Comprehensive Guide About Payment Gateway Instant Settlements

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The world has seen an unprecedented rise in online payments in the last decade, which leads to constant innovation in payment systems. Now, it is clear that the consumer wants instant or real-time payment solutions to meet the continuous demand for retail payments. One such promising payment mechanism is payment gateway instant settlements. Understanding the fundamental working of the payment gateway settlement is necessary to expand the business and make our life more convenient.

Decoding The Workings of Payment Gateway Instant Settlements

A proper advanced mechanism is required to facilitate the smooth flow of instant settlement & better cash management, you can know more here in detail. Practically, payment processing involves two junctures, first is the valid authorization and the next one is about payment settlement. The authorization includes verification of essential things like requisite details of the cardholder and balances available to make an online payment. The latter part is the payment gateway instant settlements where the intended transaction funds are debited from the account and immediately get credited to the account of the merchant.

Certainly, the payment gateway settlement facilitates when the bank immediately transfers the amount without any delay. As soon as the retailer initiates and finishes the payment, the funds get credited to the merchant’s account instantly.

How Does a Payment Gateway Instant Settlement Work?

The moment the retail payment is initiated, based on the availability of required funds in the account, the following transaction is either endorsed further or declined. If payment is disapproved, this means the retailer does not have sufficient funds available in his or her account to go through for further processing.

Once the payment is endorsed further, the issuing bank transfers the funds to the payment processor. Then, the intended amount is transferred to the acquiring bank and the overall transaction amount gets debited in the customer’s account.

Important Steps Involved in The Settlement Process

The process involves two important junctures i.e authorization of payment and settlement. Let’s, understand the following steps:

Payment Authorization

When the customer initiates the payment through a card by putting all the account details or by just swiping the card, the details are verified and processed further. After successful verification of the cardholder’s and card details, the required amount is the debit from the bank account. The debited amount gets transferred to the acquiring bank and then the acquirer debits this intended amount in the destined account.


The amount is credited into the merchant’s bank account as per the settlement cycle. The merchant account has a predefined settlement cycle. Generally, the cycle takes T+1/T+2 or T+3 days (T denotes the transaction date), variations in the cycle depend on various aspects such as merchant history, business model, high-risk ratio, etc. Once the amount is credited to the merchant’s account, the transaction is marked as settled.

Settlement Mechanism

Generally, there are two types of settlement mechanism:

Host Capture

Under this category, every aspect required to settle the transaction like verification, authorization, etc. is facilitated by the payment gateway (host system). The payment gateway tracks all the essential authorization processes and takes responsibility for the settlement on its own.

Terminal Capture

Under this, the merchant is solely responsible for the settlement. It is usually done by sending a settlement message along with a settlement file with all requisite information about the transaction that needs to be settled. Terminal capture provides more control over the settlement mechanism.

Further, all settlements are allotted into two groups:

  • Merchant Initiated – It includes terminal capture and on-demand payment settlement.
  • Time Initiated- It refers to payment settlement which is done numerous times a day with a fixed number of settlements.

While choosing a settlement mechanism, every crucial aspect of the business needs to be considered. In the era of online connectivity where major businesses are opting for online, retailers and business owners must look for an online opportunity to expand the business. In doing so, they must evaluate the payment gateway and choose the one that is flexible and adapting the needs.

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