Credit clearing is the practice according to which a small group of banks need to make many payments to each other, of adding up the payments and cancelling them out before
settling
Settling is the process by which particulates move towards the bottom of a liquid and form a sediment. Particles that experience a force, either due to gravity or due to centrifugal motion will tend to move in a uniform manner in the direction e ...
the remainder. While
clearing is about waiting for the payment to go through, credit clearing is about cancelling out a payment with one coming in the opposite direction.
This process originated between all the banks in London, who would send their checks to the
clearing house
Clearing house or Clearinghouse may refer to:
Banking and finance
* Clearing house (finance)
* Automated clearing house
* ACH Network, an electronic network for financial transactions in the U.S.
* Bankers' clearing house
* Cheque clearing
* Cl ...
at the end of each day. After the calculations were made there would be a single payment to or from each bank.
In 21st century with
spreadsheets and
blockchains, this process tends to be fully automated.
The mechanism is used not only by banks, but in any
multilateral exchange
A multilateral exchange is a transaction, or forum for transactions, which involve more than two parties.
For example, Alice gives Bob an apple in exchange for an orange, that is a bilateral exchange.
A multilateral exchange would involve a third ...
situation.
Many
complementary currencies
A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and thei ...
work this way, calling it
mutual credit.
Banking technology
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