Understanding the Complete Payment Process: From Transaction Initiation to Settlement

When can we say a payment is truly finished? Is it when the Payer’s money leaves their account, or only when the Merchant actually receives it?

The payment process involves several steps that take place behind the scenes. Once a transaction is made, it can take up to a few days before the funds appear in the Merchant’s account. During that time, the transaction might be shown as pending, processing or in another non-final status. At the end of the payment process, it can be in a successful final status, or it can even be declined or reversed.

So, what exactly happens during the payment process?

Introduction to the Payment Process

The payment process is the process of transaction initiation with the goal of transferring money from the Payer's account to the business receiving the funds.

In the UK, this process is supported by strong Payment Systems. The Faster Payments Service sends money between banks almost instantly, and Bacs handles millions of salary payments and direct debits every day. Card payments run through networks (such as Visa and Mastercard), and these have built-in fraud checks.

Open Banking rules require banks to use strong customer authentication and allow approved third parties to make payments or access account information. This has made it possible to offer budgeting apps and faster payments to businesses and still keep payments secure.

Key Stakeholders in the Payment Process

The payment process in banking involves several key players:

• Cardholder – The customer who uses a debit or credit card to pay for goods or services.
• Merchant – The business that sells the goods or services and accepts card payments.
• Issuer bank – The bank that provides the Cardholder’s debit or credit card and approves or declines payment requests.
• Acquirer bank – The bank that works with the Merchant to process transactions and receive the funds.
• Payment networks – Companies that connect Issuer and Acquirer banks and make sure payments are routed correctly.
• Payment gateways – The technology platforms that send payment details from the merchant to the acquirer and keep the process fast and secure.

Orchestration, the behind-the-scenes coordination of all the systems and steps involved in processing a transaction, manages how the parts work together.

Stages of the Payment Processing

As we’ve mentioned, payments go through a few important steps before they’re complete:

Payment Initiation

A transaction starts when a customer chooses a payment method and provides their payment details. It can be done online through a website or app, in-store via a card terminal, or on a mobile device using wallets like Apple Pay, Google Pay or other APM..

In the UK, most people tend to pay for things with a debit or credit card or just tap their card or phone for a contactless payment.

Payment Authentication and Preauthorisation

Once initiated, the payment must be confirmed as legitimate and approved for processing. Authentication methods include PIN entry, 3D Secure, PSD2 Strong Customer Authentication, and biometric checks like fingerprint and facial recognition.

Payment Capture

After preauthorisation, funds are placed on hold in the customer’s account.

Capture is the action of securing these funds for transfer to the merchant. Some merchants capture immediately (common in retail), and others wait until goods are shipped or services rendered.

Payment Cancel is the opposite of Capture, which cancels the deduction and returns the locked amount back to the Payer's card.

Clearing and Settlement

Clearing is the process of sharing transaction details between the Merchant’s bank (acquirer) and the Customer’s bank (issuer) through payment networks. Settlement refers to the stage where the funds are transferred into the Merchant’s account. In the UK, this process typically takes one to three working days.

Reconciliation and Reporting

Merchants review payment records, match them with internal sales data, and confirm all transactions have been processed correctly. Accurate reconciliation is essential for proper accounting and identifying suspicious activity.

Payment Reversals (Refunds, Chargebacks, and Preauthorisation Reversals)

Payment reversals happen when money that was already authorised or transferred is sent back to the Customer. They can occur for a variety of reasons, from a customer changing their mind to a disputed transaction or a technical issue during payment processing.

Common Transaction Statuses Explained

When you make a payment, it may show different statuses as it moves through the processing steps:

Authorised

The payment has been approved by the Customer’s bank or card issuer, but the money has not yet moved. The bank confirms there are enough funds or credit and temporarily reserves the amount.

Pending

The payment is in progress but not yet finalised. This can occur due to bank processing delays, fraud checks, unusual transaction reviews, or the time between preauthorisation and capture. Pending doesn’t always indicate a problem.

Captured

At this stage, the merchant finalises the payment and requests the funds. The reserved amount from the preauthorisation is taken from the Customer’s account. In many businesses, capture happens right after preauthorisation, but some delay it until goods are shipped or services are provided.

Settled

This is the transfer of funds from the customer’s bank to the merchant’s account. Depending on the payment method and agreements between banks, this process takes anything from a few hours to several working days.

