What is a Clearing?

What Is Clearing in Payments?

Clearing is the process that happens between authorisation and settlement in a card payment transaction. When a cardholder makes a purchase -- whether in a shop, online, or over the phone -- the payment is first authorised (approved), then cleared, and finally settled. Clearing is the middle step where the transaction details are exchanged between the banks involved and the final amounts are calculated.

Think of it this way: authorisation is the "yes, this card is good and has enough funds" step. Clearing is the "here are the exact details of what happened" step. And settlement is the "now let's actually move the money" step.

How the Clearing Process Works

After a transaction is authorised, the merchant's payment system creates a clearing record containing the final transaction details. This record is then submitted through the card network to the cardholder's issuing bank.

Step by step

• Transaction capture -- The merchant (or their payment processor) submits the finalised transaction details to the acquiring bank. This may happen immediately or at the end of the business day in a batch
• Interchange -- The acquiring bank sends the transaction data through the card network (Visa, Mastercard, etc.) to the issuing bank
• Reconciliation -- The issuing bank receives the clearing record, matches it against the original authorisation, and prepares to debit the cardholder's account
• Fee calculation -- During clearing, the interchange fees, scheme fees, and other charges are calculated and applied

The clearing process ensures that all parties agree on the transaction amount, the merchant details, and any applicable fees before actual money changes hands.

Clearing vs Settlement

Clearing and settlement are closely related but distinct processes:

• Clearing is about exchanging information -- making sure the issuing bank and acquiring bank agree on what happened
• Settlement is about exchanging money -- actually transferring the funds from the issuing bank to the acquiring bank and then to the merchant

In most card payment systems, clearing and settlement happen together or in quick succession. The card network acts as the central clearing house, processing millions of transactions between thousands of banks every day and calculating the net amounts each bank owes or is owed.

Clearing in Telephone Payments

For telephone payments, the clearing process works exactly the same as for any other card-not-present transaction. After the customer's card is authorised during the phone call, the transaction enters the clearing cycle. The merchant's payment system submits the transaction details, and the clearing process runs in the background -- typically completing within one to two business days.

The cardholder will see the transaction appear on their statement once clearing is complete. In some cases, the authorisation hold may appear first as a "pending" transaction, which is then replaced by the cleared amount.

Clearing Houses and Networks

The card networks -- Visa, Mastercard, American Express, and others -- act as clearing houses for card transactions. They operate the infrastructure that routes clearing messages between banks worldwide.

For non-card payments, other clearing systems exist:

• BACS -- Handles clearing for UK direct debits and bank transfers (typically three-day cycle)
• Faster Payments -- Near-instant clearing for UK bank transfers up to certain limits
• CHAPS -- Same-day clearing for high-value UK payments
• ACH -- The Automated Clearing House network handles clearing for US bank transfers

Why Clearing Matters

Clearing might seem like a behind-the-scenes technicality, but it affects merchants in practical ways:

• Cash flow timing -- The clearing cycle determines when funds actually become available in your merchant account
• Dispute handling -- Chargebacks and disputes are processed through the clearing system, so understanding the cycle helps with dispute management
• Reconciliation -- Merchants need to reconcile cleared transactions against their own records, which requires understanding what data the clearing process provides
• Fee transparency -- Interchange fees and scheme fees are applied during clearing, so this is where the cost of accepting card payments is determined