“Moving money” is a common yet abstract way of describing the minefield processes behind how payments work. In reality, the movement of money, certainly for card payment, is actually a coordinated exchange of digital instructions and value representations, relying on a system of protocols, messages, and reconciliations to facilitate the transfer of value between all stakeholders of the ecosystem. The movement of funds is largely digital and ledger-based, i.e:
◾ At the authorisation stage, with a hold placed on the cardholder’s account to confirm funds availability
◾ At the clearing stage, where transaction data are exchanged in preparation for settlement.
◾ At the settlement stage, to instruct the debit of the cardholder’s bank and credit to the merchant’s bank, often through card networks or central clearinghouses.
So, the clearing stage serves as the trigger for the eventual settlement of a transaction among parties. It is a crucial step in reconciling and verifying the transactional data.
Merchants can simultaneously process the auth and clearing or split the transaction by capturing the auth and delaying clearing for several reasons:
◾Inventory, to ensure that goods are in stock or that a service can be fulfilled before finalising the transaction.
◾Partial or incremental service, when taking deposits or to allow tips.
◾Operational efficiency, to consolidate transactions into batch submissions and therefore optimise processing and reduce costs.
However, the separation of the auth and clearing data can lead to discrepancies, as an auth hold may have expired by the time clearing is submitted, which will increase the risk of disputes or declined payments, (especially if the cardholder lacks sufficient funds). This can also cause errors with mismatched amounts etc…
◾The card networks have historically allowed clearing without linked authorisations under specific rules. However, Mastercard is introducing stricter requirements, mandating that by October this year clearing records must reference a valid prior authorisation using identifiers.
◾This mandate does not outright ban split authorisation and clearing, as these are of course fundamental to certain industries (e.g., hospitality, car rentals, and e-commerce).
👉🏽#Paymentexperts, any perspectives to add on the #clearing process?
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