Clearing and settlement for cards

IN ONE LINE

An everyday analogy: if authorisation was the phone call, clearing is the paperwork and settlement is payday.

Through the day, Demo Coffee Ltd collects approved taps the way a waiter collects signed bills — promises, not cash.

At closing time the batch goes to Meridian Bank, the acquirer, which files each transaction with the Cardnet network (a fictional stand-in for Visa- or Mastercard-style networks).

Overnight the network plays accountant: it sorts every record to the issuer that must pay, nets off what each bank owes against what it is owed, and has only the differences moved between banks.

Then Bank Alfa turns Maya Chen's hold into a real debit, and Meridian Bank pays the coffee shop — slightly less than the tap amount, because the fees come out on the way through.

(SYNTHETIC / TRAINING ONLY — all names fictional.)

WHAT IT ACTUALLY IS

Clearing is the exchange of the transaction's full financial record; settlement is the movement of money it results in.

After authorisation, each approved payment is submitted as a clearing record — its presentment — usually in end-of-day batches from merchant to acquirer to network.

The network validates each record, applies interchange — the fee the acquirer pays the issuer, set by card type, merchant category and channel — and sorts the records out to issuers in its clearing cycle.

It then computes each bank's net position: everything it owes minus everything it is owed.

A settlement bank moves those net amounts.

The issuer posts the final debit to the cardholder, releasing the authorisation hold; the acquirer credits the merchant minus the merchant discount rate — its all-in fee, which bundles interchange, the network's scheme fees, and the acquirer's own margin.

HOW IT WORKS

The practitioner's view is clocks and reconciliations.

Clearing runs in cycles with cut-offs; a presentment that misses today's cycle rides tomorrow's, which is one reason the statement debit lags the tap by a day or two — how long exactly is scheme- and cycle-dependent, so treat any 'T+1' you hear as a habit, not a law.

Cleared amounts can legitimately differ from the authorised ones — tips, fuel, hotel folios — and currency conversion happens here, at clearing-time rates, not at tap time.

Every stage reconciles: the acquirer matches presentments to authorisations, the issuer matches clearing files to holds, and both match the network's settlement reports to the money that actually arrived from the settlement bank.

Records the network cannot accept — malformed, too late, or missing a required authorisation trail — do not settle; they come back to the acquirer for repair and re-presentment.

THE WORDS

Clearing record

The batch record an acquirer submits after the sale that carries the final amount into the network's clearing cycle, where interchange is applied.

Presentment

The scheme-rule name for delivering a transaction into clearing: the acquirer's first presentment claims payment from the issuer; disputes can trigger a second.

Interchange fee

The per-transaction fee the acquirer pays the issuer under scheme rules — capped in the EU at 0.2% (consumer debit) and 0.3% (consumer credit) of the value.

Scheme fee

What the card network itself charges issuers and acquirers for membership and processing — separate from interchange, which flows between the banks.

Merchant discount rate

The overall price a merchant pays its acquirer for card acceptance — interchange plus scheme fees plus the acquirer's margin.

READ FIRST

• Authorization: the first journey

CONNECTED TO

• FLOW Card clearing & settlement
• CHECKPOINT Card fundamentals checkpoint

SOURCES

• A glossary of terms used in payments and settlement systems — CPSS (now CPMI), Bank for International Settlements
• Payments Signal editorial teaching models — Payments Signal