Merchants accepting credit card payments most likely have heard about batch processing. Credit card involves two common types of transactions—batch processing and real-time payments. Both might sound similar but have notable differences that every merchant should know before choosing the payment model. The biggest difference between the two is that batch processing doesn’t require user interaction.
It’s a set of payments processed at once, usually at the end of the business day or on a date determined by the card processing company. Real-time transactions are reflected instantly after they are initiated by a customer. If you are confused about choosing the most suitable payment model for your business, this post is for you.
We’ve explored batch and real-time payment processing in detail. Let’s understand each payment solution so you can have a better idea of which payment method is the most suitable for your business.
What is Batch Processing?
Batch processing is the process of sending a set of transactions to the bank for settlement either at the end of the day or on a specific date set forth by the card processor. It separates card authorization and settlement.
In real-time transactions, the payment is settled as soon as the issuing bank authorizes the transaction. The amount is deducted from the customer’s bank and is reflected in the merchant’s bank account immediately or within a few hours. That’s not how batch processing works.
Batch processing allows merchants to authorize card payments and settle them in batches (with other transactions). While the transaction is verified, it’s not submitted to the bank immediately for clearance.
Instead, the amount is held until the transaction is sent in batches to the acquiring bank. This is a more flexible approach to accepting payments, as it gives merchants a chance to adjust the transaction before submitting it to the bank for settlement. The money is deducted from the customer’s account when the bank clears the transaction.
How Does Batch Processing Work?
Let’s understand the two crucial elements of batch processing.
- Authorization: When a customer uses a credit/debit card at the POS or online store, the payment gateway or the point-of-sale unit sends the card details to the relevant card network for verification. The card network verifies the card data and checks whether the account has sufficient balance to process the requested transaction. Once the card is authorized, the amount is held temporarily (until it’s sent for settlement). The money won’t be deducted from the customers’ accounts, but they can’t use it either.
- Settlement: The settlement may take place within a few hours of the card authorization or in a few business days, depending on your batch processing policy. This is the final step of a transaction, as the amount is deducted from the customer’s account and credited to the merchant’s account once the transaction is settled.
Let’s take a restaurant’s payment system, for example. Let’s say you’ve made the payment for your food after dining at a restaurant and left a tip for the waiter on the table. The waiter will swipe your credit card at their POS system to authorize the transaction, but won’t process it until later. At the end of the day, they will enter the tip amount and send the transaction for settlement. This way they can adjust other transactions.
They usually do it once the business hours are over. Before leaving, the waiters enter all the tip amount they’ve collected on that date into the POS and send the batch payment for settlement. The most obvious reason businesses would consider batch processing is when they want to make changes to the transaction, i.e. add tips.
How long this process takes depends on when you process batch payments and how often you process these transactions. Some merchants process batch payments 2-3 times a day, while others wait till the end of the day to process all transactions in one sitting.
The merchant gets money within 72 hours of the payment settlement. Although the transaction is comparatively slower than real-time payments and requires an additional manual step, it gets credited into your account within a reasonable timeframe.
Why Should You Choose Batch Processing?
The two most common reasons merchants consider batch processing are the lower transaction fee and the ability to modify the payments. Let’s discuss each in brief.
Modify the Final Transaction
In the example mentioned above, the restaurant can add tips to the POS before submitting the transaction for settlement. This makes batch processing a convenient solution for restaurants, bars, and businesses in all industries where employees generate tips from customers.
Cheaper than Real-time Transactions
You may have noticed that businesses that do not accept tips or need to make changes to the final transaction also process payments in batches. That’s because it helps them lower the credit card processing fee. It saves you the individual fee for processing each transaction separately.
It is cheaper to group the transactions together and process them in one go instead of accepting each payment in real-time. However, the rates can be higher for batch processing. It’s best to discuss the cost of such payment solutions with your card network and acquiring bank before implementing it. Usually, banks charge a specific fee for batch processing. It is calculated based on how frequently you process the payments instead of the volume of transactions. That’s why most banks conduct batch processing once a day.
Are There Any Disadvantages?
Like other payment methods, batch processing comes with its share of drawbacks. Here are some come challenges of batch payment settlement.
Takes Time to Process Payments
If waiting for a few days for the payment to be reflected in your bank account doesn’t sound like an ideal way to do business, then batch processing is not for you. As mentioned above, batch processing can take anywhere between 42 and 72 hours to be credited to the merchant’s account.
Unlike real-time transactions, it doesn’t give you the option to check your account balance immediately to see if the transaction is cleared from the customer’s end. Instant payments are a much better and more reliable choice for businesses that want payment within seconds.
Besides, there’s no manual work involved in real-time transactions. Batch payments, on the other hand, require merchants to manually fill the payment details into the POS, group the transaction, and send them for settlement to their banks at the end of the day. This can be a lot of work for businesses that accept hundreds of card payments in a day.
Not Convenient for Your Customers
Most customers have the habit of checking their bank accounts to see if the amount has been deducted or not. While you may confirm the transaction is authorized, it will take time to notify your customers that the transaction is settled and the amount has been deducted from their accounts. This can be a nuisance for some customers.
The Fee is Not Minimal
Most businesses consider batch processing because of the nominal fee they pay to the card networks, instead of paying for each transaction separately. However, batch processing doesn’t necessarily incur a lesser processing fee than real-time payments.
As mentioned above, the fee you are charged depends on the number of batches you process every day. The more the batches, the higher the fee you pay. So, eventually, it doesn’t have any cost benefits. For businesses that do not receive tips, this payment model doesn’t make sense.
Cash Flow Problems
Since payments are not settled instantaneously, there’s always a risk of poor cash flow, which might impact your regular business operations. It’s important to have a proper batch processing schedule in place. Your employees must know when to process batch payments so that you don’t face poor cash flow issues.
How Is It Different from Real-Time Payments?
Both methods share some common features, but choosing one over the other will make a big difference in how you accept and process payments. Real-time payments do not separate authorization and settlement processes. Both are conducted at the same time, i.e. when the customer initiates the transaction.
The amount is immediately deducted from their account and transferred to the merchant’s account. A real-time payment can take a few hours or be processed instantaneously, depending on what day it is and the card network. It doesn’t give merchants the flexibility of adjusting the final payment later.
While the system is pretty convenient for both merchants and customers, it is more expensive than batch processing in the long run. Since you are charged a processing fee for individual transactions, you will end up spending significantly in fees. Batch processing groups the payment into one and incurs a single, one-time fee.
By now, you must know whether batch processing is an ideal payment solution for your business or whether is it better to stick to real-time payments. It’s best to make a decision based on your transaction volume, the industry you operate in, and the most convenient payment system for your customers