Clearing:
Refers to the transmission of transfer orders sent to the system, mediating the mutual delivery of these orders, obtaining authorization prior to settlement in some systems, and netting the payment orders entering the system.
Settlement:
The transfer of the security or financial product subject to the transaction from the seller to the buyer, and in return, the buyer transferring the payment for that transaction to the seller. Settlement means that the parties to the transaction fulfill their obligations and the transaction is concluded.
Their equivalents in payment systems
In payment systems, the English terms "clearing" and "settlement" are used for takas and mutabakat respectively. Clearing is the transmission of transactions between the parties and the calculation of who owes whom how much. Settlement, on the other hand, is when the money resulting from this calculation actually changes hands and the parties' obligations to one another come to an end.
How does netting work?
During the clearing process, transactions are usually netted rather than paid one by one. For example, if Bank A owes Bank B 100 units during the day, and Bank B owes Bank A 80 units, then instead of two separate payments, Bank A pays Bank B only 20 units. In systems with many participating banks, a single net position is calculated for each bank. This method significantly reduces the liquidity banks need.
Gross and net systems
In some payment systems, every transaction is settled individually and instantly. These are called real-time gross settlement systems. They are preferred for high-value payments, because each transaction becomes final immediately. In systems with large numbers of low-value transactions, such as card payments, transactions are collected over specific periods, netted, and settled based on net positions.
Clearing and settlement in card payments
In card payments, transactions made during the day are sent to the card-issuing banks via clearing files. As a result of clearing, each bank ends up with a net receivable or payable position against the other banks. These positions are closed during settlement. The merchant's acquiring bank then pays the merchant according to the payment terms set out in their agreement.
