Authorization, Capture, Clearing, Settlement in Detail

Authorization is the real time check that the card is valid and the funds are available. It happens in one to two seconds at the point of sale or checkout, and it creates a hold on the customer account for the transaction amount. The issuer returns a response code, such as 00 for approved, and an authorization code, such as 482913, which the merchant must keep. No money moves at authorization, and the merchant cannot spend the authorized amount. If the merchant never captures the payment, the hold expires, usually after seven days for a card present transaction and up to 30 days for a hotel or car rental, and the funds become available to the customer again. Capture is the merchant confirmation that the goods or services have been provided, and it turns the authorization into a claim for payment. A merchant can capture the full authorized amount, a smaller amount if the final bill is lower, or in some cases a larger amount within network limits, for example a restaurant adding a tip. Capture usually happens at the end of the day, when the merchant terminal or gateway batches all the day authorizations and sends them to the acquirer. A hotel may authorize 10,000 rupees at check in, then capture 8,500 rupees at check out after the final bill is calculated, and the remaining 1,500 rupees of hold is released. If a merchant captures without a matching authorization, the network can reject the transaction. Clearing is the batch process where the acquirer sends the captured transactions to the card network in a clearing file, Visa Base II or Mastercard IPM, and the network matches each record to its authorization, calculates interchange and scheme fees, and prepares settlement. Clearing usually happens overnight, on the same day as capture or the next business day. The network checks the card number, the amount, the merchant identifier and the authorization code, and rejects any record that does not match. A rejected record must be corrected and resubmitted, otherwise the merchant will not be paid for that transaction, even though the customer was charged at authorization. Settlement is the actual movement of money between banks, based on the net positions calculated during clearing. The network instructs the settlement bank to debit banks that owe money and credit banks that are owed money, usually once per business day. The acquirer then credits the merchant account with the net amount, after deducting interchange, scheme fees and the acquirer margin. In India, a merchant typically receives settlement in one to three working days from the transaction date, depending on the acquirer and the card type. The customer sees the final debit on the card statement after clearing, which may be one or two days after the purchase, even though the hold appeared immediately. A worked example with amounts makes the timing clear. On Monday at 10 in the morning, a customer buys a laptop for 60,000 rupees with a Visa credit card issued by ICICI Bank, at a merchant whose acquirer is Axis Bank. Authorization takes two seconds, the issuer approves it with code 847201, and a hold of 60,000 rupees appears on the card. On Monday evening, the merchant captures 60,000 rupees and includes it in the nightly batch. On Tuesday, Visa clears the transaction, calculates interchange of 1,100 rupees and scheme fees of 50 rupees, and prepares settlement. On Wednesday, Visa settles the net amount to Axis Bank, and Axis Bank credits the merchant with 58,750 rupees after its own margin of 100 rupees. The customer statement shows a 60,000 rupee purchase on Monday, even though the merchant received the money on Wednesday.