Clearing and settlement for cards
Authorisation moves no money. Clearing files and net settlement do — with interchange applied on the way. The second journey of a card payment.
L0 Explain simply
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.)
L1 Core concepts
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.
L2 Practitioner view
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.
L3 Technical details
Two rule layers price and time this pipeline. Regulation (EU) 2015/751 caps consumer interchange in the EEA at 0.2% (debit) and 0.3% (credit) of the transaction value (Articles 3 and 4); commercial cards and three-party schemes sit outside the caps. The scheme manuals govern the mechanics: presentment time limits counted from the transaction date, the data a clearing record must carry to qualify for a given interchange category, and the settlement services through which net positions are funded. Late presentment is more than untidy — it can downgrade interchange or expose the acquirer to chargebacks under the networks' rules. Multilateral net settlement, finally, concentrates risk on the settlement day itself, which is why networks impose collateral and exposure controls on settling participants.
Sources & standards2
- Simplified educational illustration
Payments Signal editorial teaching models — Payments Signal
Used wherever diagrams, scenarios, figures, or example values are didactic constructions rather than sourced facts; every such use carries a simplifications disclosure. All people, companies, banks, and list entries in examples are fictional.
- Market practiceMarch 2003 edition
A glossary of terms used in payments and settlement systems ↗ — CPSS (now CPMI), Bank for International Settlements
Terminology has evolved since this edition; newer CPMI publications refine some definitions.
SEE THE PAYMENT MOVE
Read the steps as text
- 03Clearing obligationCardnet runs the clearing cycle and applies interchangeCardnet (card network)
The network validates each record and attaches interchange — the fee the acquirer pays the issuer on each transaction, set under the scheme's rules. The record now says exactly who owes whom, and how much of it is fee.
Clearing establishes obligations, interchange included. No money has moved yet — that is settlement's job.
- 04Clearing obligationCardnet calculates each bank's net positionCardnet (card network)
Across the day's records, everything each bank owes and is owed collapses into one net figure per participant — multilateral netting. Bank Alfa owes the net of what its cardholders spent; Meridian Bank is owed the net of what its merchants sold.
A net position is still an obligation, not money.
- 05SettlementNet amounts move between settlement accountsBank Alfa (issuer) → Meridian Bank (acquirer)
The scheme's settlement bank moves each participant's net amount. On this transaction Bank Alfa settles EUR 42.40 to Meridian Bank — the EUR 42.50 sale less the illustrative EUR 0.10 interchange the issuer retains — inside Bank Alfa's larger net payment. This is the moment money actually moves between the banks, typically a day or two after the sale, on a timetable each scheme's rules set.
- DR Bank Alfa settlement account — EUR 42.40
- CR Meridian Bank settlement account — EUR 42.40
- 06PostingBank Alfa posts the final debit and releases the holdBank Alfa (issuer)
The cleared record replaces the authorisation hold: the reserve is released and a posted debit takes its place. Only now has Maya's money actually left her account — the 'pending' line on her app becomes a booked transaction.
- RELEASE Maya Chen's card account at Bank Alfa — EUR 42.50
- DR Maya Chen's card account at Bank Alfa — EUR 42.50
- 07PostingMeridian Bank pays Demo Coffee, less the merchant discountMeridian Bank (acquirer)
The acquirer credits Demo Coffee EUR 41.90 — the sale less the merchant discount, the acquirer's charge that covers interchange, scheme fees and its own margin. The figures are illustrative; the actual rate comes from Demo Coffee's acquiring agreement.
- CR Demo Coffee Ltd settlement account at Meridian Bank — EUR 41.90
Sources for this topic2
- Market practiceMarch 2003 edition
A glossary of terms used in payments and settlement systems ↗ — CPSS (now CPMI), Bank for International Settlements
Terminology has evolved since this edition; newer CPMI publications refine some definitions.
- Simplified educational illustration
Payments Signal editorial teaching models — Payments Signal
Used wherever diagrams, scenarios, figures, or example values are didactic constructions rather than sourced facts; every such use carries a simplifications disclosure. All people, companies, banks, and list entries in examples are fictional.
Deepest material on this page: L3 — Technical details. Where a topic stops short of implementation depth, that is a deliberate coverage decision, not an oversight — see coverage.