What does Settlement in payment processing involve?

Settlement in payment processing specifically refers to the process by which the issuer, typically the bank that issued the credit card to the consumer, sends payment to the acquirer, which is the bank or financial institution that processes credit card transactions on behalf of the merchant. This step is crucial in the transaction lifecycle as it ensures that funds are transferred from the cardholder's bank to the merchant's bank.

At this stage, the transaction amount is finalized, and the acquirer receives the funds, which have been deducted from the issuer's account. This process typically happens after several preceding steps, including authorization and batching of transactions. After settlement, the merchant receives the funds, completing the cycle of the transaction.

Other options listed involve actions that may occur within the realm of payment processing but do not encompass the definition of settlement. For instance, collecting cash from customers refers to direct retail transactions and not to credit card processing; billing the cardholder is associated with the invoice process rather than the settlement phase; and issuing refunds relates to reversing a transaction, rather than completing a settlement. Understanding the distinct role of settlement helps clarify the overall payment ecosystem.