A card payment can feel instantaneous: you tap, get a sound of confirmation, and walk away with your purchase. But behind that split-second exchange, a host of actions occur. There is a terminal, a merchant, the payment network, and an issuing bank that communicates to determine whether the transaction is possible and how money will eventually change hands.
The first phase is known as authorization. The terminal sends a message that tells the amount, the merchant, and the card data in a secured format. The bank that issued your card is then asked to check if the card is valid, if enough money or credit remains, and whether a security feature should be triggered. Once approved, the issuing bank has agreed to put those funds on hold. At this point, the merchant has not been paid.
Consider a fictional customer buying groceries for $240. Once the bank authorizes the transaction, the banking app will most likely display that pending $240 transaction. The available balance may now show a reduced amount. At the time, the account balance will not yet change, and the transaction will not yet have been settled. It is this time difference that explains why a purchase might appear in your banking app even before being reflected on your statement.
Eventually, the merchant will send completed transactions for clearing. Clearing is a process whereby transaction information is collated and sent from the merchant bank, through the payment network, to the bank that issued the card. The final amount is determined, fees are calculated, and each institution gets information it needs to close out the transaction. This may occur later the same day or at the conclusion of the merchant’s business day.
When the funds are actually sent between banks, this is settlement. After the merchant is paid, the transaction will usually be posted on your account, changing it from pending status to completed. The merchant might not get funds immediately, since it may follow its own banking schedule. Thus, transactions may be posted to your account before the merchant is actually paid.
Not all authorized transactions reach the settlement stage. The merchant may decide to cancel the transaction and send an adjustment request, and the amount you have already authorized becomes available. A refund usually happens after the final settlement and starts a separate flow of transactions back toward the merchant. The chargeback is another thing altogether. It is a formal dispute resolution procedure governed by its own specific rules and does not ensure that you will get your money back.
To see this, try mapping out the full timeline of a purchase: use authorized, clearing, settled, and completed. Then add a canceled transaction, a refund, and a disputed transaction to see how each transaction is handled differently. When checking the status of a real purchase, you will notice the status, the date, the amount, and the merchant name. If you don’t understand something, contact the bank to get it solved. Do not share your personal security information, password, or PIN with anyone reaching out to you unexpectedly.