How a card payment works: authorisation, clearing and settlement

This is the main guide in How payments work. Every guide in the series is listed at the end.

A customer taps a card. A second later the machine beeps, and the sale is done. From the counter it looks instant. Behind that beep is a chain of messages between several companies, followed by a transfer of money that takes a day or more. Understanding the chain explains why fees exist, where they go and why a payment can appear on the machine before it reaches your bank.

This guide walks through a card payment from tap to bank account. It names the parties, shows each stage and follows a £100 payment to show who receives what. It is the background to everything else on a merchant statement.

Who are the five parties in a card payment?

Many businesses deal with a reseller, ISO or payment service provider that sits between them and the acquirer. See acquirer, ISO, payfac and gateway for the differences.

Stage 1: authorisation (seconds)

When the card is tapped, inserted or entered, the terminal sends a message that travels from the merchant to the acquirer, through the card network, to the issuer. The issuer checks whether the card is valid, whether there are enough funds or credit and whether anything looks suspicious. It sends back an answer: approved or declined.

Two points matter. First, authorisation does not move money. It places a hold on the customer's available funds or credit. Second, authorisation is where declined-payment fees can arise, as set out in authorisation and per-transaction fees.

Stage 2: clearing (end of day)

Approved payments are collected together, usually in a batch at the end of the day, and sent for clearing. The terminal or system sends the batch to the acquirer, which passes it through the card network to the issuers. Clearing confirms the final amounts and prepares the money to move.

On some systems, batching happens automatically. On others a staff member closes the batch. Late or missed batches can delay settlement, and in some pricing models they can cause a payment to be charged at a higher rate. See tiered pricing.

Stage 3: settlement (a day or two later)

Settlement is the movement of money. The issuer pays the card network, which pays the acquirer. The acquirer pays the merchant, after deducting its fees. Because the money passes through several parties, it usually arrives a day or two after the sale, and sometimes longer at weekends and on bank holidays.

Different providers settle at different speeds, and some charge for faster payouts. It is worth asking when the money reaches your bank, because it affects cash flow as much as a fee does.

Where does the money go in a £100 payment?

Follow a single £100.00 payment from a customer's consumer debit card, in an interchange plus arrangement. The figures are illustrative.

• Interchange to the issuer: 0.20% = £0.20
• Scheme fees to the network: 0.12% plus 2p = £0.14
• The provider's markup: 0.20% plus 3p = £0.23
• The merchant receives: £100.00 − £0.20 − £0.14 − £0.23 = £99.43

The total of the fees is £0.57, or 0.57% of the payment. A different card would change the split. A commercial card might carry several times the interchange. See debit, credit and commercial card fees. On a blended or flat rate, the merchant would see one deduction, and the split between the parties would not be shown.

Why does the merchant see the sale before the money?

The terminal's approval is a promise from the issuer, not a transfer. That is why the sale appears on the machine, and in your till reports, immediately, and in your bank account later. If you check your bank balance on the afternoon of a sale, you will not see it yet.

When reading a statement, remember that the turnover and the amounts paid into the bank may not line up in the same period. A sale on the last day of the month may settle in the next. That timing difference explains some small mismatches in a bill check.

What other parts are in the picture?

Card present and card not present

A payment where the card is physically at the terminal is card present. An online or phone payment is card not present. The stages are the same, but card-not-present payments carry a higher fraud risk, which shows in higher interchange. Online payments also pass through a gateway, which securely collects the card details and sends them to the acquirer.

Refunds and chargebacks

A refund reverses a payment, sending money back to the cardholder. A chargeback happens when the cardholder disputes a payment with their bank, which can reverse it and pass the dispute to the merchant. See refunds, chargebacks and turnover.

Authentication

Many online payments require the customer to prove it is them, for example with a code or a banking app. This extra step can reduce fraud, though it may also cause some customers to abandon a purchase.

Fraud checks

Issuers and acquirers use a range of checks to catch fraud, including address checks, security codes and pattern analysis. Declines for suspected fraud can happen even when the funds are available.

Why does it help to know the stages?

When a merchant asks why a fee exists, the stages give you the answer in a sentence. Authorisation is the issuer taking the risk, so it is paid for. Clearing and settlement are the networks and the acquirer moving the money, so they are paid for. The provider's markup pays for the service you see: the terminal, the support and the account. Seeing the fee as the price of a step in a chain makes it less mysterious, and it makes the effective rate easier to explain.

What does this mean for reading a statement?

Knowing the stages helps you understand each part of a statement.

• Turnover and transaction count come from the cleared batches.
• Interchange and scheme fees are the pass-through costs on each payment.
• The provider's markup is its own charge for running the service.
• Fixed fees are for the terminal, gateway and compliance.
• Settlement determines when you get the net amount.

Our guide to how to read a merchant statement walks through each section, and the checkmyrates calculator lets you enter the figures and see them as a clear cost breakdown.

Frequently asked questions

How does a card machine work?

It sends the payment details, encrypted, to your provider, which passes them through the card network to the customer's bank. The bank approves or declines in seconds, and the terminal shows the answer. The money moves later, at settlement.

What are authorisation, clearing and settlement?

Authorisation is the bank's approval, which takes seconds. Clearing is the end-of-day batch that confirms the payments. Settlement is the movement of money to the merchant, usually a day or two later.

Why does the money take a day or two to arrive?

Because it passes through several parties and is settled in batches. Some providers are faster than others, and weekends and bank holidays add delay.

Who gets paid from a card payment?

The issuer receives interchange, the card network receives scheme fees, the provider keeps a markup and the merchant receives the rest.

What happens when a payment is declined?

The issuer says no, usually because of insufficient funds, a limit, a stolen card report or a fraud signal. The terminal shows a decline, and no money moves. Some providers still charge for the attempt.

Can I speed up settlement?

Some providers offer faster payouts, sometimes for a fee. Ask your provider what is available and what it costs.

Figures in this guide are examples to show the method. Fees, rules and rates change, so check your own statement, contract and current rules before you decide. This is general information, not financial or legal advice.