This is crucial for businesses with high transaction volumes and those required to meet strict service level agreements.
- Automated Reconciliation: Batch processing often requires manual reconciliation, leading to potential errors and settlement delays. A continuous processing system automatically matches transactions with corresponding settlement records, minimizing reconciliation time. This ensures that funds are accurately settled without manual intervention.
- High Availability and Scalability: Legacy batch-based systems often create bottlenecks during peak processing periods, but continuous processing systems continue to process without delays, ensuring high availability and faster settlement processing, even during peak transaction volumes.
- Enhanced Liquidity Management: Continuous processing systems provide faster settlement, which allows businesses to access their funds quickly.
Embracing Continuous Processing
The evolution of card payment settlement from batch to continuous processing marks a significant shift in the payment industry. As consumer expectations evolve and technological advancements drive the need for faster, more efficient payments, businesses must modernize their payment back-office systems to stay competitive.
Organizations that adopt continuous processing systems will benefit from automated reconciliation, 24/7 availability, real-time transaction processing, and scalable infrastructure, ensuring that settlement keeps pace with the speed of modern commerce.
As financial institutions, payment providers, and merchants adapt to this new reality, those who lead the charge in modernizing their settlement infrastructure will be best positioned for long-term success.
About the Author
Casey Scheer has over 25 years of experience in the payments industry. Casey is Director of Marketing at BHMI, a leading software solutions provider focused on the back-office processing of electronic payments. The company is best known as the creator of the Concourse Financial Software Suite® – a proven payments back-office solution that allows companies to adapt to the rapidly changing world of payments.