Background, Authorization, Settlement, Reconciliation, Chargebacks, Refunds

Credit Card Settlement

Credit card settlement is the process by which authorized transactions are submitted to card issuers for payment.  Unlike authorization, which is typically performed in real time, settlement is a batch process. Prior to settlement, payment information for authorized transactions is "captured" to create a settlement record for each authorized transaction.  These captured transactions are stored on batch files either on Global's system (termed "host capture") or on the agency's payment device or third party processor's device (termed "terminal capture").  Whether using host or terminal capture, batch settlement files are processed by Global, which routes, or "outclears" these transactions to the appropriate issuing entity (i.e., Visa or MasterCard member banks or American Express or Discover) to initiate payment to the agency.

Host Capture vs. Terminal Capture

Host and terminal capture, which refer to the location in which a settlement file is created, are described in the following table.

Batch Balancing

The process of comparing settlement file totals (i.e., number of transactions and net dollars) to a separate file or log of authorized transactions, is known as batch balancing.  Batch balancing is performed prior to settlement to verify that the settlement file contains the correct number and dollar value of transactions.

Design Consideration Agencies should work with Global to develop batch balancing procedures for their payment program.

Voiding Transactions

A void transaction is used to entirely back out a purchase transaction on a current batch which has not been submitted for settlement.  These are commonly referred to as "same day voids" since they must be performed before the batch is submitted for settlement, which typically occurs at the end of each processing day.  Agencies should be aware of the effect voids will have on a cardholder's "open-to-buy".  The open-to-buy amount applies to cards with credit limits, and is the amount of the credit limit minus both the amount of the credit limit used and the amount of authorized transactions.  Since authorizations are valid for thirty days, the cardholder's open-to-buy will be lowered by the amount of the voided transaction for that thirty day period as the voided transaction does not reverse the authorization request.

Design Consideration Agencies should work with Global or their Internet payment gateway to establish protocols and controls for voiding transactions.

Settlement Process Flow

The following diagram depicts the settlement process from submission of the settlement file to receipt of funds in the agency's designated account.

Interim Working Account

As seen in Diagram 1 above, funds for Visa and MasterCard transactions may first be transferred to an interim working account at HSBC, a subcontractor of Global under the EVT Contract.  While the interim working account is not a state account (the funds are not state monies until they are received in the designated state account) the agency will have inquiry capabilities into this account using HSBC's Hexagon software.  This software is available through the EVT Contract with Global.  Use of the interim account is not mandatory for any user of the EVT Contract.

Designated State Account

The agency must designate an account for receipt of settlement funds from:

• Visa and MasterCard funds (via transfers from the interim working account or via direct transfer from Global),
• American Express (via direct transfer from American Express), and
• Discover (via direct transfer from Discover).

While two separate accounts could be designated for each of these sources, using the same account for all sources will facilitate the reconciliation process.  If the agency's designated account is at HSBC, the agency will receive funds the same day they are deposited into the interim working account, which will generally be a day sooner than if the agency's designated account is at a different financial institution.  Also, Fedwire transfer fees, which are charged each time funds are transferred from an interim working account to a non-HSBC designated State account, will not be incurred.

Timeliness of Settlement

Settlement of batch transactions should occur daily. For terminal capture, batches must be closed out and submitted to Global for settlement by 3:00 a.m. EST in order to receive funds timely.  (Global suggests submission should occur by 2:00 a.m. EST to allow for any slippage in processing times at Global).  For host capture, settlement files will generally be closed out to meet Global's 3:00 a.m. cut off.  There are additional costs imposed on transactions which are not settled timely.  Furthermore, delays in settling transactions timely leads to a greater possibility of the transaction being denied for payment due to an account having been closed between the time of authorization and settlement.

Funds Availability

Funds for Visa and MasterCard transactions can, at the option of the agency, be either (1) transferred directly into their designated account or (2) transferred into an interim account  from which funds will be transferred to their designated account. The availability of Visa and MasterCard funds will, under either option, depend on whether or not the agencies designated account is with HSBC.  The following tables provide the anticipated days funds will be received into agencies' designated accounts depending on whether or not an interim account is used and whether or not an HSBC designated account at HSBC is used. 

Under the EVT Contract, Global offers a pre-funding service for Visa and MasterCard settlement amounts.  Under pre-funding, settlement amounts will be transferred from the interim working account one day sooner than that shown in the table above.  An interest fee is assessed for this service.

Funds for American Express transactions will be transferred directly by American Express to an agency's designated depository account.  The following tables provide the anticipated days funds will be received into an agency's designated account assuming they are using Global as their processor. 

Funds for Discover transactions will be transferred directly by Discover to an agency's designated depository account.  The following tables provide the anticipated days funds will be received into an agency's designated account assuming they are using Global as their processor. 

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Last Modified April 1, 2003