2.10 Clearing and settlement
Clearing is the process initiated by an acquirer through which issuers are informed about the payment transactions performed by their cardholders. These transactions were completed at points of service managed by card acceptors that are the clients of the acquirer. Following the clearing process, the issuer can bill the transaction amounts to the accounts of the appropriate cardholders and can settle its debt with each of the acquirers that accepted its payment cards. Settlement is the process through which funds are exchanged between the members of the payment system(s) for the value of the transaction amounts cleared during a certain period .
The payment network topology in Figure 2.4 shows the clearing and settlement process. We assume that a national operator, handling transactions only in the national currency, manages the upper payment system network, while an international card association, able to handle multiple currencies, manages the cooperating payment system network. We also assume for simplicity that both networks support the off-line clearing with dual messages (see Section 2.8.2).
The transaction records stored at the points of service by either POS or ATM terminals are transmitted electronically to the AH. After checking and validating the received transaction records from one terminal, the transaction records database of the card acceptor kept with the AH is appropriately updated. The AH forms a financial notification message (1240) from each valid transaction record. Then it creates a separate clearing batch file with all the 1240 messages having the same IIN.
If a clearing batch file gathers transactions, the IIN of which corresponds to an issuer located in the same country as the acquirer and subscribing to the same national payment system network, then the acquirer directly transmits the clearing batch file to the appropriate issuer.
If a clearing batch file gathers transactions performed with cards issued by members from other countries than the acquirer but subscribing to the same international payment system network with which the national payment system network cooperates, this file is transmitted over the gateway nodes (GN1, GN2) to the card association. The currencies in which these transactions will be settled are different from the currency in which the transaction amount is expressed at the point of service.
The card association continues the clearing process, collecting the clearing batch files containing transactions in various currencies from the acquirer members. Clearing batch files received from different acquirers in different currencies are sorted according to the IIN of the card, and a separate IIN batch file is compiled for each issuer. Each IIN batch file contains transactions performed with one type of card product, while the transaction amounts are expressed in various currencies. These currencies are different from the billing currency, which is the currency in which the billing of the cardholder account is performed.
The issuer can receive IIN batch files compiled by both card associations and local acquirers. Using the unique transaction reference number retrieved from each financial notification message (1240), the issuer matches each 1240 message received during clearing against the authorization database, containing all the previously accepted or rejected authorization request messages (1100). All the matching records are separately compiled. For each record received from the card association a currency exchange operation is performed from the currency in which the amount at the point of service is expressed to the billing currency agreed by the issuer. The records are sorted according to the PAN corresponding to each cardholder, and a statement file is separately compiled for each cardholder. The issuer knows all the information it needs to settle payment with its customers. The issuer recovers the disbursed amount during the clearing period by billing its cardholders. The total in each statement file, corresponding to a cardholder, is computed. For debit cards, the resulting total amount is debited directly from the cardholder's account kept with the issuer. For credit cards, the total of the statement file is posted to a temporary account linked to the cardholder's account, updating its balance, which is held until the statement billing time. This completes the reimbursement of the issuer.
After the clearing of the transactions carried out in a well-defined time period is performed, settlement can be accomplished. The three organizations involved in the processing of a point of service transaction (namely, the card acceptor, the acquirer, and the card association) are reimbursed for their services. The card association computes the financial compensations between issuers and acquirers. The transfer of funds is performed through an international settlement bank, which is designated by the card association and which can handle various currencies. Both acquirers and issuers have an account with this bank.
The settlement process can be schematized as follows . The clearing batch file compiled by the card association containing the transaction data that was submitted for clearing to the issuer with transaction amounts in various currencies is submitted to a currency exchange procedure with currency exchange rates provided by the settlement bank. The amount in each transaction record of the batch file is converted from the card acceptor's currency, which is the local currency at the point of service, to a settlement currency agreed by each issuer. After all the transaction amounts are converted in the issuer's settlement currency, a total is computed that reflects the amount to be debited from the issuer's account kept with the settlement bank. The issuer is notified about the settlement of its debt. The card association repeats this process for each issuer that participated in the clearing.
The card association processes the transaction data file received from each acquirer and computes the total of the transaction amounts of all the records in the file. The resulting value is credited in the acquirer's account kept with the settlement bank. The acquirer is notified about the crediting of its account. The card association repeats this process for each acquirer that participated in the clearing. Each acquirer credits the amount in each card acceptor master file to the corresponding account, which finishes the settlement process.