Settlement & Clearing
How authorized card transactions are submitted for clearing, how net positions are computed across thousands of banks, and how funds actually move. Covers clearing file formats, dispute timelines, and interchange fee economics.
Authorization, Clearing & Settlement
A card payment involves three distinct phases. Authorization happens in real-time. Clearing and settlement happen in batch, typically the following business day (T+1 for card-present, T+2 for card-not-present). Understanding this separation is critical for reconciliation, dispute handling, and treasury management.
The weekend gap is closing from two directions. Card networks now settle in stablecoins on weekends and holidays (see Stablecoin Payments 101), and the Federal Reserve will run the Fedwire Funds Service and National Settlement Service Sunday to Friday, 22 hours a day (NSS 21.5 h), including weekday holidays — implementation expected in 2028–2029 as an interim step toward 22x7x365.
Authorization
Real-time check. ISO 8583 0100/0200 message from terminal through acquirer through network to issuer. Issuer approves and places a hold on available balance. No funds move. Authorization may expire if not captured within the scheme's defined window (typically 7-30 days).
Clearing
Acquirer submits transaction data to the card scheme in a clearing file (IPM for MC, CTF/BASE II for Visa). The scheme validates data, calculates interchange, and computes net positions between all member banks. Transaction data enriches the financial record.
Settlement
Final funds movement. The scheme sends settlement instructions to each member bank's central bank account. Acquirer bank account credited; issuer bank account debited (net of interchange). Cardholder's outstanding balance updated. Transaction is complete.
Animated walkthrough — step through each phase
The three phases of a card payment. Authorization is real-time and only reserves funds; clearing and settlement run in batch (typically T+1/T+2) and actually move the money.
Authorization
Real-time 0100/0200 through acquirer and network to the issuer.
Issuer approves and places a hold on the available balance. No funds move. The authorization may expire if not captured within the scheme window (typically 7–30 days).
Key Participants
| Participant | Role in Settlement |
|---|---|
| Issuing Bank | Funds the transaction. Receives net debit from scheme. Releases hold from cardholder's account. Posts transaction to statement. |
| Acquiring Bank | Receives funds from scheme and credits the merchant's settlement account (minus MDR). Submits clearing files on behalf of merchants. |
| Card Scheme | Acts as central counterparty. Validates clearing files. Computes net positions. Sends settlement instructions. Collects scheme fees. |
| Central Bank | Holds RTGS (Real-Time Gross Settlement) accounts for member banks. Executes the actual fund transfers between bank accounts per scheme instructions. |
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Common questions
What is the difference between authorization, clearing, and settlement?
Authorization is the real-time approval that only reserves funds. Clearing is the batch exchange of transaction data that computes what each bank owes. Settlement is the actual movement of funds between banks, typically T+1 or T+2.
When does the merchant actually get paid?
After clearing and settlement: the acquirer receives the transaction value minus interchange and scheme fees, and deposits the proceeds minus its own margin (the MDR) to the merchant — usually one to two business days after the sale.
What is interchange?
Interchange is the fee paid by the acquirer to the card issuer on each transaction, set by the scheme and varying by card type, entry mode, and merchant category. It is the largest component of the merchant discount rate.
How long does a cardholder have to dispute a transaction?
Typically 120 days from the transaction date under Visa and Mastercard rules; the dispute then moves through chargeback, representment, pre-arbitration, and arbitration stages with strict deadlines at each step.