Payments Academy
Settlement: movement of money PAYMENT OPERATIONS STARTED LIVE 01 Settlement - follows clearing ACTIVE 02 Acquirer - its own transactions QUEUED 03 Acquirer with the opposite profile - has a single net amount to receive. QUEUED 04 Step four - merchant settlement QUEUED 05 Credit card - issuer pays the scheme at settlement QUEUED 06 Chargeback after settlement reverses - flow: the acquirer debits the QUEUED Settlement is the movement of money that follows clearing, and it is the stage where promises become payments. Step 1 of 6 Settlement: movement of money STARTED Settlement follows clearing ACTIVE Acquirer its own transactions QUEUED Acquirer with the opposite profile has a single net amount to receive. QUEUED Step four merchant settlement QUEUED Credit card issuer pays the scheme at settlement QUEUED Chargeback after settlement reverses flow: the acquirer debits the merchant QUEUED Settlement is the movement of money that follows clearing, and it is the stage where promises become payments.
Acquirer checks the batch adds PAYMENT OPERATIONS IN PROGRESS LIVE 01 Settlement - follows clearing DONE 02 Acquirer - its own transactions ACTIVE 03 Acquirer with the opposite profile - has a single net amount to receive. QUEUED 04 Step four - merchant settlement QUEUED 05 Credit card - issuer pays the scheme at settlement QUEUED 06 Chargeback after settlement reverses - flow: the acquirer debits the QUEUED The acquirer checks the batch, adds its own transactions, and sends a clearing file to the scheme. Step 2 of 6 Acquirer checks the batch adds IN PROGRESS Settlement follows clearing DONE Acquirer its own transactions ACTIVE Acquirer with the opposite profile has a single net amount to receive. QUEUED Step four merchant settlement QUEUED Credit card issuer pays the scheme at settlement QUEUED Chargeback after settlement reverses flow: the acquirer debits the merchant QUEUED The acquirer checks the batch, adds its own transactions, and sends a clearing file to the scheme.
Acquirer with the opposite profile PAYMENT OPERATIONS IN PROGRESS LIVE 01 Settlement - follows clearing DONE 02 Acquirer - its own transactions DONE 03 Acquirer with the opposite profile - has a single net amount to receive. ACTIVE 04 Step four - merchant settlement QUEUED 05 Credit card - issuer pays the scheme at settlement QUEUED 06 Chargeback after settlement reverses - flow: the acquirer debits the QUEUED An acquirer with the opposite profile has a single net amount to receive. Step 3 of 6 Acquirer with the opposite profile IN PROGRESS Settlement follows clearing DONE Acquirer its own transactions DONE Acquirer with the opposite profile has a single net amount to receive. ACTIVE Step four merchant settlement QUEUED Credit card issuer pays the scheme at settlement QUEUED Chargeback after settlement reverses flow: the acquirer debits the merchant QUEUED An acquirer with the opposite profile has a single net amount to receive.
Step four PAYMENT OPERATIONS IN PROGRESS LIVE 01 Settlement - follows clearing DONE 02 Acquirer - its own transactions DONE 03 Acquirer with the opposite profile - has a single net amount to receive. DONE 04 Step four - merchant settlement ACTIVE 05 Credit card - issuer pays the scheme at settlement QUEUED 06 Chargeback after settlement reverses - flow: the acquirer debits the QUEUED Step four is merchant settlement, and it is a separate step with its own timing. Step 4 of 6 Step four IN PROGRESS Settlement follows clearing DONE Acquirer its own transactions DONE Acquirer with the opposite profile has a single net amount to receive. DONE Step four merchant settlement ACTIVE Credit card issuer pays the scheme at settlement QUEUED Chargeback after settlement reverses flow: the acquirer debits the merchant QUEUED Step four is merchant settlement, and it is a separate step with its own timing.
Credit card PAYMENT OPERATIONS IN PROGRESS LIVE 01 Settlement - follows clearing DONE 02 Acquirer - its own transactions DONE 03 Acquirer with the opposite profile - has a single net amount to receive. DONE 04 Step four - merchant settlement DONE 05 Credit card - issuer pays the scheme at settlement ACTIVE 06 Chargeback after settlement reverses - flow: the acquirer debits the QUEUED For a credit card, the issuer pays the scheme at settlement and the cardholder repays the issuer later, under the card terms, which may be weeks later. Step 5 of 6 Credit card IN PROGRESS Settlement follows clearing DONE Acquirer its own transactions DONE Acquirer with the opposite profile has a single net amount to receive. DONE Step four merchant settlement DONE Credit card issuer pays the scheme at settlement ACTIVE Chargeback after settlement reverses flow: the acquirer debits the merchant QUEUED For a credit card, the issuer pays the scheme at settlement and the cardholder repays the issuer later, under the card terms, which may be weeks later.
Chargeback after settlement reverses PAYMENT OPERATIONS COMPLETE LIVE 01 Settlement - follows clearing DONE 02 Acquirer - its own transactions DONE 03 Acquirer with the opposite profile - has a single net amount to receive. DONE 04 Step four - merchant settlement DONE 05 Credit card - issuer pays the scheme at settlement DONE 06 Chargeback after settlement reverses - flow: the acquirer debits the ACTIVE A chargeback after settlement reverses the flow: the acquirer debits the merchant and pays the issuer, and the cardholder is credited. Step 6 of 6 Chargeback after settlement reverses COMPLETE Settlement follows clearing DONE Acquirer its own transactions DONE Acquirer with the opposite profile has a single net amount to receive. DONE Step four merchant settlement DONE Credit card issuer pays the scheme at settlement DONE Chargeback after settlement reverses flow: the acquirer debits the merchant ACTIVE A chargeback after settlement reverses the flow: the acquirer debits the merchant and pays the issuer, and the cardholder is credited.

