How long is the payment settlement cycle?
Are there delays? If yes, why?
What factors impact the speed of payment settlement?
The payment settlement process might initially feel complicated and, to some extent, overwhelming for small eCommerce merchants. However, understanding how a successful payment settlement works can help you navigate its impact on your business cash flow.
Knowing how the payment settlement process works will help you ensure customer satisfaction and manage delayed payment scenarios.
This article will explain the payment settlement process for eCommerce merchants and provide best practices for speeding it up. Let’s go!
Content Index
- What is Payment Settlement?
- What is the Payment Settlement Process for Online Transactions?
- Parties Involved in the Payment Settlement Process
- How Long does the Payment Settlement Process Take to Complete?
- Best Practices Related to Payment Settlement Process for Businesses
- How can Nimbbl speed up your payment settlement process?
What is Payment Settlement?
Payment settlement is a credit of payment from the cardholder’s (or any shopper’s) account to the merchant’s account after a purchase. It occurs when a customer pays using a credit or debit card, UPI, and other digital payment methods (except cash payments).
After deducting the applicable processing fee, the acquirer collects and deposits the funds into the merchant’s business account.
The time taken for the entire settlement process varies depending on factors like:
- The merchant’s agreement with the payment service provider
- Whether the transaction is domestic or cross-border
The payment settlement process involves several stages before a payment is finally credited to a merchant’s account. Let’s discuss the process in the next section.
According to the RBI Payment Aggregator guidelines, there are several key rules and provisions related to payment settlement timelines:
Payment Aggregators (PAs) manage merchant settlements through a structured timeline, completing the process within one to two business days after the transaction (T+1 or T+2). The timeframe varies based on the transaction type and payment method used.
For transaction security, PAs maintain escrow accounts where funds are held until payment verification is complete. This system protects all parties involved while ensuring proper fund disbursement to merchants.
PAs must also maintain transparent dispute resolution mechanisms and efficient refund processing systems. Additionally, they implement comprehensive fraud prevention measures and conduct continuous compliance monitoring. These robust risk management practices ensure secure, timely settlements while maintaining the integrity of the payment ecosystem.
What is the Payment Settlement Process for Online Transactions?
The payment settlement process involves several key steps that ensure the smooth transfer of funds from the customer to the merchant. While this process may seem complex, understanding how it works helps you manage your cash flow better.
Here’s a breakdown of the steps involved, with the card as a payment mode:
The settlement process follows a specific timeline:
T0 (Transaction day)
- The customer initiates payment for purchase/service
- Payment flow:
- Merchant → Payment Service Provider/Aggregator → Acquiring Bank → Card Scheme → Issuing Bank
- Initial authorization and transaction verification occur
T1 (Next Banking Day)
Aggregation Phase
- All participants (acquiring banks, issuing banks, payment aggregators, merchants) aggregate their transactions
- Transactions are batched for processing
Settlement Flow
- Issuing bank settles to card scheme
- Card scheme settles to acquiring bank
- Acquiring bank settles to Payment Service Provider (PSP)
- PSP settles to merchants
Settlement Components
- Credits for all successful transactions from the previous working day
- Debits for Refunds, Chargebacks, Transaction fees, and Applicable taxes and charges
Here’s a sneak peek into the payment settlement summary that you can receive using payment solutions like Nimbbl:
It includes elements like:
- Settlement date
- Payment service provider details
- The total amount settled
- No. of Entries
- The Unique Transaction Reference (UTR) number
- Sub- merchant’s name and ID
You can manage all your settled payments and check their history on Nimbbl’s payment settlement dashboard.
Parties Involved in the Payment Settlement Process
The payment settlement process involves several parties who work together to ensure a secure transaction. The main parties involved in the process include:
Customer or the cardholder: The transaction starts with a customer selecting a product or service and providing payment information via different channels, such as cards or UPI.
Business: The merchant, or business, who sells goods or provides service. They receive the payment details and forward them for processing. The business accepts payments using a merchant account that holds the funds before transferring the amount to the primary business or merchant account.
Acquiring bank: The merchant’s bank receives the authorised transaction details and temporarily holds the funds. It processes credit and debit card transactions and provides the necessary tools to accept payments.
Issuing bank: The customer’s bank that authorises or declines the transaction.
Payment gateway: Payment gateways process credit card payments and facilitate the transfer of information between the payment portal and the acquiring bank.
Payment processor: It is the intermediary between the merchant’s bank and the customer’s bank. The payment processor validates the transaction, checks funds, and ensures the safe processing of the payment.
Card networks: The card networks facilitate the electronic transfer of funds and financial information between parties. Mastercard, Visa, and American Express are some examples of card networks.
Regulatory bodies: These are the legal standards for payment systems, and compliance is monitored to ensure consumer protection.
How Long does the Payment Settlement Process Take to Complete?
