|What does Clearing mean?
There are several meanings for the word Clearing, depending on which area of banking or credit we look at:
a. Clearing is the movement of checks from one bank, in which the check was deposited initially, to another bank in which the check was drawn. The face amount of the check is then moved from one bank to the other in the opposite direction. The ‘clearing cycle’, as it is called, usually results in a debit to the bank account at the institution where the check was drawn. It also results in a credit, equivalent to the debit, to the bank account at the financial institution in which the check was deposited.
b. In the banking industry, the term stands for the process by which a company or organization operates as an intermediary and takes up the role of both the buyer and the seller for transactions, in which the organization reconciles orders between two other transacting parties. In order to match all buy and sell orders on the market, clearing is essential. It provides more efficient and smoother markets, because parties can actually make transfers to the specific clearing organization, as opposed to each and every individual side with whom they have previously transacted.
c. Clearing could also mean the 3rd step in credit card processing. The acquirer sends the batch through the credit card network, after it has been received. Here every sale is then guided towards the right issuing financial institution. The issuing companies each subtract their own interchange fees, that are shared with the credit card network, and they transfer the remaining sum back to each acquirer through the network.