What Is Batch Processing?

Batch processing is a method used to process a day’s worth of credit card transaction all at once. The term batch processing, or batching out, actually originated long before credit card processing terminals, processing software, or electronic payment gateways were ever conceived. Back in the days when computers used punched cards to store data similar to today’s software programs, these cards were sorted into groups that had similar program requirements and run through the mainframe together as a batch. From these humble beginnings comes the concept of batch processing for credit card transactions, where sales authorizations are stored throughout the day in your point-of-sale terminal or online, and sent to your processor as one file to be cleared and settled. Simply put, after making a sale, batching out is the next step in the credit card payment process towards getting paid for your merchandise or service.

How Batch Processing Works

Batch processing works the same way whether your customer swipes his card at your POS terminal or you input the information from an on-line or phone sale. Let’s say you are the owner of a charming, 4-star Italian restaurant. A customer comes in, enjoys his meal, and, after lots of compliments to the chef, you present him with his check. He discreetly slips his credit card into the check folio, and you take it to your credit card payment terminal for processing. When you swipe the card, the information is relayed to your credit card processor, then on to the bank that issued the card, and within seconds you get back an authorization code.

At this point in the process, it would seem like the transaction is settled. But that’s not the case. All you have is an approval or decline code. If it’s approved, you know the card is valid. It’s gone through all the security checks and it’s not stolen, being used fraudulently, or over the limit. If the transaction is approved, this authorization record is stored in your POS terminal (or processing software or electronic payment gateway) to be sent along with the rest of your day’s receipts in one batch to your processor. Of course, if you get back a decline code, you must go back to your customer to request another form of payment.

Now when it comes time to batch out your day’s receipts, you transmit all the stored authorization codes to your credit card processing company. They in turn sort the transactions and present them to each individual issuing bank for payment. Usually within the space of a 48-hour time period, the issuing bank sends the funds back to your credit card processor, and it’s deposited into your account, less the fees involved for the transaction. Meanwhile, the issuing bank bills the cardholder, who sees the charge on his next monthly statement. You get your money, the issuing bank gets their money, and your customer is still raving about your special of the day. Everyone’s happy.

Obviously, this is an abbreviated version of how batch processing works. Other information needs to be added to the stored transaction before it gets batched out, for example a tip for the server, which is added after the card has been approved.  But it helps to point out what an important step batch processing is in the overall scheme of credit card processing.

The Benefits vs. The Pitfalls

Of course, there both positives and the negatives associated with batch processing. Some merchants prefer to batch out their credit card transactions because:

1. It’s an automated process that is so convenient. Batching out can be done at the end of the business day when computers or phone lines are free, or you can automate your system so sales transactions are batched out at specific times during the business day.

2. Batching out makes it easy to go back and find a specific transaction. If a customer wants a refund on his purchase or has some other issue, you can find the transaction with a simple search of the batch number.

3. If you process recurring transactions, such as monthly service or subscription fees, you can set up a computer program that automatically sends a file to your processing company with all the information on the customers to be billed that month.

4. By sending credit card transactions in batches, instead of individually, there is less of a security risk. Fewer connections made to transfer credit card transaction to your processor during the day means less of a change your files could be compromised.
Batch processing fees can save you money over the cost of processing each transaction individually.

However, there are two major pitfalls when using batch processing:

1. If you forget to batch out at least once within a 24-hour period, your transactions could be subject to higher fees.

2. As we explained above, an authorization from the issuing bank for a credit card transaction is not the same as settling the transaction and starting the money transfer. It simply means at the time you swiped the card or keyed in your customer’s information, there was enough money in the account to cover your charge. If you batching out at the end of the day, you won’t know about any problems with the payment until the next day after the transactions are processed by the issuing bank. So you risk losing the profits from the sale if you can’t reach the customer and ask for another form of payment.

Is there a way to avoid this risk? Yes, by using a method called Real-Time processing. Real-Time processing is exactly what it sounds like: If the final amount of the sale is known at the time of processing, then all the data needed to get authorization for the credit card and the data to settle the transaction is sent to the issuing bank at one time. The issuing bank processes the charge and bills the cardholder immediately.

The way you choose to process your credit card transactions can depend on a lot of factors, for example: how much credit card business you do in a day, what kind of processing equipment or software you use, how much phone or internet access you have. But whether you have an e-commerce site, or you own a small business, or you run a large retail operation, you will find that batch processing can be the most efficient and cost effective way to process your daily credit card transaction.