POS PAYMENT FLOW EXPLAINED: FROM CHECKOUT TO SETTLEMENT

Understanding the Initial POS Payment Steps

The point-of-sale (POS) payment process begins the moment a customer chooses to make a purchase and presents a payment method, typically a debit or credit card. From that point, multiple stakeholders — including the merchant, acquirer, card network, and issuer — play roles in ensuring the transaction is processed securely and swiftly. The flow can be divided into several critical stages: checkout, authorisation, clearing, and settlement.

1. Initiating the Transaction

When a customer reaches the end of their shopping journey, they are directed to the POS terminal where the transaction is initiated. The payment method can be a magstripe swipe, chip insert, or contactless tap. The terminal collects the payment data encoded on the customer’s card, including:

• Cardholder name
• Card number (Primary Account Number or PAN)
• Card expiry date
• CVV or CVC code

If the card has a chip, an EMV transaction takes place, adding an extra layer of dynamic data to counteract fraudulent activity.

2. Transmission to the Acquirer

Once the terminal reads the card data, it encrypts and sends the information to the acquiring bank (also known as the merchant’s bank). This step happens in near real-time via secure communication channels. The acquiring bank acts as an intermediary, passing the transaction request to the correct card network (e.g., Visa, Mastercard, American Express).

3. Routing Through the Card Network

The card scheme (or card network) receives the authorisation request from the acquirer and determines which issuing bank (the customer’s bank) is responsible for the card. It then forwards the request to the issuer for approval, while ensuring compliance with regulatory and fraud prevention protocols.

4. Issuer Decisioning

At this point, the card issuer evaluates whether the transaction is valid using a combination of factors:

• Sufficient available funds or credit limit
• Card status (reported lost/stolen or active)
• Security rules (e.g., PIN entry or transaction limits)
• Historical account behaviour and fraud scoring

If approved, the issuer sends an authorisation code back through the chain — via the network to the acquirer and finally to the POS terminal. If declined, a reason code is sent instead with an appropriate failure message displayed to the customer.

5. Customer Notification

The POS terminal receives and displays the result. If the transaction is authorised, the merchant proceeds to issue a receipt and conclude the sale. At this point, the transaction is considered approved — but not yet finalised. The money has not yet moved.

Clearing: Preparing Transactions for Settlement

After a transaction is authorised at the POS terminal, it enters the clearing stage — the behind-the-scenes process that matches, formats, and prepares payments for eventual settlement. While authorisation establishes a temporary hold, clearing serves to formally exchange detailed transaction information among financial institutions.

1. Batch Processing and Data Compilation

Merchants typically batch transactions, meaning sales from a day or defined period are grouped before submission. The POS system or payment gateway compiles these into a file that includes line-item details for every transaction:

• Transaction amount and currency
• Merchant ID and location
• Timestamp of sale
• Card information and authorisation code

This compiled file is then forwarded to the acquiring bank. Many merchants submit daily batches during off-business hours to maximise efficiency and reduce system load.

2. Acquirer and Network Roles

The acquirer reviews the transaction data for completeness and accuracy before forwarding it to the appropriate card network. At this stage, it is crucial that formats adhere to each network’s clearing rules and standards (e.g., ISO 8583).

The card scheme plays a central role in routing and translating the information into a format the issuing bank can interpret. It also timestamps the data for future reference, associates fees, and ensures that both the acquirer and issuer are in sync regarding amounts and terms.

3. Handling Fees and Chargebacks

As part of clearing, interchange fees are calculated — the costs borne by merchants for accepting card payments — and these are deducted later during the settlement stage. If a transaction is flagged for review or possible future dispute, the relevant indicators (such as AVS mismatch or suspicious location) are documented during clearing.

4. Time Frames and Business Day Impact

Clearing does not represent money movement but is essential to prepare accurate, dispute-free settlement later. The process may take from several hours to a full day, depending on cut-off times and the type of card used. For example, local debit card transactions might clear faster than cross-border credit cards due to reduced network complexity and regulatory oversight.

5. Preparing for Settlement

Once all data is validated and each party agrees on the details, the transaction becomes “cleared.” The issuing bank now expects to receive a financial instruction requesting the actual funds transfer — to be processed in the next and final step: settlement.

Final Stage: Completing the POS Payment Cycle

The final step in the POS payment process is settlement — where money officially changes hands from the cardholder’s issuing bank to the merchant's bank account. While authorisation and clearing set the foundation, settlement completes the transaction cycle and provides liquidity to the merchant.

1. Issuing Bank Transfers Funds

Upon receiving the financial settlement instruction from the card network, the issuing bank initiates payment to the acquiring bank. The amount issued reflects the authorised transaction value minus interchange and other card scheme fees. This movement happens via established banking rails, such as automated clearing house (ACH) systems or SWIFT, depending on geography and transaction type.

2. Acquirer Credits the Merchant

After receiving the funds, the acquirer deposits the final amount into the merchant’s business account. This typically occurs on a T+1 or T+2 basis — meaning one or two working days after the transaction date, although this can vary depending on:

• Merchant’s settlement agreement
• Type of card (debit vs. credit)
• Geographic location
• Risk profile and transaction history

3. Reporting and Reconciliation

Merchants receive settlement reports detailing gross sales, refunds, chargebacks, and fees deducted during the clearing phase. Accurate reconciliation is vital to match sales with deposits. Many businesses use accounting software integrated with their POS or payment gateway to simplify this process and identify inconsistencies quickly.

4. Handling Exceptions

Occasionally, transactions may not settle as expected due to:

• Insufficient funds in the cardholder’s account
• Fraudulent or disputed transactions
• Technical mismatches between clearing and authorisation data

These are escalated through formal dispute resolution mechanisms, with chargebacks initiated based on card scheme rules to protect consumers and ensure merchant fairness.

5. Transparency and Trust

The efficiency and reliability of the settlement phase are crucial in maintaining trust among all parties. Merchants rely on timely deposits, acquirers depend on accurate reporting, and cardholders expect clarity in statements. As digital transactions grow, ensuring a smooth settlement process helps minimise chargebacks, reduce fraud, and build long-term financial trust between merchants and their customers.