Settlement
The step in which funds from card or other payments actually move to the merchant's bank account, usually a day or two after the sale and net of fees.
In short
- Authorization approves a sale; settlement pays for it.
- Deposits are usually one lump sum per day, net of fees, refunds and chargebacks.
- Reconciling deposits back to individual sales is a routine and often tedious finance task.
Settlement is when a payment is completed. For card payments, the merchant submits the day's authorized transactions in a batch. The acquirer and card networks clear them, the issuing banks pay, and the acquirer deposits the funds into the merchant's bank account, typically one or two business days later.
Why deposits don't match sales
A merchant rarely receives exactly what it sold. The deposit is usually:
- the total of settled transactions for the batch,
- minus processing fees, if deducted daily,
- minus refunds issued,
- minus chargebacks and chargeback fees,
- sometimes minus a reserve held by the provider.
Batches may also cut off at a time other than midnight, so a day's deposit covers parts of two calendar days.
Reconciling settlements
Accounting for sales correctly means breaking each deposit back into gross sales, fees, refunds and chargebacks. Settlement reports from the payment provider show this detail. Matching them to the point-of-sale records and the bank deposit, then recording fees as expenses rather than netting them against revenue, keeps revenue and costs accurate.
For businesses with many locations or payment providers, settlement reconciliation is one of the most time-consuming parts of the month-end close.
Worked example
Monday's sales, Wednesday's deposit
A restaurant's card sales on Monday total $6,480. On Wednesday, its bank shows a deposit of $6,254.18. The settlement report explains the difference: $142.60 of processing fees, a $68.22 refund and a $15.00 chargeback fee. The bookkeeper records $6,480 of sales, $157.60 of fees and the refund, and the deposit reconciles.