Settlement Account
A settlement account is used to receive and pay out the net proceeds of transactions between counterparties — a processor paying a merchant, a partner paying an operator. It is an operating account between businesses, not a structure for holding customer money.
Also called: clearing account
A settlement account is a working account between counterparties. The proceeds of transactions are paid into it and out of it: a processor paying a merchant its takings net of fees, a scheme paying an acquirer, a payout partner returning an operator’s unused balance. It exists so that the net result of a great deal of activity can be moved in one direction, once.
It is held in the account holder’s own name, and as far as the bank is concerned the balance is the account holder’s money. That is the distinction that matters. Funds a firm holds on behalf of its customers need a structure built for the purpose — a safeguarding account, a segregated account or an FBO account — and calling an operating account a settlement account gives those funds none of it.
In practice
A settlement account is for moving net proceeds between counterparties. It is not, by itself, a structure for holding customer money: it sits in the firm’s own name, the bank treats the balance as the firm’s, and naming it differently creates no protection for anyone.
Example
A processor collects 2.1 million pounds of card takings for a merchant during the week — the pay-in leg. On Friday it deducts its fees and sends 2.06 million to the merchant’s settlement account — the payout leg. That 2.06 million is the merchant’s own revenue arriving in the merchant’s own account. Money the merchant is holding for its own customers would not belong there.
Commonly confused with
| Term | How it differs |
|---|---|
| Safeguarding account | A safeguarding account is designed to keep customer funds separate and protected; a settlement account holds the firm’s own net proceeds. |
| Nostro account | A nostro is your account in another bank’s books, usually for currency and correspondent flows; a settlement account is where net proceeds between counterparties land. |
See also
- SettlementSettlement is the point at which value actually moves between parties and the obligation between them is discharged. It is a separate step from clearing, which only works out who owes what, and from finality, which is the moment the transfer can no longer be reversed.
- Nostro AccountA nostro account is an account a bank holds in a foreign currency at a bank in that currency’s home market, literally “our account with you.” It is how a bank keeps a working balance in a currency it cannot hold at its own central bank.
- Safeguarding AccountA safeguarding account is the account at an eligible institution in which a UK payment or e-money firm places the customer funds it must safeguard, held and designated the way the applicable rules require rather than the way a bank chooses to label its product.
- FBO AccountAn FBO account is a bank account held in one company’s name for the benefit of its underlying customers. The company controls the account; the money inside belongs to the customers. The bank’s relationship is with the account holder, not with them.