Net settlement: the key to better organized cash flows
Dive into the benefits of net settlement and discover how it can lead to better cash flow management for you.
![desktop-net-settlement](https://blog.mangopay.com/hubfs/desktop-net-settlement.png)
![desktop-net-settlement](https://blog.mangopay.com/hubfs/desktop-net-settlement.png)
When it comes to payment settlements, platforms need to consider two options. There is the gross settlement, where transaction fees are invoiced at the end of the month, and net settlement, where fees are deducted instantaneously at the point of transaction, so fees are applied right away. The latter helps businesses understand their daily costs better, making it easier to keep track of money coming in and going out.
In this overview, we'll look at the key differences between gross and net settlement and the benefits of net settlement for your payment operations and cash flow management.
The settlement: an essential step in the payment process
Settlement is that phase in the payment process when the issuing bank deposits the payment amount in the platform’s bank account. Platforms then reconcile the settled transactions with their internal records, ensuring all sales and refunds are correctly accounted for. This may involve matching transaction amounts and fees against bank statements.
Here is how the entire payment journey looks with Mangopay.
Weighing the options: gross settlement or net settlement?
Net settlement involves handling each payment one by one as they occur, meaning transactions are settled the moment they're made. While the payments themselves are immediate, any fees related to the transaction, such as those from card schemes or the acquiring bank, are deducted at the point of transaction. Once a transaction goes through in a net settlement system, it's complete and irreversible due to the real-time nature of the processing.
Gross settlement, on the other hand, bundles all transaction fees over a set period, and the platform is invoiced at the end of the month.
The benefits of net settlement
Net settlement simplifies the payment process by aggregating transaction fees at point of transaction, especially for marketplaces and platforms that deal with a high volume of transactions.
Handling multiple transactions and associated fees on a daily and monthly can be tedious. By dealing with all transaction fees as they happen, platforms can increase the efficiency of cash flow management. What’s more, platforms operating on a global scale in multiple currencies often encounter cash flow complexities. Net settlement reduces these challenges due to its centralized process consolidating all transactions across different currencies.
How net settlement works
With net settlement, transaction fees are deducted at the time of payment. Here are the steps:
- The transaction is successfully completed.
- Transaction fees are automatically deducted.
- The buyer's account is credited with the funds.
- The platform may choose to either hold the funds or initiate a transfer or payout.
- The payment processor reconciles payments daily.
- At the end of the month, the platform receives an invoice detailing all transaction fees.
In the same scenario, with gross settlement, every transaction would have been settled individually without aggregating transactions over a period. This approach is suitable for transactions where immediate settlement is critical, but for a platform trying to manage a high volume of transactions, net settlement is generally more efficient.
We manage your settlements, you focus on scaling your platform. Get in touch to learn how to simplify and improve your payments and cash flow operations.