The Basics of Next Day Funding

Jeff Zimmerman


Next day funding continues to be a hot topic in merchant services. Despite the popularity of next day funding, merchant account providers often still ask us questions about how it works. To appreciate the benefits of next day funding, it's helpful to understand the normal funding cycle for credit card processing. I will walk through a simple example to illustrate the difference.

In normal credit card transaction processing, funds are deposited in the merchant's account two business days after the sale transaction. For example, let's say a ski shop sells a snowboard on Monday afternoon for $350. After the store closes at 7:00 p.m., the store manager settles the terminal (batches out). The ski shop will see a $350 deposit (net of any fees) enter its bank account on Wednesday. Let me describe what happens between Monday night and Wednesday.

During the night - early Tuesday morning in this example - the merchant services provider processes the credit and debit card transactions from the prior day, submits the transactions to the card associations, and initiates a funds transfer to deposit the money into the merchant's bank account. The funds are transferred using the ACH network. The ACH network uses an overnight process to transfer money between bank accounts, so the funds are received one business day after they are transferred -Wednesday in this example.

Now that you understand the standard funding cycle, I'll explain how next day funding is different, using the same example. If the ski shop had next day funding, the merchant services provider would process the transactions late Monday night and initiate the funds transfer to the ACH network Monday night before its last cut-off time. The funds would then be deposited the next day, which is Tuesday in this case.

Seems simple, right? Unfortunately, it can be confusing because each payment processor has its own way of processing and funding. For example, each processor has its own cut-off time for merchants to make sure it can meet the cut-off time of the ACH network. Depending on their systems and capabilities, some processors have to allow for much more time in order to meet the ACH windows.

Other processors try to get around the ACH constraints by working with banks to ”memo post” transactions to merchants' accounts before the funds have truly been transferred. This sounds good, but it relies upon the policies of each bank, and often requires funds to be held at a certain bank.  

I originally published this post in 2012. I made a few edits to the post to make it even more relevant for merchant account providers.