Tech, ExplainedFintech
Concept

Authorisation and settlement

Approved in seconds, settled tonight.

HOW IT WORKSThe customer paysby card at a shopor on a websiteThe request goesfrom the acquirerto the card networkto the issuerThe issuer holds theamount and approves,in about 2 secondsEnd of day: the cardnetwork adds up allpayments between banksEach bank pays the netamount; the shop iscredited, minus a feeApproval must take seconds; moving money is cheaper and safer done once a day, in bulk.HOW IT WORKSThe customerpays by cardat a shop oron a websiteThe requestgoes from theacquirer tothe cardnetwork tothe issuerThe issuerholds theamount andapproves,in about2 secondsEnd of day:the cardnetwork addsup allpaymentsbetween banksEach bankpays the netamount; theshop iscredited,minus a feeApproval must take seconds; moving money is cheaper and safer done once a day, in bulk.HOW IT WORKSThe customer pays by card at a shop or ona website↓The request goes from the acquirer to thecard network to the issuer↓The issuer holds the amount and approves,in about 2 seconds↓End of day: the card network adds up allpayments between banks↓Each bank pays the net amount; the shopis credited, minus a feeApproval must take seconds; moving money is cheaper andsafer done once a day, in bulk.
A card payment is approved in seconds through the acquirer, the card network and the issuer, and the money moves between the banks later, as one net payment.
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Authorisation and settlement are the two separate steps of every card payment. Authorisation is your bank approving the payment, which takes about two seconds. Settlement is the money actually moving from your bank to the shop's bank, which happens later, usually by the next working day.

Here is how authorisation works. The shop's card machine or website sends the payment request to the shop's own bank. In payments, the shop's bank is called the acquiring bank, or acquirer. The acquirer sends the request to a card network, such as Visa or RuPay. The card network sends it to the customer's bank, which is called the issuer because it issued the card. The issuer checks the balance or the credit limit, puts a hold on the amount and approves the payment. The approval travels back the same way. No money has moved yet.

At the end of the day, the card network adds up every approved payment between every pair of banks. This adding up is called clearing. Then each bank pays only the net amount it owes. The acquirer then credits the shop's account, after deducting a small fee. This is settlement. Inside a bank, the payment hub runs settlement for cards, UPI, NEFT and RTGS.

Why keep the two steps apart? Approving a payment must be fast, so that the customer at the counter does not have to wait. Moving money between banks is cheaper and safer when it is done once a day, in bulk.

Take, for example, a hotel. It authorises ₹5,000 on your card at check-in, and settles only the final bill when you check out.

Consider a share that you buy on the stock market. The trade is matched in a second, but the shares and the cash change hands the next working day, as described in T+1 settlement.

How is this different from UPI? For the customer, a UPI payment reaches the other bank account in seconds, so there is no separate settlement step that the customer can see. The banks still settle UPI payments with each other later, several times a day.

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