What does the term 'settlement' refer to in credit card processing?

The term 'settlement' in credit card processing specifically refers to the finalization of transaction funds transfer. It is the process where the funds from a credit card transaction are transferred from the cardholder's bank (the issuing bank) to the merchant's bank (the acquiring bank). This crucial step comes after an initial approval of the transaction, which merely confirms that the cardholder has sufficient credit available.

During settlement, the financial transactions are aggregated, and the necessary funds are moved between banks, allowing the merchant to receive the payment for the goods or services provided. This is distinct from other processes involved in credit card transactions, such as generating daily reports or handling chargebacks, which occur at different points in the transaction lifecycle. By understanding settlement, professionals in the payments industry recognize its importance in ensuring that payments are completed and funds are effectively transferred.