The time it takes to settle the payment process varies depending on several factors, including the payment method, card network, and acquiring bank processes.
Understanding the timeline of payment settlement is crucial for eCommerce merchants to manage cash flow effectively. While customers might see their purchases as instant, the behind-the-scenes process is more complex and time-consuming.
Think of payment settlement as a relay race, with each stage passing the baton to the next:
- The Sprint (Authorization): Lightning-fast, often completed in seconds.
- The Handoff (Batching): This usually occurs at the end of the day when transactions are being grouped
- The Night Run (Clearing): This happens overnight, sorting out the financial details.
- The Marathon (Settlement): The longest leg, typically lasting 1-3 business days.
- The Victory Lap (Funding): The final 2-3 days before funds hit your account.
Different payment methods have their race strategies:
- Credit cards run the full course, often taking 3-5 days in total
- ACH transfers are steady performers, usually settling within 3-5 business days
- Digital wallets like PayPal are the sprinters, sometimes completing in just a day
But what causes some racers to stumble? Several hurdles can slow down the process:
- New compliance rules can act like unexpected obstacles
- System maintenance or glitches can cause delays
- International transactions often take scenic routes, extending the journey
- Some sectors face longer holding periods due to higher risks
For eCommerce merchants, while a sale might cross the starting line immediately, the finish line (funds in your account) is still days away. This gap can create cash flow challenges, especially for smaller businesses.
To optimise your payment race:
- Choose a processor known for speed and reliability
- Offer a variety of payment options to suit different customer preferences
- Develop strategies to manage your business during the settlement “marathon”
- Regularly review your payment setup to ensure you use the most efficient routes
Understanding these timelines and potential hurdles allows you to better plan your financial strategies and keep your eCommerce business running smoothly, even when payments are still going around the track.
Best Practices Related to Payment Settlement Process for Businesses
To ensure a smooth transaction, follow these practices for your payment settlement:
Define payment terms
Every contract should clearly define your payment conditions. Include the timeline, penalties for missed deadlines, and payment methods to set clear expectations for payments.
Data protection
Prioritise safeguarding customer information throughout the payment process. Implement robust data protection measures that align with regulations like GDPR or local equivalents. Establish strict access protocols, limiting data visibility to essential personnel only.
Employ encryption for data both at rest and in transit. Regularly update your payment security measures to stay ahead of emerging threats. Consider implementing data minimisation practices and collecting and retaining only necessary information. Educate your team on the importance of data protection and their role in maintaining it.
Transaction monitoring
Implement a comprehensive transaction monitoring system to detect and prevent fraudulent activities. Use advanced analytics and machine learning algorithms to identify unusual patterns or anomalies in transaction data.
- Conduct regular audits of your payment processes, looking for discrepancies or potential vulnerabilities
- Set up real-time alerts for suspicious transactions that fall outside normal parameters
- Develop a clear protocol for investigating and responding to flagged transactions
- Regularly update your monitoring criteria to adapt to new fraud tactics
Consider partnering with specialised fraud prevention services to enhance your capabilities.
Practise frequent reconciliation
Frequent reconciliation allows merchants to promptly identify discrepancies, errors, or potential fraud in payment transactions. By reconciling more often than the typical end-of-month practice, merchants can quickly detect and address issues with acquirers regarding charges, debits, and unsettled transactions.
This proactive approach reduces the time spent chasing down problems later, minimises delays in settling accounts, and ensures more accurate and up-to-date financial records. Ultimately, frequent reconciliation improves cash flow management, enhances financial transparency, and allows for more timely and informed business decisions.
How can Nimbbl speed up your payment settlement process?
Nimbbl streamlines your payment settlement process, offering a comprehensive solution for eCommerce merchants.
With features like automated reconciliation and multi-currency support, Nimbbl simplifies complex payment processes. It lets you focus on your core business while ensuring smooth, efficient settlements.
Nimble’s payment settlement features include:
- Flexible integration: Merchants can choose from different payment aggregators (e.g., Razorpay) during integration
- Detailed settlement reports: Merchants can access comprehensive settlement reports, including Settlement ID, Date, Payment Service Provider (PSP), Total Amount Settled, UTR (Unique Transaction Reference), Sub-merchant Name, Pricing Plan, and Settlement Date
- Categorised transaction views: The credits tab shows all successful transactions and the debits tab displays refunds, chargebacks, and adjustments
- Advanced filtering options: Merchants can search and filter settlements using various criteria such as duration, date range, payment partner, sub-merchant, sub-merchant ID, amount range, settlement ID, and UTR
- Transparent transaction tracking: The system allows merchants to check details of particular settlements by clicking on the Settlement ID
- Multi-sub-merchant support: The system can handle settlements for multiple sub-merchants, indicating it’s suitable for platforms or marketplaces
- Reconciliation tools: The detailed reports and filtering options facilitate easy reconciliation of transactions and settlements
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