Key points of this lesson, in order.

0:00 / 3:59 Step 1 of 6

Settlement Between Issuer, Acquirer and Scheme

Card Authorization, Clearing and Settlement, Lesson 6 of 8, Narration 3:59, D08 Cards and alternative payments

AuthorisationInterchangePresentment

What you will learn

Your objective. By the end of this lesson, you will be able to explain settlement between issuer, acquirer and scheme. Settlement is the movement of money that follows clearing, and it is the stage where promises become payments.

Why it matters. A transaction that was authorised but never cleared does not appear in settlement at all, which is why clearing discipline, including timely presentment, is a control the analyst must watch.

Chapter objective: Learner explains card authorization, clearing, and settlement, including the roles of issuer, acquirer, network, and merchant, and traces a card transaction from swipe to settlement. Learner practises this skill on realistic banking cases, explaining the reasoning clearly and using correct terminology throughout the work.

Key learning points

  • Settlement: movement of money
  • Acquirer checks the batch adds
  • Acquirer with the opposite profile
  • Step four
  • Credit card
  • Chargeback after settlement reverses

Key terms

Authorisation: Approval by the issuer for a card transaction to proceed, confirming the card is valid and funds or credit are available.

Interchange: A fee paid by the acquirer to the issuer for each card transaction, set by the card scheme. It compensates the issuer for handling the transaction, funding the interest free period and managing fraud...

Presentment: The submission of a card transaction by the acquirer to the scheme for clearing after authorisation and capture.

Payment flow diagram showing Settlement Between Issuer, Acquirer and Scheme.

Insights and practice scenarios

Worked insights and practice scenarios for this lesson. Each one is a reusable PaymentForge case, so the same case may appear in more than one lesson.

Practise this lesson

Exercise

Decide which settlement model fits the scenario in this lesson and explain why.

Use the settlement models, the liquidity trade-off and the finality rules in this lesson.

  1. What to do. Name the model, state when settlement becomes final, and explain what happens if the sending bank does not have enough liquidity.

Correct result. Real time gross settlement settles each payment individually in central bank money with immediate finality, but it needs liquidity for every payment. Deferred net settlement nets payments and settles the net position, which needs less liquidity but leaves settlement risk until the net settles.

Why. Settlement is where money actually moves. The model decides the risk, the liquidity need, and when the payment is truly final.

Check your understanding

Practice question

Which of the following best describes settlement between issuer, acquirer and scheme?

Takeaway and next step

What to remember

A transaction that was authorised but never cleared does not appear in settlement at all, which is why clearing discipline, including timely presentment, is a control the analyst must watch.

Follow a payment through every stage, from instruction to beneficiary credit, and note where it can stop.

Open the Payment Lifecycle Simulator →

Builds on "Interchange Fees and How Money Moves".

