Receiving credit card payments from customers happens in several steps.
The first step is the authorization stage, which happens at the time of purchase. In this step, the payment processor sends the credit card information to the card issuer to verify that the card is legitimate, that it has not been stolen, and that the card has enough available credit for the transaction. If everything is in order, an authorization code is sent back to the merchant’s system, and the card will have a hold placed on it for the value of the transaction.
The second step is the processing stage, which in the case of batch processing happens several hours after the authorization stage. In this stage, the information for the transaction, along with the authorization code, is sent to the bank via the payment processor.
The final step is the settlement stage, where the money is transferred from the customer account to the merchant account. This may take several days to happen.
There are two ways that the information can be sent to the banks, either by real-time processing or batch processing. In real-time processing, the information is sent to the bank as the transaction happens, and settlement happens at the same time. In batch processing, a number of transactions are submitted at one time. The transactions are then grouped and sorted by the payment processor and sent to the various issuing banks for settlement. It may take several days for a merchant to receive payment for a batch.
As with all things payment related, there are fees involved. The fees for real-time processing may be considerably higher than with batch processing. For many merchants, the additional fees are not worth the trade-off for receiving settlement only a few hours earlier.
Batch processing is usually done either after closing time of a physical store, or in the case of an online business (which technically never closes) at a predetermined time of the day. Some businesses may submit more than one batch a day at different times, but again that incurs additional costs as fees are applied per batch.
The batching process could be automated to happen at a specific time without any intervention, or it could be a manually initiated process. Some merchants prefer a manual process, especially if they wish to review or make changes to transaction amounts. In some parts of the world it is common for the cost of tips at a restaurant, for example, to be added after the cost of the meal has been swiped. Mistakes also happen, and the cardholder may not notice at the time. If an incorrect amount has been charged, such as an additional zero added by mistake, it could be rectified before the batch is sent. Merchants should be wary, however, of changing transaction amounts, as this could result in a chargeback.
Batching can be done on credit card terminals, or via payment gateway software.
There are several benefits to batch processing:
- It’s more efficient and saves time
- It’s less expensive in terms of fees
- It’s possible to review transactions within a batch
- It makes processing recurring transactions much simpler
- Transactions can be amended in the case of tip-based industries, or if mistakes are made
- It’s a lower security risk as it minimizes the contact time with the payment processor
- Knowing when to expect settlement helps with cash flow
And of course, there are some downsides to batch processing:
- It takes longer to receive money
- It takes longer to notify customers
- There is a higher risk of declines – the customer’s account may have had sufficient funds at the time of the transaction and authorization, but that could literally change in an instant
- Each batch incurs fees, so if a merchant does multiple batches in a day the costs add up
It is important to note that batch processing must be done within a specified timeframe, which is usually 24 hours. Failure to do so results in penalties and chargebacks. So if a merchant opts for a manual process it is vital that the schedule is adhered to.
When it comes to settlement, there are two options that may be available to merchants, depending on their provider:
- Gross settlement – the total amount processed will be deposited into the merchant’s account. The fees for the transactions will then be drawn from the merchant’s account in a separate transaction
- Net settlement – the merchant will receive the amount processed minus the transaction fees
When it comes to choosing payment partners, there are several things a merchant should consider:
- What are the fees for batch processing?
- When do batches need to be processed?
- What are the penalties for late presentment?
- Does the provider cover your needs in terms of manual and automated batching?
- Is the software easy to use?
- Do they provide excellent support?
- Are there any hidden fees?
- When will you receive your payments?
At Baer’s Crest we know that merchants need to focus on running their businesses, and that they need payment solutions that are secure, easy to use, and at reasonable rates. Talk to us about the right payment solutions for your business.