Payment Acceptance at POS: Authorization, Settlement and Reconciliation

Authorisation is the real time check that happens while the customer waits at the counter, and it usually takes two to three seconds. The terminal sends the card details, the amount and the merchant data to the acquirer, the acquirer routes the request through the card network to the issuing bank, and the issuer checks the account balance, the card status, the PIN or cryptogram, and the fraud rules before replying with an approval or a decline. An approval includes an authorisation code that the merchant must keep, because it is the proof that the issuer agreed to pay. If the issuer does not respond within the timeout, usually around 30 seconds, the terminal must show a clear message and must not assume the payment succeeded, and the BA must specify the reversal logic for a timed out authorisation. Offline authorisation allows a terminal to approve a small transaction without contacting the issuer, using the limits and risk counters stored on the card chip itself. This is useful where connectivity is poor, such as in a basement shop or a moving train, but it carries a risk, the issuer has not checked the balance in real time, so a transaction could be approved against an account that has no funds. For that reason offline authorisation is limited to low value transactions, often below 500 rupees for contactless payments, and the card maintains a counter of consecutive offline transactions that forces an online check after a set number. A BA must document the offline floor limit, the maximum number of offline transactions, and the rule that an offline approval is not a guarantee of payment until the transaction is cleared. Batch settlement is the end of day process where the terminal sends all of its approved transactions to the acquirer in a single batch file, usually after the shop closes. The terminal totals the batch, prints or displays a settlement report, and uploads the transactions to the acquirer, who then forwards them through the card network for clearing. The issuer debits the cardholder account, the acquirer credits the merchant after deducting the merchant discount rate, and the net amount reaches the merchant bank account, often on the next working day. A BA should specify the batch cut off time, the settlement cycle for each card type, and the handling of a batch that fails to upload, because a missed batch delays the merchant money by a full day. Reconciliation is the daily proof that what was sold matches what was settled, and it is a critical control for both the merchant and the acquirer. The merchant compares the terminal settlement report against the till takings and the bank credit, while the acquirer compares the batch totals against the network clearing file and the settlement file sent to the bank. Differences arise from declined transactions that were retried, duplicate batches, missing authorisations and network fees deducted at source. A good reconciliation report lists each transaction by authorisation code, amount and card type, and highlights every exception with a reason code. The BA must define the matching keys, the tolerance for rounding differences, and the ageing rule for unresolved exceptions, so that a difference is never left open indefinitely. A worked example makes the whole flow concrete. A customer buys groceries for 4,250 rupees at a supermarket in Bengaluru and taps a Visa debit card issued by HDFC Bank. The terminal sends the authorisation to the acquirer, the issuer approves it with code 482913, and the customer leaves with the goods. At 10 in the evening the terminal settles a batch of 312 transactions totalling 8,45,000 rupees, and the acquirer sends the clearing file to Visa. The next working day the merchant receives 8,43,310 rupees after a merchant discount rate of 0.2 percent, and the finance team reconciles the batch total against the bank credit and the till report. If one transaction of 1,200 rupees is missing from the clearing file, the reconciliation report flags it, the acquirer raises a query with the network, and the merchant is credited once the network confirms the transaction.