Clearing is the process by which completed transaction data is submitted to the card network and exchanged between the acquiring bank and the issuing bank in preparation for settlement. After a transaction is authorized and captured, the acquirer processor submits the transaction details to the card network in a clearing file. The network routes this data to the issuing bank, which uses it to post the charge to the cardholder’s account and prepare the corresponding funds transfer.
Clearing is distinct from authorization and settlement. Authorization happens in real time at the point of sale and reserves funds. Clearing happens in batch after the transaction is complete and formally presents the transaction for payment. Settlement is the actual movement of funds that follows clearing.
The clearing process typically occurs within one business day of the transaction being captured, though the exact timing depends on the processor’s batch submission schedule and the card network’s processing windows.
Diving Deeper into Clearing
Clearing is the middle step in the three-stage card payment lifecycle that begins with authorization and ends with settlement. It is the process by which the acquiring side of the transaction formally presents completed transaction data to the card network, which in turn routes that data to the issuing bank so the charge can be posted to the cardholder’s account and funds can be prepared for transfer.
While authorization happens in real time and is visible to both the merchant and cardholder immediately, clearing happens in the background and is largely invisible to both parties. Its importance lies in the fact that without clearing, authorized transactions cannot settle and merchants cannot receive their funds.
The Clearing Process Step by Step
After a merchant captures a transaction — either individually or as part of an end-of-day batch close — the transaction data moves through a defined sequence.
Capture and Batch Submission
The merchant’s point of sale system or payment gateway captures the authorized transaction, adding it to the open batch. When the batch is closed, the processor formats the batch data according to card network specifications and submits the clearing file to the appropriate network. Visa transactions are submitted to VisaNet. Mastercard transactions go through Banknet. Each network has its own file format requirements and submission cutoff windows.
Network Processing
The card network receives the clearing file, validates the transaction data, and routes each transaction record to the corresponding issuing bank. The network applies interchange fees at this stage, calculating the amount owed to the issuing bank for each transaction based on the applicable interchange category.
Issuer Posting
The issuing bank receives the cleared transaction data and posts the charge to the cardholder’s account. The provisional hold placed during authorization is replaced with the final posted transaction. If the cleared amount differs from the authorized amount — as commonly occurs in restaurants where tips are added after authorization — the issuer posts the cleared amount.
Clearing vs. Authorization
Authorization and clearing serve different purposes and can reflect different transaction amounts. Authorization is a real-time approval that reserves funds for an estimated or exact amount. Clearing is the formal presentment of the actual transaction amount after the transaction is complete.
The gap between authorization amount and cleared amount is most common in industries where final charges are determined after the initial authorization. Hotels authorize for the estimated stay cost at check-in and clear for the actual charges at checkout. Restaurants authorize for the meal total and clear for the total plus tip. Gas stations authorize for a small fixed amount and clear for the actual fuel purchase.
When the cleared amount exceeds the authorized amount beyond card network tolerances, the issuer may reject the clearing record, resulting in a failed settlement that the merchant cannot recover.
Clearing Timeframes and Settlement Impact
Clearing must occur within defined timeframes after authorization or the transaction may not settle successfully. Card network rules specify maximum clearing windows — typically between one and three business days for most transaction types, though some categories allow longer windows. Transactions cleared outside these windows are subject to downgrade, meaning they settle at higher interchange rates, or may be declined entirely by the issuer.
For merchants, understanding clearing timeframes matters because it directly affects when captured transactions become funded. A transaction authorized on Monday, captured in Monday’s batch, cleared Tuesday, and settled Wednesday represents a two-day funding cycle. Delays in any step push the funding date further out.
The Role of Clearing in Interchange
Interchange fees are calculated and applied during the clearing process based on the transaction characteristics present in the clearing data. The interchange category that applies to a given transaction depends on factors including the card type, the merchant category code, whether the transaction was card-present or card-not-present, whether AVS data was submitted, and whether the transaction qualifies for any special interchange programs.
Merchants and processors who submit incomplete or incorrect clearing data may find that transactions downgrade to higher interchange categories than expected, increasing processing costs. Proper clearing data submission is therefore both a technical requirement and a cost management consideration.