Clearing vs. settlement: What's the difference?

Whenever your business accepts a credit or debit card payment, or sends a wire transfer to pay a supplier, the whole process seems simple. Deceptively simple.

Because, although the payment process appears instantaneous – one second the money’s not in your account, the next it is – those funds have actually had to pass through a series of processes to make it to your business’s coffers. And it’s two of those key processes – clearing and settlement – we’ll be exploring in more detail below.

Yet clearing and settlement are often confused: so, after defining the role of each process in the payment lifecycle, we’ll unpack their key differences – clearing up the confusion, and settling the clearing vs settlement debate once and for all.

What is clearing?

In a payments context, clearing is the process in which the financial institutions involved in a transaction – the payer’s and payee’s bank – exchange payment details and and reconcile funds. Clearing happens after a transaction has been initiated (for example, a cardholder purchasing something from a merchant’s online store) but before settlement.

Essentially, clearing is the exchange of payment information between the customer’s bank (the issuer) and the merchant’s acquiring bank (the acquirer), with the card scheme (such as Visa, Mastercard, and American Express) playing the role of facilitator. The goal? To verify the transactions’ authenticity, check for sufficient funds, and confirm the details of the payment.

What is settlement?

In a debit or credit card transaction, settlement is the process of actually transferring the funds from the customer’s account to the merchant’s.

When payment settlement occurs, the issuing bank moves funds from the account of its customer, the cardholder, to the acquirer’s account.

To do this, the funds move through a payment gateway: a piece of software that, by capturing the customer’s card details and submitting them to the relevant parties for authorization, also plays a key role in the clearing process, too.

Settlement only occurs once a transaction has been successfully cleared – although exactly how soon a payment will settle after it’s been cleared can vary.

While clearing happens quickly – typically, within minutes – settlement can take a little longer. When settlement delay occurs, it can be due to several reasons: including technical issues, and the need by banks to comply with Anti-Money Laundering (AML) regulations by running extra checks and risk assessments.

Another reason that settlement can often take several days, though, is because some financial institutions settle transactions in ‘batches’: grouping them together to settle them later, en masse, at specific intervals. Also known as net settlement, this process slows the payment down; but makes it more affordable to send money and accept credit and debit card payments.

Other real-time payment services, such as FedNow, make both clearing and settlement instant. This process – also known as real-time gross settlement (RTGS), or simply gross settlement – facilitates the real-time authorization and transfer of funds, and makes the money immediately available in the recipient’s account for them to access.

To read more about the difference between gross and net settlement, our guide will help.

Differences between clearing and settlement

Clearing and settlement are closely linked – and occupy adjacent spots in the chain of the payment lifecycle. However, it’s important to remember that they are two distinct processes, and therefore play separate roles in a successful payment.

Let’s explore the main differences between clearing and settlement.

Their purpose

Clearing and settlement fulfill different functions.

The role of clearing is to reconcile and verify payment information: authenticating the transaction and determining the obligations of each party. (That is, the acquirer and issuer.)

The purpose of settlement, by contrast, is to fulfill the financial obligations the clearing process establishes. Once the clearing process has verified the transaction and given it the – ahem – all clear, it’s the role of settlement to actually transfer the funds between the parties involved.

Their timing

Clearing always happens before settlement – and, usually, immediately after the transaction has been initiated. Transaction settlement, however, can only take place after a transaction has been cleared. And, as we discussed earlier, settlement is more prone to delays due to ‘batching’ techniques – although this depends on the particular financial institutions involved, and on which payment method was utilized.

Because of this, payments can take between one and three days to settle after they’ve cleared.

Their processes

Another difference between clearing and settlement is, quite simply, that each relies on a different set of processes.

Clearing involves comparing transaction records, verifying account balances, and ensuring compliance with regulatory requirements. Settlement, on the other hand, consists of moving money between financial institutions, updating account balances, and notifying the payer and payee that the transaction has gone through.

Checkout.com as a payment gateway

At this stage, you’re probably wondering – what role does Checkout.com play in the clearing and settlement processes?

Is Checkout.com an acquirer: a company that accepts credit and debit card payments on behalf of businesses like yours? Is it a payment gateway: the software that serves as the crucial intermediary responsible for authorizing the payment and verifying a transaction’s key details?

Well – it’s both! Checkout.com isn’t just a payment processor, but an acquirer and a payment gateway, too. Better still, we offer these services – which include both clearing and settlement – as an end-to-end solution.

That means you won’t need to be working with separate, third-party payment gateways and payment processors to cobble together a fit-for-purpose payment process. Instead, you can rely on our full-stack payment solution to meet the entirety of your business’s payment needs – whatever they may be. Our customers are already enjoying the ease, speed, and increased acceptance rates Checkout.com’s payment processing solution provides for their business. And their customers are already benefiting from the ability to make secure, friction-free payments.

The only question left is: is your business ready to join them?

Get in touch with the team here at Checkout.com today to learn more about clearing, settlement, and how we can simplify both as part of a seamless, end-to-end payment solution.