Settlement is the pivotal moment when financial transactions are finalised

"Every day, hundreds of millions of transactions flow through diverse payment channels, covering all types of purchases, from groceries to transport fares and more!

At the heart of this process lies settlement. Settlement is the pivotal moment when financial transactions are finalised, and the corresponding obligations between parties are fulfilled.

Though settlement may seem straightforward conceptually, its execution, especially regarding speed and format, has changed and continues to change with the advancement of technology.

#didyouknow💡

◼️ When a transaction occurs over a card network, the funds are not necessarily moving directly from the issuer account onto the acquirer account.

◼️ Instead, there are vital yet very often forgotten parties that ensure this role, known as 𝐒𝐞𝐭𝐭𝐥𝐞𝐦𝐞𝐧𝐭 𝐒𝐞𝐫𝐯𝐢𝐜𝐞 𝐏𝐫𝐨𝐯𝐢𝐝𝐞𝐫 (𝐒𝐒𝐏) or 𝐒𝐞𝐭𝐭𝐥𝐞𝐦𝐞𝐧𝐭 𝐀𝐠𝐞𝐧𝐭𝐬.

◼️ They work in the background to enable the movement of funds between the acquirers and the issuers through a bilateral interbank arrangement (i.e coordination and exchange of funds between the banks).

The settlement agent serves as a mediator and can be:

🖇️an intermediary operator

🖇️a commercial bank

🖇️or in some cases, the Central Bank

Each scheme may choose a Settlement Service Provider (SSP) for their network, but the settlement process occurs through the banking infrastructure, not the card network itself.

Although bilateral settlement is prevalent in interbank arrangements, there are different settlement types:

◼️ Gross Settlement: Direct transfer of funds without offsetting fees for each party.

◼️ Net Settlement: Calculation of total owed between parties, with only the net amount transferred.

◼️ Deferred Settlement: Involves a delay between transaction initiation and final settlement, allowing for additional processing (e.g. securities trading).

◼️ Multilateral Settlement: All transactions are collectively netted and settled among all participating parties (e.g., centralised clearinghouses). "

Author

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