5. Settlement Time
Main purpose of online payments is getting ‘money’ from user. So ‘settlement’ is the crucial part of the payment cycle. Let’s assume transaction was successful, when will merchant get the money and how much?
In this section, let us touch upon settlement time of followed by payment aggregators.
Three factors affect settlement time
1. Type of merchant:
Standard settlement time is T+2 working days
Exceptions: (a) MF merchant (T or T+1 depending on liquid or non-liquid funds) (b) if you are large merchant then you can negotiate on T+1 day settlement
2. T Count
In payments world, days are always working days (as per RBI list). So that means there won’t be any settlement on 2nd & 4th Saturdays, Sundays, Bank holidays (as per RBI List)
3. Transaction time:
Different banks have different transaction cut off time. So any transaction done after cut-off will move to next settlement batch.
Illustration of settlement time:
Let us assume, the settlement time is T+2 days then this is how settlement cycle looks
Why T+2 day?
Because it takes time for reconciliation and then move the money.
Reconciliation:
Imagine you and your friends had gone for dinner. At the end, the bill comes to your table and one of your friends checks whether bill amount is correct based on orders you placed. If both are matching then ‘reconciliation’ is successful else you ‘call the manager’ for corrections.
Exactly similar process is followed by aggregator as well.
An aggregator has to match amount needs to be received for successful transactions Vs. total amount received by banks. And then total success transactions of merchant is checked and corresponding amount is settled. (After factoring adjustment for refunds)
Considering an aggregator works with 50+ banks and lakhs of merchants so reconciliation is time consuming process.
Fund Movement:
Issuing bank has to move money to acquiring bank and acquiring bank has to move money to aggregator then only aggregator can settle to merchant.
In net-banking & wallets: The bank or wallet company has to move money to aggregator.
As aggregator works with multiple banks so funds start moving in to aggregator’s account on different time on T+1 day. Post that aggregator has to reconcile and do settlement to merchant.
Merchant receives money for successful transaction… right? Then why wait to receive money from banks then settle to merchant?
A risk averse aggregator, settles money only when receives from the banks than funding from its own account (because of opportunity cost)
Funds sit in aggregator’s account for a day (since received from bank till settled to merchant)… so aggregator earn interest on that?
No… RBI mandates that Aggregator has to move money through Nodal account which is non-interest earning account.
Also, as per nodal account guidelines, the funds should exit the account by T+3 days. (these are strict guidelines as RBI audits these nodal accounts)
Crores of funds move through aggregator’s nodal account but NO INTEREST?
That is not entirely true, aggregator work in multiple ways to take advantage of this fund/float to gain in either financials or business. We will cover this in ‘revenue models’ section.
<<Let’s move to next section — Settlement Amount>>
