Processing Date

A processing date is the date (month, day and year) when a merchant’s bank processes a credit or debit card transaction that has been authorized between a merchant and a customer. Processing is a broad term that describes the multi-step process of transferring funds from a customer to a merchant whenever a debit or credit card is involved in a transaction. Interbank clearing and settlement occur on the processing date.

Credit card acceptance is the first step in a credit card transaction. The merchant accepts the physical card or the card number a customer provides online or by phone. Authorization and authentication are the next steps. An electronic system sends information about the transaction to the cardholder’s bank, called the issuing bank, to make sure the cardholder has enough money available to complete the purchase. The system also makes sure the card is valid and not lost, stolen, fake or expired. The transaction is then approved or declined.

At some point during the day, perhaps after the close of business, the merchant will electronically send all of its credit card transactions together in a batch to its bank, called the merchant bank or acquiring bank. The acquiring bank sends the details of all these transactions to a settlement bank, also called a processing bank. The settlement “bank” is usually a payment technology company like MasterCard or Visa Inc.

For each transaction, the processing bank makes sure the right amount of money gets exchanged between the issuing bank (the consumer’s bank) and the acquiring bank (the merchant’s bank). This process is called “interbank clearing and settlement.” Interbank means that more than one bank is involved. The information-gathering step is called “clearing,” and the money-exchange step is called “settlement.” The whole process is automated and takes only seconds.

Next, for a purchase transaction, the settlement bank receives funds from the customer’s bank, then sends those funds to the acquirer (the opposite occurs if the merchant is issuing the customer a refund). The acquirer then transmits the funds to the merchant (or returns them to the customer), and the transaction is posted to the cardholder’s account.

The merchant pays various fees to accept credit cards from customers because of all the behind-the-scenes steps involved in processing the payments. The issuing bank – the customer’s credit card company – assumes the risk that the customer won’t pay for the transaction.