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.

  1. Processing Date

    The month, day and year when a merchant’s bank processes a credit ...
  2. Acquirer

    An acquirer is a company that acquires rights to another company ...
  3. Settlement Period

    The period of time between the settlement date and the transaction ...
  4. Merchant Agreement

    A contract between a business and a credit card service provider.
  5. Settlement Risk

    Settlement risk is the risk that one party will fail to deliver ...
  6. Merchant Bank

    A merchant bank is a bank that deals mostly in (but is not limited ...
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. Personal Finance

    WePay vs. PayPal Fees

    WePay and Paypal facilitate payments between businesses and people. Which one should you go with?
  5. Managing Wealth

    An Introduction To Life Settlements

    A life settlement is the trading of a life insurance policy under specific circumstances. Learn what it's all about.
  6. Insurance

    The Rise Of The Modern Investment Bank

    Get to know a little bit about the institutions whose actions help to guide free markets.
  7. Investing

    How American Express Makes its Money

    Consumers like novelty, reliability, variety, and other subjective qualities. But what really keeps them coming back to American Express is convenience.
  8. Small Business

    Best Checking Accounts For Small Businesses

    What you need to know to choose the best checking account for your small business – and where to look.
  1. What is the difference between investment banks and merchant banks?

    Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different ... Read Answer >>
  2. What do T+1, T+2 and T+3 mean?

    For security transactions, T+1, T+2, and T+3 refer to settlement dates which occur on a transaction date plus one, two and ... Read Answer >>
  3. How will debt settlement affect my credit score?

    Learn how a debt settlement arrangement, though sometimes the best option to eliminate an outstanding debt, can negatively ... Read Answer >>
  4. How do mutual fund trades clear and settle?

    Learn how mutual fund trades are cleared and settled, and when the money owed must be available or the proceeds due must ... Read Answer >>
Trading Center