One picture is worth more than a thousand words. This is what happens when you buy a product using PayPal or a bank card โ under the hood.
To understand this, we need to digest two concepts:
๐ Clearing โ calculates who pays whom, and how much.
๐ Settlement โ is when real money moves between reserves in the settlement bank.
๐ค Letโs say Bob wants to buy an SDI book from Claireโs shop on Amazon.
๐น Pay-in Flow (Bob pays Amazon):
- Bob buys a book on Amazon using PayPal.
- Amazon sends a money transfer request to PayPal.
- PayPal, which has Bobโs debit card token, transfers money on his behalf to Amazonโs bank account in Bank A.
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Bank A and Bank B send transaction statements to the clearing institution.
- This reduces the number of actual settlements.
- If Bank A owes Bank B $100, and Bank B owes Bank A $500 โ only $400 is settled.
- The clearing institution sends clearing & settlement info to the settlement bank.
- Actual money movement happens between reserve accounts at the settlement bank.
๐น Pay-out Flow (Amazon pays Claire):
- Amazon informs Claire sheโll get paid soon.
- Amazon sends a money transfer request from Bank A (its bank) to Bank C (Claireโs bank).
- Both banks record the transaction, but no real money moves yet.
- Bank A and Bank C send transaction statements to the clearing institution.
- The clearing institution sends clearing and settlement info to the settlement bank.
- ๐ฐ Money is transferred from Bank Aโs reserve to Bank Cโs reserve.
๐ง Three Layers in Play:
- Transaction layer โ where online purchases happen
- Payment and clearing layer โ where payment instructions/netting happen
- Settlement layer โ where actual money moves
โ
The first two are information flow
๐ฐ The third is fund flow
These flows are asynchronous โ which is why reconciliation is critical for consistency across systems.
๐ It gets even more interesting when Bob shops internationally, like in the Indian market:
- Bob pays in USD ๐ต
- But Claire (the seller) receives INR ๐ฎ๐ณ
So much happens behind that one simple "Buy Now" button!
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