Clearing vs. settlement: two steps, two businesses
Clearing is the exchange of information in which acquirers submit the details of captured transactions to issuers, and the network works out who owes what to whom. Settlement is the corresponding movement of funds across the banks’ accounts. Both steps come after authorization and capture. Together, they turn the commitment the issuer made at authorization into an actual transfer of funds. In most of the European ecosystem, settlement takes place in central bank money through T2 (formerly TARGET2), or on the settlement accounts of the international schemes.
| Clearing | Settlement | |
|---|---|---|
| Type | Transaction-by-transaction data exchange | Transfer of aggregated positions |
| Granularity | Individual (each presentment) | Net or gross, by institution and by currency |
| Players | Acquirers, issuers, scheme (position calculation) | Settlement banks, central bank (T2), scheme |
| Instrument | Clearing files/feeds (Base II, IPM, CB feeds via STET) | Transfer orders, settlement accounts |
| What can go wrong | Presentment rejects, duplicates, late presentment | Participant default, liquidity incident |
Clearing files
Each network has its own clearing format. Visa has historically used Base II files organized by transaction code (TC05 = sale, TC06 = credit, etc.). Mastercard uses IPM (Integrated Product Messages, derived from ISO 8583-1993), where a 1240 message carries a first presentment, a 1442 a chargeback, and a 1740 a fee. In France, the acquirer collects terminal batches through CB2A file (end-of-day batch upload). Interbank CB clearing then goes through the CORE(FR) system operated by STET, with settlement in central bank money in T2.
MTI 1240 First Presentment
DE24 Function Code : 200 first presentment (205 = second presentment)
DE2 PAN : 510000######0001
DE3 Processing : 00 purchase
DE4 Txn amount : 000000012550 125.50 in transaction currency
DE49 Txn currency : 978 EUR
DE5 Settl. amount : 000000012550 amount in settlement currency
DE50 Settl. curr. : 978
DE31 ARN : 24332616192000012345678 acquirer reference (23 digits)
DE38 Auth code : 123456 must match the authorization
DE43 Merchant : DUPONT BAKERY\PARIS\75011\FR
PDS 0158 : business data (program, product indicators)Acquirers consolidate their merchants’ batches, then produce outgoing files to each network before the cut-off. In return, they load the incoming files: transactions made by their cardholders at other merchants, chargebacks, and scheme fees. Transactions sent after the cut-off are held and rolled into the next cycle, which delays the funds by one day.
| Step | Typical time (Paris) | Consequence if missed |
|---|---|---|
| Terminal batch upload → acquirer | 10 p.m.–2 a.m. (set per terminal) | Batch included in the next day’s run |
| E-commerce batch PSP → acquirer | Continuous, closed around 11 p.m.–midnight | Capture pushed to the next batch |
| Acquirer → scheme (clearing) | Several windows a day (Mastercard: 6 daily cycles) | Presented in the next cycle, settlement delayed |
| Scheme settlement → banks | Every business day (T2) | Position carried over to the next business day |
Settlement cycles: from sale to account credit
The standard cycle in France is T+1 to T+2 from the batch to the credit on the merchant’s account. Speed depends on the batch upload time, the network, the acquirer, and the negotiated value dates. Some PSPs offer faster payouts, same day or even instant via SCT Inst. This cash flow service comes at a price. It does not speed up clearing itself.
Net vs. gross settlement
In gross settlement (RTGS, Real-Time Gross Settlement), each obligation is settled individually and immediately in central bank money, with zero credit risk but maximum use of liquidity. In net settlement, mutual obligations are netted multilaterally, and each participant pays (or receives) only its net position for the period. Card systems work this way: millions of transactions boil down to a few net positions per bank per day.
| Criterion | Deferred net settlement (DNS) | Real-time gross settlement (RTGS) |
|---|---|---|
| Liquidity needed | Low (net positions only) | High (every transaction in full) |
| Intraday credit risk | Exists between clearing and settlement | Near zero |
| Examples | CORE(FR), Visa/Mastercard scheme positions, EURO1 | T2 (formerly TARGET2), urgent payments |
| Safeguards | Guarantee fund, collateral, exposure limits | Central bank money, immediate finality |
Currencies, conversion, and DCC
An international transaction can involve up to three currencies. The transaction currency is the merchant’s. The settlement currency, often EUR or USD, applies between the scheme and each bank. The billing currency is the one the cardholder is charged in. The scheme converts at its daily rate, and the issuer usually adds an FX markup, typically 1.5% to 3% on traditional bank cards and 0% at some neobanks.
DCC (Dynamic Currency Conversion) moves currency conversion to the point of acceptance, instead of leaving it to the scheme and the issuer. The terminal or website offers the foreign cardholder the option to pay in their own currency, and the DCC provider converts the amount on the spot. The FX margin is built into the rate offered and shared among the provider, the acquirer, and sometimes the merchant. Since 2020, EU Regulation 2019/518 has required the markup over the ECB rate to be displayed when the cardholder chooses.
| Option | Who converts | Typical FX margin | Final cost to the cardholder (ballpark) |
|---|---|---|---|
| Pay in EUR (network conversion) | Scheme + issuer markup | Scheme rate ≈ mid-market + 0–1%; issuer markup 0–3% | ≈ 100 to 103 (mid-market = 100) |
| Pay in USD (DCC) | DCC provider at the point of sale | 3% to 8% above the reference rate | ≈ 104 to 109 (mid-market = 100) |
Merchant batches and reconciliation
The batch is the set of captured transactions a merchant sends to its acquirer (end-of-day upload from the POS terminal, or the e-commerce PSP’s batch). It is the basic unit of reconciliation. After fees are deducted, each batch must show up in an identifiable transfer to the bank account and in the monthly card processing statement.
BATCH UPLOAD OF 2026-07-11 22:04
CB CONTRACT: 1234567 merchant contract number (MID)
TERMINAL : 00012345 terminal identifier (TID)
--------------------------------------------
NO. OF TRANSACTIONS .... : 87
OF WHICH DEBITS ...... : 85 1,254.30 EUR
OF WHICH CREDITS (refunds): 2 45.80 EUR
NET DEPOSITED .......... : 1,208.50 EUR
BATCH NO. 001234 STATUS: ACCEPTED
--------------------------------------------
next check: match 1,208.50 EUR
(less fees) against the acquirer transfer on D+1/D+2- Transfer granularity: some acquirers pay out batch by batch, others aggregate by day or by contract. Align this with your accounting.
- Fees deducted or invoiced: fees are either withheld at source from each transfer (net settlement) or invoiced at month-end (gross settlement). The second makes reconciliation far easier.
- Rejects and chargebacks: a transaction included in a batch can come back as a clearing reject or as a chargeback weeks later. Reconciliation has to tie out three sources: batches, transfers, and the card processing statement.
- Multiple PSPs: each channel (POS terminal, e-commerce, marketplace) has its own batches and timelines. A shared reference model (order, batch, transfer) is essential.