Gross and net settlement are two forms of financial transactions, offering varying styles, speeds, and benefits. However, there are key differences to consider.
This page will not only explain the difference between gross settlement and net settlement, but also how they work, which method may best suit your business, and how Checkout.com can support your business with both types of settlement.
Payment settlement involves the transfer of funds from the cardholder's account to the acquiring bank via a payment gateway. The acquiring bank is responsible for accepting card payments on behalf of the merchant.
After the transaction gets approval and authorization, payment settlement becomes the last step in the process initiated by a customer's transaction.
Although transaction approval can be almost immediate, the actual transfer of funds into the merchant's account may take several hours, days, or even weeks. The duration of settlement periods depends on various factors, such as the transaction type and the issuing bank responsible for transferring the money.
Net settlement is when banks collect and share transaction data during the day with a clearinghouse and the Federal Reserve Bank. This is to settle any remaining amounts owed.
Let’s say Bank X owes Bank Y $5,000,000, but Bank Y owes Bank X $3,000,000. Using the net settlement system, the Federal Reserve Bank enables Bank X to transfer $2,000,000 to Bank Y rather than hold two multi-million dollar transactions between the two banks, settling the difference in transaction amounts between the two.
A bank's net settlement is like reconciling a checkbook. The reconciliation becomes difficult when dealing with various incoming funds, such as cash, checks, and direct deposits, and outgoing expenses like cash purchases, checks, and credit card transactions.
All of these transactions, including purchases, refunds, bill payments, and received paychecks, need to be calculated to understand the complete financial picture.
Net settlement simplifies liquidity management for banks, ensuring they have enough physical cash available to meet customer demands at counters and ATMs.
There are two main types of net settlement systems:
Gross settlement, also known as real-time gross settlement (RTGS), is a system that instantly sends funds and settles transactions as they happen rather than in batches. This instantaneous process makes transactions final and irreversible.
RTGS systems are overseen at a national level by a country's central bank and are accessible only to individuals or entities banking within that country. Although the operating hours of these systems vary, some RTGS systems may operate continuously, 24 hours a day.
Gross settlement systems are ideal for larger transaction amounts that need fast and secure fund transfers, reducing fraud risks due to their rapid settlement timeframe.
Here, we’ll explain the four key differences between gross settlement and net settlement. We’ll then compare the pros and cons of each settlement method.
Which method is right for your business? Well, here are the advantages and disadvantages of net and gross settlement methods:
At Checkout.com, we’re a payment gateway that supports both net and gross settlement methods. Payment gateways serve as the vital link for authorizing transactions and settling funds between issuers and merchants, accommodating both card and alternative payment methods.
At Checkout.com, we specialize in addressing your payment settlement needs, with our comprehensive payments solution serving as both an acquirer and processor, enabling faster transaction processing and settlement.
We also ensure near-real-time authorization of payments and provide you with the flexibility to decide when to capture your customers' reserved funds, extending up to seven days after authorization via our platform.
Moreover, our platform grants you access to valuable data and insights, empowering you to improve your payment experience, boost acceptance rates, and drive revenue growth.
Experience the difference with Checkout.com for seamless, efficient payment settlement solutions tailored to your needs. Contact our sales team for more information.