What is a 'Settlement Bank'

A settlement bank is the last bank to receive and report the settlement of a transaction between two entities. It is the bank that partners with an entity being paid, most often a merchant. As the merchant’s primary bank for receiving payment it can also be referred to as the acquiring bank or the acquirer.

BREAKING DOWN 'Settlement Bank'

Settlement banks are a primary component of the transaction process, helping to make electronic transaction processing available for merchants. With a significant majority of customers seeking to make electronic payments, it is important that merchants have good relationships with processing entities including settlement banks in order to ensure a fast and efficient payments system for their business and their clients.

Transaction Processing

When processing an electronic payment transaction there are typically three main entities involved: the cardholder’s bank, the settlement bank and a payment processor. The settlement bank also known as the acquiring bank is the lead facilitator of communication on the transaction.

Merchants partner with a settlement bank to ensure efficient settlement of transactions in electronic payment processing. In order to facilitate electronic transactions the merchant must first open a merchant account and sign an agreement with an acquiring bank detailing terms for processing and settlement of transactions for the merchant. Acquiring settlement banks usually charge merchants a per transaction fee and a monthly fee for their services.

When a customer chooses to make a purchase with a merchant using an electronic payment, the customer’s card must be in compliance with the settlement bank which means it must be acceptable for processing through the settlement bank’s processing network. Settlement banks typically have relationships with all of the major processing networks including Visa, Mastercard, Discover and American Express. However, they may be restricted to only a single processor based on the terms of the agreement.

Once a cardholder’s payment card is accepted by the acquiring settlement bank, the settlement bank then contacts its network to process the transaction. The payment brand network contacts the cardholder’s bank also known as the issuing bank to ensure that funds are available. If available funds are deducted and sent through the processing network to the settlement bank which settles the transaction for the merchant.

The settlement bank will typically deposit funds into the merchant’s account immediately. In some cases settlement may take 24 to 48 hours. The settlement bank provides settlement confirmation to the merchant when a transaction has cleared. This notifies the merchant that funds will be deposited in their account.

RELATED TERMS
  1. Net Settlement

    Net settlement refers to the resolution of all of a bank's transactions ...
  2. Merchant Account

    A merchant account is a type of business bank account that allows ...
  3. Authorized Transaction

    An authorized transaction is a debit or credit card purchase ...
  4. Settlement Period

    A settlement period is the time between the settlement date and ...
  5. Credit Card Posting

    Credit card posting occurs when a cardholder transaction has ...
  6. Settlement Agent

    A settlement agent coordinates all paperwork and conditions required ...
Related Articles
  1. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  2. Tech

    Bitcoin Transactions Vs. Credit Card Transactions

    We provide an overview of the differences between bitcoin and credit card transactions, and the advantages of using one over the other.
  3. Insurance

    4 Tips for Negotiating an Insurance Settlement

    It is possible to negotiate your own insurance settlement, especially when the injuries are relatively minor and the other party’s fault is obvious.
  4. Investing

    Goldman Sachs Agrees to $5 Billion Settlement (GS)

    The Department of Justice announced Monday that Goldman Sachs Group Inc. (GS) will pay $5 billion to settle state and federal claims related to its handling of mortgage-backed securities in the ...
  5. Tech

    Are Bitcoin Payment Services Similar to Credit Cards?

    Here's how Bitcoin Payment Services works and if it's a threat to credit card giants like Visa and Amex.
  6. Personal Finance

    The Evolution of Banking Over Time

    Discover how the evolution of banking has changed the business model. Find out how this system of money management developed into what we know today.
  7. Personal Finance

    Retail Banking vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking refers to the aspect of banking that deals with corporate customers. Check out more on the differences between ...
  8. Personal Finance

    Roles and Functions of Modern Investment Banks

    Discover the different roles and functions that surrounds investment banks, and the role they have played throughout the evolution of the modern system.
  9. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
RELATED FAQS
  1. How will debt settlement affect my credit score?

    Understand how debt settlement typically works and find out how sometimes the best option to eliminate an outstanding debt, ... Read Answer >>
  2. Forward Contracts vs. Futures Contracts

    While both forward and futures contracts allow people to buy or sell a specific asset at a specific time at a given price, ... Read Answer >>
Trading Center