Written by Modulr | Jul 24, 2025 11:00:00 PM
Clearing and settlement refer to the sequential processes by which financial transactions are validated, confirmed and completed. Clearing is the process of verifying transaction details, reconciling obligations and determining the net positions of participants, and ensures that funds and transaction details are accurate. is the final step, involving the actual transfer of funds or securities between financial institutions to discharge those obligations. These tasks are typically carried out by banks, clearing houses or payment processors. For example, a card payments would require the card issuer (such a customer’s bank), communicating with the merchant acquirer (the merchant’s bank acquiring the funds) through the card scheme the card belongs to (for example Visa, Mastercard or American Express). If all the necessary information is exchanged without issue, the payment would proceed through to settlement. Clearing houses are typically used for high-value or cross-border transactions, and form an important part of the global commercial banking ecosystem, with some owned or operated by national central banks or industry bodies (including the Automated Clearing House (ACH) and The Clearing House Interbank Payment System (CHIPS) in the US and The Clearing House Automated Payment System (CHAPS) in the UK). It is worth noting that The Clearing House is actually a banking association and payment company in the US, not a process or function of the financial system. In the context of payments, a CSM (Clearing and Settlement Mechanism) is the process that validates and facilitates the movement of funds between payment service providers (PSPs) for transactions between different institutions, ensuring accurate and secure transfers. Payment processors such as Modulr, which has direct access and relationships with the Bank of England, major card networks and Pay.uk, which owns rails such as BACS and Faster Payments, are able to automate the clearing process alongside providing additional due diligence and fraud protection such as Confirmation of Payee. Through Open Banking and embedded payments, it is possible for many more payments to become nearly instantaneous, with automated clearing and settlement and account-to-account transactions.