What Is a Settlement Bank?

Settlement Banks Explained

Definition
A settlement bank, also known as an "acquirer" or "acquiring bank," works on the merchant’s end to assist with taking credit card payments from customers and receiving the funds in the merchant account.
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A settlement bank, also known as an "acquirer" or "acquiring bank," works on the merchant’s end to assist with taking credit card payments from customers and receiving the funds in the merchant account. This financial institution does business with one or more card networks and serves as a middleman between the merchant and the card issuer’s bank when you use your card.

Definition and Examples of Settlement Banks

A settlement bank enables a merchant to allow you to pay with credit and debit cards and receive the funds in its merchant account. The settlement bank plays an important part in helping brick-and-mortar and online retailers do business and provide convenient payment options for you. This type of bank also can help with other services, such as handling customer chargebacks.

Note

Merchants have to pay credit card network fees, and this influences which cards they choose to accept. Some businesses don’t allow you to use an American Express card due to the higher associated fees.

After a merchant partners with a settlement bank, it can accept card payments through compatible card networks. A settlement bank might choose to work with just a few major networks, such as Visa or Mastercard, or it might support others—such as Discover and American Express–to offer more flexibility for merchants and customers.

  • Alternate names: Acquiring bank, acquirer

How Does a Settlement Bank Work?

When a merchant signs up to work with a settlement bank, these parties enter an agreement where the settlement bank and possibly a third-party processor handle the details of processing. The settlement bank will relay transaction information from the merchant to the card network that communicates with the card issuer’s bank for payment approval or rejection. The payment clears through the issuing bank associated with the customer’s card. It's eventually settled through the merchant’s settlement or acquiring bank.

With the help of the settlement bank, the funds will move from the issuing bank’s account to the merchant account if your card issuer authorizes your transaction. The issuing bank will not authorize your transaction if you do not have enough money available on the card or if the card is past its expiration date. The merchant won’t get the money, and you’ll be told at checkout that your card has been declined.

Note

Major banks such as Chase and U.S. Bank can serve as settlement banks, so it’s possible for the same bank to act as the issuing and settlement bank in your transaction.

Let’s say you’re a customer at a local store and you’re buying an item with a Visa credit card issued to you through Chase Bank. The following steps might happen for this transaction:

  • You swipe or insert your credit card at the checkout’s card terminal.
  • Your credit card information is sent to the acquiring or settlement bank for further handling.
  • The settlement bank forwards your transaction details to the Visa card network, after which, it goes to your card issuer’s bank, Chase.
  • Chase applies the charge to your credit card account and sends the amount to the settlement bank if it approves your transaction. Otherwise, your transaction is declined, and you’re notified at checkout.
  • The store you shopped at receives your credit card funds in its merchant bank account if your transaction successfully processes, less any fees due to the card network and settlement bank. It can then transfer or use the money as it wishes.
  • You can later pay back your credit card company for the charge. But if you decide to file a chargeback and you succeed, you might have the amount reversed on your card account. The merchant ends up with the funds plus fees taken from its merchant account during the process.

Your own bank would be the issuer if you instead use a Visa debit card for the purchase. The funds would come directly from your bank account before being sent to the acquiring bank for settlement into the merchant’s account. You wouldn’t have a charge to pay off later in that case. Any money resulting from a successful chargeback would appear in your bank account.

Associated Fees

Merchants incur various fees during the transaction-processing stages. The most significant is the interchange fee paid to a card network to account for the card issuer’s expenses for transaction handling. This varies by card network. It's often a set amount plus a percentage of the transaction amount.

Card networks usually also charge merchants additional dues based on a percentage of their monthly sales. Settlement banks charge for various expenses such as a monthly minimum fee, terminal and gateway fees, reporting and processing fees, and more. Different fee structures are available for merchants to consider.

The merchant will have an associated merchant account with the settlement bank where approved payments can be deposited. The time required for the processing to finish can vary, but can be as short as hours with some settlement banks. The merchant can move the money to its business bank account for use after the money reaches the merchant account. But withdrawals from the merchant account may come with a fee.

Note

Some settlement banks offer merchants perks such as a percentage of cash back on processed payments if they also have a business credit card through them.

Risks of the Process

Both merchants and settlement banks face the risk of chargebacks. These happen when customers file complaints with their card companies due to a problem with a purchase and they want their money back. The issuing bank will request that the merchant’s settlement bank return the funds as a result. This leaves the merchant in the position of having to decide whether to accept or appeal the request. It can result in costly fees and money lost for the merchant.

Settlement banks have considered that the merchant’s account could become insolvent from chargebacks. They charge merchants costly fees on top of the money that needs to be returned as a result. If chargebacks happen often, this can cause the settlement bank to no longer want to do business with the merchant. The merchant can find it hard to continue operating if it can’t do business with customers who want to use cards to pay.

Key Takeaways

  • A settlement bank enables a merchant to take customers’ card payments and receive the money in its merchant account.
  • The settlement bank sends a customer's card information to the card network when the customer uses one. The network forwards it to the card issuer’s bank for authorization.
  • Approved transactions result in the funds being moved from the issuing bank to the settlement bank for deposit in the merchant’s account.
  • Settlement banks and card networks charge various fees for their services, and these cut into the final amount merchants receive for transactions.
  • Settlement banks face the risk that chargebacks will occur, so they charge merchants fees and may take further actions, such as canceling a risky merchant’s account.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Experian. "Who Accepts American Express?"

  2. Nacha. "Understanding the Cost of Processing Card Payments," Page 3.

  3. Nacha. "Understanding the Cost of Processing Card Payments," Page 4.

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