Declined

A payment has been refused by the acquirer or card issuer. Common reasons are insufficient funds, entering the wrong details, using an expired card, a suspected fraud alert, or hitting the credit limit. Let customers know why it happened and offer another attempt to avoid frustration.

Refunded

A refund returns money to the customer, either partially or in full, due to returned goods, order cancellations, or service issues. Depending on the payment method, the refund may take a few days to show in the customer’s account.

Chargeback

A chargeback happens when a customer disputes a payment with their bank, and the bank sends the money back. This happens because of fraud, missing deliveries, or goods that aren’t as described. Merchants must provide proof to challenge unfair chargebacks and avoid losing money or paying extra fees.

Challenges and Risks in the Payment Process

Businesses face various challenges and risks that impact the speed and success of transactions:

Fraud and Security Threats

Payment fraud can take many forms, such as stolen card details, identity theft, phishing scams, or account takeovers. Security gaps, such as weak authentication, outdated software, or poor encryption, give criminals an opening. As a result, fraud can erode trust and cause serious financial losses for both merchants and customers.

Payment Failures and Declines

Every failed or declined payment risks losing a sale and leaving a customer annoyed. If it happens too often, it can hurt the business’s reputation and make customers think twice about coming back.

Chargebacks and Disputes

Disputes take time to resolve and often involve providing evidence to the bank. Even if the Merchant wins, chargebacks can mean extra costs, lost time, and higher risk ratings with payment providers.

Compliance and Regulatory Risks

UK and EU payment rules are strict. PSD2 requires strong customer authentication to reduce fraud. GDPR sets out how personal and payment data must be stored and processed. The FCA regulates payment institutions to ensure fair, transparent services.

Non-compliance can lead to fines, legal action, or the loss of the right to process payments.

Best Practices for Managing the Payment Process Effectively

Here, we’ll share practical tips for managing the full payment process effectively and improving overall payment performance:

Choosing Reliable Payment Partners

The foundation of a strong payment process is the provider you choose.

• Look for payment gateways and providers with a solid track record for uptime, fast settlement times, and robust security measures.
• A good partner should offer multiple payment methods (cards, bank transfers, and digital wallets) so customers can pay the way they prefer.
• It’s also worth considering customer support quality. When something goes wrong, quick and knowledgeable help can save the sale.

Implementing Fraud Prevention Measures

Fraud prevention protects your revenue and your reputation. Use tools like 3D Secure authentication, AVS (Address Verification Service), and real-time fraud scoring to spot suspicious activity before it becomes a problem. Multi-factor authentication and tokenisation make payments more secure, too.

Training staff to recognise signs of fraud, such as unusual order patterns or mismatched delivery addresses, also helps keep threats in check.

Real-Time Monitoring and Analytics

Constant visibility into payment activity allows businesses to detect issues early on. Real-time dashboards and alerts can flag failed transactions, unusual traffic spikes, or patterns that suggest fraud.

Beyond spotting problems, consider using analytics to identify trends. For example, you might notice that certain payment methods work better than others, or that declines happen more often at specific times of day. Then, it’ll be easier to adjust processes.

Ensuring Compliance and Transparency

Complying with payment regulations protects your business and keeps you on the right side of the law. Following PSD2 and GDPR standards helps avoid penalties and reassures customers that their payments are secure.

Clear information about terms, fees, and refund timelines further strengthens trust and sets the right expectations.

The Future of Payment in the UK

The way payments are approved and processed is set to change dramatically in the coming years. Data-driven technologies are leading the charge:

• Biometrics – fingerprint and facial recognition, and even voice authentication will make it quicker and more secure for customers to approve payments. This should reduce reliance on passwords and PINs.
• Cloud computing – allows transactions to clear more quickly, systems to scale easily during busy periods, and connections with other financial platforms to be more straightforward. It also helps institutions bring new services to market faster.
• Artificial intelligence – AI will help detect suspicious transactions in real time, approve legitimate transfers more quickly, and personalise payment experiences for customers.
• Tokenisation – replacing sensitive card details with unique tokens reduces fraud risk and makes storing payment information safer across platforms.

Alongside these innovations, new powers for UK banks to hold suspicious payments, tighter rules to safeguard customer funds from 2026, and enhanced data sharing will boost overall payment security.

Anyway, forecasts help, but the payment landscape shifts in unexpected ways. Keep an eye on industry news and payment trends to spot changes early and respond in time.