How money moves from a card payment to your bank account

What happens in the two seconds after a card is tapped

When a customer taps or inserts a card, the terminal or the online checkout sends the transaction to a payment gateway. The gateway passes it to an acquirer, which routes it through the card scheme to the bank that issued the customer's card.

The issuing bank makes the decision. It checks that the card is valid, that the funds are available, and that the transaction does not look fraudulent. It sends back an approval or a decline, and the answer travels back down the same chain to the terminal.

What has happened at this point is an authorisation. The customer's available balance has been reduced and the amount has been earmarked. No money has moved. The card scheme has simply recorded that this transaction is valid and expected to be paid.

What happens in the days after

At the end of the trading day, the transactions are batched and submitted for settlement. This is where the money actually moves, and it moves through several hands.

• 1. The day's authorised transactions are submitted for settlement. Done by the acquirer.
• 2. Funds are collected from the issuing banks through the card schemes. Done by the acquirer.
• 3. Settlement data is collected and matched against the transaction records, per merchant account. Done by the payment facilitator.
• 4. The data is validated and reconciled, and a payment file is produced. Done by the payment facilitator.
• 5. The payment is authorised internally and released to the merchant's bank. Done by the payment facilitator.
• 6. Funds arrive in the merchant's account. Done by the merchant's bank.

Each stage has its own timetable, and each depends on the one before it completing cleanly. That is the main reason settlement takes days rather than seconds.

Why does the money arrive after the sale rather than with it

Because the card schemes work on a net basis. A bank that issues cards is also acquiring transactions from its own merchants, so rather than sending money for every individual payment, the schemes total everything up over a period and move the net difference.

That netting is what makes card payments cheap enough to use for a five pound coffee. It is also what puts a gap between the sale and the money.

On top of that, the payment has to be checked. Transaction data is matched against what the acquirer has reported, discrepancies are investigated, and funds are released under internal authorisation controls rather than automatically. A business that receives money without that check is a business that will eventually receive the wrong amount.

Why the amount in the bank does not match the total on the till

This is the question that generates more calls to software providers than any other part of payments, and the answer is usually one of five things.

• Timing. The most common cause. The settlement covers a trading period that does not line up with the calendar day the finance team is looking at. A late-evening transaction may fall into the next day's batch.
• Refunds and chargebacks. These are netted off the settlement. A refund processed on Tuesday reduces Wednesday's payment, so the figures only reconcile if refunds are being tracked alongside sales.
• Charges. Depending on how the arrangement is set up, processing charges may be deducted before the money arrives rather than billed separately. A business expecting the gross amount will always see a shortfall.
• Declines and reversals. A transaction that was authorised but never captured, or one that was reversed at the terminal, appears in the till total but never reaches settlement.
• Multiple merchant accounts. A business trading across several sites or channels usually has transactions segregated by merchant account, which is how reporting ties money back to a specific location. If the finance team is comparing one bank credit against a combined till total, the two will never agree.

The fix is almost always to reconcile against the settlement report rather than against the bank statement. The settlement report shows the transactions that make up the payment, which the bank statement cannot.

What decides how quickly a business gets paid

Three things.

• The payment method used to send the funds. Faster Payments moves money within hours of being released. BACS runs on a three working day cycle. Which one applies depends on how the arrangement has been set up.
• The settlement frequency. Some businesses are settled every working day. Others are settled weekly on a fixed day. This is set per software platform rather than per merchant, so it is a question for the provider.
• Weekends and bank holidays. Settlement runs on working days. A Friday and Saturday of trading will normally arrive together, and a bank holiday weekend pushes everything back.

If a settlement does not complete on a given day, it is normally paid the following day rather than rolled into the next cycle.

Frequently asked questions

How long should settlement take? It depends on the method and the frequency set up for the platform. Faster Payments arrives the working day after processing. BACS takes longer. The settlement timetable is set per platform, so the exact schedule is a question for the software provider.

Why did today's payment arrive smaller than yesterday's sales? Usually refunds or chargebacks netted off, or charges deducted before payment, or a timing difference between the trading day and the settlement period. The settlement report will show which.

What is a merchant account or MID? It is the identifier under which a business's transactions are processed and settled. Transactions are segregated by merchant account, which is how reporting ties money back to a specific site.

Does an authorised payment always settle? No. A transaction can be authorised and then reversed or never captured. It will appear in the till total but not in the settlement.

What happens if the business changes bank account? The change has to be verified before settlement can be redirected, because the account is part of the checks carried out when the business was onboarded. This is handled through the software provider.

Reconciliation problems are almost always answerable from the settlement report, which shows the transactions behind each payment rather than just the total.

Your software provider is the best first point of contact for questions about your own account, your figures and your settlement timetable. VestaOne is the payments engine behind the platform.

VestaOne is a trading brand of Vesta Merchant Services Limited, registered in England and Wales, company number 07108015. Vesta Merchant Services Limited is authorised by the Financial Conduct Authority as a payment institution, firm reference number 784165. Part of Vesta Software Group.

This article is provided for general information only. It is not financial, legal or regulatory advice, and it does not take account of any particular business's circumstances.