Clearing and settlement

While authorization validates transaction credentials and reserves cardholder funds in real time, the actual financial settlement occurs asynchronously across clearinghouses. Clearing is the exchange of transactional data records between acquiring and issuing institutions to calculate fees and finalize billing positions. Settlement is the actual transfer of funds between commercial bank reserve accounts to satisfy those obligations.

Neither clearing nor settlement deposits funds into the merchant's commercial operating bank account; that final disbursement is governed by funding.

The clearing process

Following the daily batch close, the acquiring processor formats transaction records into standardized clearing files and transmits them to the card network. During clearing, the network:

1. Validates that every captured transaction corresponds to a valid authorization.
2. Identifies card type, commercial tier, channel, and data attributes to assign specific interchange fee categories.
3. Computes multilateral clearing balances across all member institutions.

The pricing of every card transaction is locked during clearing. That pricing is dictated by technical attributes established during checkout—including whether the card was physically presented, whether 3-D Secure authentication executed, and whether billing address data was fully verified.

A transaction that fails to meet specific network criteria suffers an interchange downgrade, dropping from preferential interchange rates into expensive penalty tiers. Common downgrade causes include capturing transactions past scheme deadlines, failing to provide Address Verification Service (AVS) data, or omitting commercial invoice line items on corporate purchasing cards. Downgrades occur silently during clearing, typically surfacing only on monthly processor statements.

Multilateral net settlement

Card networks settle interbank obligations using net settlement. Rather than transferring funds individually for millions of discrete transactions, the card scheme calculates a single net debit or credit position for each member bank at the end of each clearing cycle:

Net Settlement Position = Gross Sales - Refunds - Chargebacks - Interchange - Assessments

Member banks settle net balances across dedicated central bank settlement accounts (such as Fedwire accounts in the United States or TARGET2 accounts in Europe) on the following banking day.

Fee architecture: decomposing processing costs

Every electronic card payment incurs three distinct fee components that are often bundled under a single processing rate:

Fee component	Recipient	Governing entity	Determining cost factors
Interchange	Issuing bank	Card network schedule	Card product (rewards, debit, corporate), channel (card-present vs CNP), MCC
Assessments	Card network	Card network	Gross processing volume, international switching, network licensing
Processor markup	Acquirer / PSP	Merchant agreement	Contractually negotiated margins per transaction or percentage markup

Interchange represents the largest portion of transaction expense (typically 70% to 85% of total fees). While card networks establish the interchange schedule, they retain none of it; interchange is paid to the issuing bank to fund credit risk reserves, rewards programs, and cardholder benefits. Assessments represent the card network's operating revenue. Only the processor markup is subject to direct commercial negotiation between the merchant and its payment provider.

Merchant pricing models

Payment providers structure pricing across three primary commercial models:

• Interchange-plus (Cost-Plus): The provider passes the exact wholesale interchange rate and network assessment through to the merchant, adding a transparent, contractually fixed processor markup (e.g. Interchange + 0.20% + $0.10). Interchange-plus provides full visibility into transaction qualification and guarantees that reductions in interchange directly benefit the merchant.
• Flat-rate (Blended): The provider charges a uniform rate regardless of underlying card costs (e.g. 2.9% + $0.30). Flat-rate pricing offers predictable billing for small businesses, but the provider absorbs the margin differential, keeping the savings when low-cost debit cards clear.
• Tiered pricing: Transactions are sorted into arbitrary buckets defined by the processor ("Qualified," "Mid-Qualified," "Non-Qualified"). Tiered models frequently reclassify transactions into expensive non-qualified tiers, obscuring actual network costs.

Reconciliation principles

Because settlement operates on a net basis across aggregated daily batches, reconciling bank deposits against internal accounting ledgers requires structured multi-stage matching.

Multi-grain reconciliation workflow

Reconcile financial records sequentially from macro settlement deposits down to granular orders.

1. Match the physical bank deposit amount against the processor's funding disbursement statement.
2. Reconcile the funding disbursement against the corresponding daily batch clearing total, accounting for fee withholdings and reserve deductions.
3. Match individual batch line items against internal order management system capture records.

Attempting to match individual customer order amounts directly against net bank deposits is futile, as bank deposits reflect consolidated daily sales net of refunds, chargebacks, rolling reserves, and processing fees.

Terms introduced

• Clearing: the exchange of records that assigns fees and positions.
• Downgrade: a transaction falling into a worse interchange category than it qualified for.
• Net settlement: sales, refunds, and chargebacks offset into one figure.
• Assessments: the network's own fees, separate from interchange.
• Interchange-plus: pricing that itemises interchange, assessments, and markup.
• Settlement: the movement of funds between issuer and acquirer settlement accounts to satisfy net clearing obligations.