Clearing & Settlement

Question 1

If a transaction is in pending it means…

Answer 1

the transaction has not officially cleared

Question 2

Clearing can be seen as the daily ‘book keeping’….

Answer 2

which results in updated net settlement positions of acquirers, issuers and schemes

Question 3

Does clearing lead to an exchange of funds?

Answer 3

No, that happens only with settlement

Question 4

In the daily card scheme clearing process…

Answer 4

millions of low value payments are aggregated into a few high value large batch payments

Question 5

End result of clearing:

Answer 5

Funds transfer instructions between the issuer, scheme and acquirer

Question 6

Why clearing is a key function of the networks:

Answer 6

“Can you imagine how hard it would be for each merchant to collect funds from the banks of all their shoppers? Or event if every acquirer was to do so?”

Question 7

Settlement

Answer 7

Is the actual movement of money from the cardholder’s bank account (Issuing Bank), to the merchants bank account (Acquiring Bank)

Question 8

Settlement: Card Transactions vs. LPMs

Answer 8

• In the case of card transactions, the funds flow from the issuer through the network, the acquirer, and then to the merchant
• Outside of card networks, funds can flow from the payment method to the merchant, sometimes directly or sometimes through an acquirer

Question 9

Settlement Definition

Answer 9

Settlement is the term used for receiving funds from a scheme for transactions submitted earlier in the Clearing Process

• The funds transfers close the net settlement positions that were calculated in the clearing process

Question 10

Settlement Step by Step

Answer 10

1. At the end of each day, the Gateway submits a batch of approved authorizations to the merchant’s Acquirer Processor to request cash settlement
2. Acquirer Processor sub divides the batch according to the applicable card network
3. Acquirer Processor sends these smaller batches to the Card Networks
4. Each Card Network further sub-divides its batches according to the applicable issuing bank
5. The card network then sends these smaller batches to the Issuer Processor associated with the Issuing Banks
6. Issuer Processor posts transactions to the applicable cardholder’s statement
7. Each Card Network calculates the net settlement positions for the Merchant Acquirer and Issuing Bank
8. Card Network then submits a funds transfer order to the Issuing Bank
9. Issuing Bank then transfers funds to the Acquirer Processor

Question 11

Advancement

Answer 11

It is common in some markets for acquirers to offer their merchants a way to receive funds faster - functionally a secured loan for faster settlement

Question 12

Deferred Settlement

Answer 12

For some industry sectors (furniture retailers, travel, hospitality) which involve large ticket items and delayed delivery, the acquirer may decide to defer the settlement in line with the delivery to manage risk

Question 13

Clearing (Reconciliation)

Answer 13

Clearing is commonly defined as the non-monetary exchange of transaction information.

“On the card rails, clearing is the process by which card transactions are reconciled between acquirers (the merchant side) and issuers (the card holder side)”

“This centralized reconciliation function is orchestrated by the card scheme with participation from both acquirers and issuers”

Question 14

Interbank Settlement

Answer 14

Its purpose is to exchange value between acquirers and issuers, orchestrated by the card scheme

• Interbank settlement is done per scheme
• Each scheme is a separate commercial entity
• Interbank settlement is conducted on the bank rails

Question 15

Merchant Settlement

Answer 15

• Performed by the acquirer

“It is the process by which the acquirer will credit the merchants bank account”