Clearing
Clearing is the process by which payment institutions exchange the records of transactions between them and agree what each owes the other — the acquirer submits the day's captured card transactions to the network, the network validates and sorts them by issuer, computes the fees, and produces the obligations that settlement will pay. It is the bookkeeping between authorisation (the promise) and settlement (the money): after clearing, the amounts are fixed and final; before settlement, no money has moved.
- Also known as
- Payment clearing, Card clearing, Clearing and settlement
- Used at
- every card transaction (cleared by the network after capture), every bank transfer through a clearing house (an ACH, SEPA's clearing houses, CHAPS-style systems), securities and derivatives (a clearing house that becomes counterparty to both sides)
- Binding
- the scheme or clearing-house rules on file formats, cut-off times, data requirements and error handling; a transaction that fails clearing validation is rejected back to the submitter
- Typical timing for cards
- authorised in real time, captured by the merchant within hours or days, cleared in the acquirer's daily submission, settled by the network the next business day; the clearing record carries the interchange category and the acquirer reference number
- Typical distinction
- clearing establishes the obligation and the amount; settlement transfers the funds; in card schemes the two are separate steps run by the network; in real-time gross settlement they collapse into one
- Parties
- acquirers and issuers (card), banks and clearing houses (transfers), the network or clearing house in the middle, and the central bank where settlement finally lands
How clearing works in practice
A merchant captures Monday's card sales at 23:00. Its acquirer builds a clearing file — every transaction with its amount, card, merchant, date, the authorisation reference, and now an acquirer reference number — and submits it to Visa and Mastercard by their cut-off. Overnight the networks validate each record, match it to the authorisation where required, assign the interchange category (which decides the fee the issuer receives), sort the records by issuing bank, and compute the net positions: acquirer A owes issuers X, Y and Z these amounts less these fees. The issuers receive the records and post the transactions to cardholders' accounts; the net positions go to settlement, where the money moves between the members' accounts at the settlement bank the following day.
The step matters because it is where the amounts become final and the disputes begin. A transaction authorised for €100 and captured for €95 clears at €95; one captured twice clears twice and is reconciled back; one cleared with the wrong interchange indicator costs the acquirer the difference. Chargebacks are clearing messages too — a reversal flowing the other way — and the network's clearing system is the ledger both sides argue from. For bank transfers the clearing house does the same: collects instructions, nets them, and hands the settlement instructions to the central bank.
For payments engineers, clearing is the batch that runs at night; for finance teams, it is why "the customer paid on Monday" and "the money arrived on Wednesday" are both true.
Example
An acquirer's clearing file on a Tuesday night contains 3.2 million transactions for €280m. The network rejects 4,100 for validation errors — missing authorisation references on 3,000 (a gateway bug that day) and invalid merchant category codes on 1,100 — worth €410,000, which the acquirer corrects and resubmits Wednesday, delaying those merchants' settlement by a day. Of the rest, 18,000 transactions clear with a "non-secure" interchange indicator because the 3-D Secure data was not carried into the clearing record, costing the acquirer's merchants a higher interchange rate on €2.1m — €6,300 the acquirer refunds when its reconciliation team spots the pattern. The night's clearing establishes €279.6m of obligations; settlement moves them Thursday.
Common mistakes
- Treating "cleared" as "paid"; settlement is a separate step and a later day. - Clearing records that lose the authorisation data, and pay higher interchange for it. - Missing the network's cut-off and settling a day late across the whole merchant base. - Reconciling captures against settlements without the clearing file between, so rejections are invisible. - Confusing card clearing (the network's batch) with a clearing house (a counterparty to both sides).