Key takeaways
- Card schemes such as Visa and Mastercard settle with their members, the issuers and acquirers, in a single net amount per settlement cycle.
- Card scheme reconciliation confirms that the net settlement matches the clearing records behind it and the firm's own ledger.
- Interchange, scheme fees and currency conversion make the net figure differ from the sum of card transactions.
- For card issuers that are e-money or payment firms, scheme settlements move customer money and affect the daily safeguarding position.
How card schemes settle
A card scheme is the network that connects the bank or firm that issued a customer's card, the issuer, with the firm that processes payments for the merchant, the acquirer. Visa and Mastercard are the largest. Each day, the scheme calculates what every issuer owes and every acquirer is owed, nets the amounts, and settles a single figure with each member through a settlement bank.
Behind that single figure sit two sets of records. Clearing records list every transaction, with its amount, currency, interchange and fees. Settlement reports summarise the net amounts due. Visa and Mastercard each provide their own reports and files for this, in their own formats.
What is being reconciled
Card scheme reconciliation has three layers. First, the clearing records must agree with the firm's own transaction records: every authorised transaction should clear, at the expected amount. Second, the clearing records must add up to the settlement report, after interchange, which is the fee paid between issuer and acquirer on each transaction, and scheme fees. Third, the settlement report must agree with the amount that moved in the settlement bank account.
Breaks appear at each layer. Transactions authorised but never cleared leave funds reserved on a customer's card. Transactions cleared without a matching authorisation, called force posts, appear with no record in the firm's system. Fee and interchange differences change the net figure.
Worked example: an e-money card issuer
An e-money institution issues prepaid cards on a card scheme. For one settlement cycle, the scheme's report shows the following. The issuer owes the scheme the net amount, which is debited from its settlement account. The issuer's own records show the same purchases and refunds, and the interchange income agrees with the published rates for its card mix.
The issuer then updates its safeguarding position. Customer card balances fell by the value of purchases net of refunds, and the settlement account paid the scheme. Interchange earned belongs to the firm, not to customers, so it must not be left in the safeguarding account. Our guide to safeguarding shortfalls and excesses explains why.
| Line | Amount (GBP) |
|---|---|
| Card purchases cleared | 1,846,220.15 |
| Less refunds cleared | (38,410.00) |
| Less interchange earned by issuer | (14,450.00) |
| Plus scheme fees charged to issuer | 2,912.40 |
| Net settlement owed to scheme | 1,796,272.55 |
| Debited from settlement account | 1,796,272.55 |
Controls
Load scheme clearing and settlement files directly. Match clearing to authorisations daily and age unmatched authorisations. Recalculate interchange and scheme fees independently rather than accepting the scheme's figure without checking. Reconcile the settlement report to the bank account each cycle. For regulated issuers, feed the result into the daily customer-money calculation.
Safeheld reconciles scheme, processor and bank records together and connects card settlement to each entity's customer-money position. See three-way reconciliation and Safeheld reconciliation.
Frequently asked questions
What is card scheme settlement reconciliation?
Confirming that a card scheme's net settlement agrees with its clearing records, the firm's own transactions and the money that moved in the settlement account.
What is interchange?
The fee paid between the acquirer and the issuer on each card transaction, set by the scheme.
What is a force post?
A transaction that clears without a matching authorisation in the issuer's records.
Does card settlement affect safeguarding?
For e-money and payment firms that issue cards, yes: settlements change customer balances and move money out of accounts that may hold customer funds.
References
- Visa, Visa Core Rules and Visa Product and Service Rules
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.