Why is daily settlement (batching) important?
Settling your transactions on a daily basis helps you avoid costly interchange-downgrades.
To set the stage – there are two distinct portions of any credit card transaction. The first is known as the authorization, which happens in real-time, when you swipe/dip/key the card into your system. You’ll receive a real-time response from the card-issuing bank of “approved” or “declined”. The second step is known as the capture, when the sale is fully processed and sent to the processor to finalize.
The act of “settling” or “batching” your transactions references the capture step above, and is when you capture all of your day’s sales. When you process sales throughout the day (either through a terminal or a payment gateway), those transactions are authorized in real-time. Those authorizations will build-up throughout the day, waiting to be sent to Dharma for processing. Then, once per day, transactions will “settle” or “batch out” – that’s the process of taking all of those built-up authorizations and sending them in for processing. If you use a payment gateway, this happens automatically. If you use a standalone terminal, you can choose to have this happen automatically, OR you can opt to manually settle out.
So – what happens if you don’t settle out on a daily basis, or on a day where you had authorizations? The answer is that you risk getting a “downgraded” interchange rate – essentially, you’ll pay more for the sale!
The card associations (Visa/Mastercard/Discover/AMEX) have very specific rules about how interchange fees are calculated. One of the common requirements to gain access to the lowest possible interchange fee is that you must settle any given sale within 24 hours of authorization. This makes sense when you think about it. If you’re a customer and you see that a company has “authorized” your card, you likely expect to see that sale complete shortly. So, assuming that sale processes same day, the customer would likely be satisfied. BUT – if you wait, and settle the sale say a week or two later, that same customer may be confused! They may ask themselves, “didn’t I pay for this sale weeks ago?” Then, they may take one more step, which is to dispute the sale with their bank, and initiate a chargeback. Chargebacks are costly, and are to be avoided at all costs!
As you can see above, the card associations want to incentivize you as the merchant to keep chargebacks minimized, and keep your customers happy. To do this, they offer the lowest rates for settling within 24 hours. If you don’t settle within 24 hours, you’re subject to higher interchange fees – typically in the range of 0.25% – 0.50%. For this reason, we always recommend settling on any day you process sales. If you have any questions about this, don’t hesitate to discuss with your Account Manager!
There are two other specific reasons to settle regularly:
- The earlier you settle transactions, the faster you get paid! If you forget to settle and wait a day, Dharma won’t receive your transactions, and therefore we can’t pay you.
- Authorizations expire! It depends on the issuing bank, but most authorizations will ultimately expire between 3 and 8 weeks from the initial authorization. Once expired, you can’t retrieve an authorization. You’ll be required to generate a new transaction.