If this is the first time you are reading our “Selecting a Payment Gateway” mini-series, please, start with the Introduction to improve your understanding of this post.
Credit card payment processing involves two phases. The first one is authorization, when the card is verified (it is checked whether the necessary sum of money is available on the account) and the money is blocked (reserved for subsequent settlement). The second one, usually taking place at the end of the business day, is capture (or settlement), when the reserved amount is withdrawn from the card-holder’s account and transferred to the merchant’s account (the funds are settled). Therefore, to complete transaction processing, settlement has to be performed.
In general, there are two settlement mechanisms commonly referred to as terminal capture and host capture.
In the case of the host capture most of the work required to settle transactions is actually done by the host system (payment gateway). When host capture is used, payment gateway (the host) keeps track of all the authorizations and takes care of settlement on its own.
Settlement is generally done:
- once a day at a fixed time
- multiple times a day within fixed settlement windows
- on demand when end-of the day settlement message is received.
Generally, no or minimum information is required from a merchant to use host capture. Terminal capture is usually done by sending a settlement message\settlement file with the full information about the transactions that need to be settled. Terminal capture puts all the responsibility for the settlement logic upon the submitter (merchant).
While terminal capture does provide more control over the settlement process, it is easier to deal with host capture whenever it is possible, because it is easier to implement and support.
From the global perspective all types of settlement can be viewed as belonging to one or two groups: merchant-initiated or time-initiated. Terminal capture and on-demand host capture are merchant-initiated. Settlement, performed daily at fixed time, or several times a day within fixed settlement windows, we are talking about time-initiated host capture.
When choosing the settlement approach, every business needs to consider, what the best option is: merchant-initiated versus time-initiated, and host capture versus terminal capture.
In each particular case it is important for a merchant to consider all the business needs while making a choice between terminal capture and host capture mechanisms, as host capture may not support certain features needed by the merchant.
While the preference is usually on the host capture side, merchants need to check if it fits their business model, and, at the same time, whether all the necessary features can be accommodated by the host capture system (as some features might be supported by payment gateways only under terminal capture).
If all of the features necessary can be accommodated by the host capture mechanism, it is really the preferred way of settlement.
As in the cases of other payment gateway selection criteria, while choosing a settlement mechanism, a reseller must carefully analyze the needs of the merchants it is dealing with.
While making a decision concerning settlement mechanism selection, a reseller should consider all the aspects, which are critical for a merchant. However, if resellers accept some limitations in order to simplify the integration process, they need to understand that any problems resulting from these limitations will be multiplied by the number of the merchants the resellers are dealing with.
Our next post will cover standard credit card features to be considered during payment gateway selection.