Transcript and full text

Show transcript

Settlement is the movement of money that follows clearing, and it is the stage where promises become payments. Authorisation reserved the funds and clearing turned the authorised transaction into a financial obligation, but no money changed hands between banks until settlement. The scheme sits at the centre of this stage. It collects the clearing files, calculates what each participant owes and is owed, and settles the net amounts. Understanding settlement means understanding who pays whom, when, and what happens when a participant cannot pay. Step one is the clearing file, which is the input to settlement. At the end of the day the merchant sends its approved transactions to the acquirer in a batch file. The acquirer checks the batch, adds its own transactions, and sends a clearing file to the scheme. The scheme validates the file, sorts the transactions by issuer, calculates interchange for each one, and produces a clearing report for every participant. A transaction that was authorised but never cleared does not appear in settlement at all, which is why clearing discipline, including timely presentment, is a control the analyst must watch. Step two is netting, and it is what makes card settlement efficient. Instead of every issuer paying every acquirer separately, the scheme nets each participant's position across all transactions in the cycle. An issuer that owes 10 million in cardholder spending and is owed 2 million in credits has a single net position of 8 million to pay. An acquirer with the opposite profile has a single net amount to receive. Netting reduces the number of payments from thousands to one per participant per cycle, and it reduces the liquidity each bank needs to hold for settlement. Step three is the settlement itself, and the timing is typically one to three days after the purchase. On the settlement date, issuers that are net debtors pay the scheme settlement account, and the scheme pays acquirers that are net creditors. The scheme does not lend its own money in this flow; it passes funds from debtors to creditors, and settlement is final once the scheme account movement is complete. A participant that misses its settlement obligation is in breach of scheme rules and faces penalties and possible suspension. Step four is merchant settlement, and it is a separate step with its own timing. The acquirer credits the merchant account, usually one to two business days after the purchase, with the transaction value minus the merchant service charge. Faster settlement is a competitive feature: some acquirers offer next day or same day settlement, funding the merchant from their own liquidity before the scheme settlement arrives and taking the timing risk themselves. Settlement reports must also reconcile to the clearing file, transaction by transaction. Step five is the cardholder side, and it differs for debit and credit. For a debit card, the cardholder account is debited when the transaction is posted at clearing, so the money leaves the account around settlement time. For a credit card, the issuer pays the scheme at settlement and the cardholder repays the issuer later, under the card terms, which may be weeks later. That gap is the issuer funding the purchase in the meantime, and it is part of the economics of credit cards, along with interchange and interest. The cardholder statement shows the posting date, the merchant name and the amount, and the analyst must ensure the statement data matches the clearing data. Exceptions in settlement are rare but serious, and the analyst must know the controls. A clearing file rejected for a format error delays settlement for a whole batch, so file validation before submission matters. A short settlement payment from an issuer triggers scheme default procedures, including drawing on collateral or a settlement guarantee if one exists. A chargeback after settlement reverses the flow: the acquirer debits the merchant and pays the issuer, and the cardholder is credited. A settlement break, where the scheme report and the bank ledger disagree by even a small amount, must be investigated the same day, because an unreconciled break can hide a missing file or a duplicate batch.

Settlement is the movement of money that follows clearing, and it is the stage where promises become payments. Authorisation reserved the funds and clearing turned the authorised transaction into a financial obligation, but no money changed hands between banks until settlement. The scheme sits at the centre of this stage. It collects the clearing files, calculates what each participant owes and is owed, and settles the net amounts. Understanding settlement means understanding who pays whom, when, and what happens when a participant cannot pay.

Step one is the clearing file, which is the input to settlement. At the end of the day the merchant sends its approved transactions to the acquirer in a batch file. The acquirer checks the batch, adds its own transactions, and sends a clearing file to the scheme. The scheme validates the file, sorts the transactions by issuer, calculates interchange for each one, and produces a clearing report for every participant. A transaction that was authorised but never cleared does not appear in settlement at all, which is why clearing discipline, including timely presentment, is a control the analyst must watch.

Step two is netting, and it is what makes card settlement efficient. Instead of every issuer paying every acquirer separately, the scheme nets each participant's position across all transactions in the cycle. An issuer that owes 10 million in cardholder spending and is owed 2 million in credits has a single net position of 8 million to pay. An acquirer with the opposite profile has a single net amount to receive. Netting reduces the number of payments from thousands to one per participant per cycle, and it reduces the liquidity each bank needs to hold for settlement.

Step three is the settlement itself, and the timing is typically one to three days after the purchase. On the settlement date, issuers that are net debtors pay the scheme settlement account, and the scheme pays acquirers that are net creditors. The scheme does not lend its own money in this flow; it passes funds from debtors to creditors, and settlement is final once the scheme account movement is complete. A participant that misses its settlement obligation is in breach of scheme rules and faces penalties and possible suspension.

Step four is merchant settlement, and it is a separate step with its own timing. The acquirer credits the merchant account, usually one to two business days after the purchase, with the transaction value minus the merchant service charge. Faster settlement is a competitive feature: some acquirers offer next day or same day settlement, funding the merchant from their own liquidity before the scheme settlement arrives and taking the timing risk themselves. Settlement reports must also reconcile to the clearing file, transaction by transaction.

Step five is the cardholder side, and it differs for debit and credit. For a debit card, the cardholder account is debited when the transaction is posted at clearing, so the money leaves the account around settlement time. For a credit card, the issuer pays the scheme at settlement and the cardholder repays the issuer later, under the card terms, which may be weeks later. That gap is the issuer funding the purchase in the meantime, and it is part of the economics of credit cards, along with interchange and interest. The cardholder statement shows the posting date, the merchant name and the amount, and the analyst must ensure the statement data matches the clearing data.

Exceptions in settlement are rare but serious, and the analyst must know the controls. A clearing file rejected for a format error delays settlement for a whole batch, so file validation before submission matters. A short settlement payment from an issuer triggers scheme default procedures, including drawing on collateral or a settlement guarantee if one exists. A chargeback after settlement reverses the flow: the acquirer debits the merchant and pays the issuer, and the cardholder is credited. A settlement break, where the scheme report and the bank ledger disagree by even a small amount, must be investigated the same day, because an unreconciled break can hide a missing file or a duplicate batch.

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