Clearing houses in banking: How they work

By definition, settlement makes a transfer irrevocable and unconditional. As such, it’s at this crucial point that certainty enters the payment process. Clearing houses and settlement systems underpin settlement finality. For many interbank payments, funds are only final once they make their way through these institutions.

Recent statistics show the Clearing House Interbank Payments System (the CHIPS Network) alone settles roughly $2T every day. But clearing houses run on set operating hours and within specific banking systems, which limits them for always-on, cross-border payments. That’s where blockchain-based stablecoins come in.

The Bank for International Settlements (BIS) claims stablecoins differ from bank transfers because they don’t settle on a central bank’s balance sheet. Stablecoins are introducing a new settlement model, and enterprises adopting them have to account for unique functional and legal implications.

In this guide, we clear up what clearing houses do and what happens to settlement finality without them. We also discuss how stablecoin rails deliver settlement finality.

What’s the main purpose of a clearing house?

Here’s how clearing house payments help clarify the clearing and settlement process.

Reduces counterparty risk

In securities and derivatives markets, a key way clearing houses establish trust is by acting as a central counterparty (CCP) between buyers and sellers. Payment clearing houses manage risk through netting, settlement rules, and participant requirements. In a CCP structure, participants don’t need to rely on the financial institution on the other side of the trade. Because CCPs act as the buyer for every seller and the seller for every buyer, they provide certainty for settlements.

When a payment closes, the obligation is final. There’s also less dependence on individual counterparties’ performance.

Note: Keep in mind that clearing and settlement aren’t the same step in the clearing house workflow. Clearing confirms what a party owes, while settlement moves the value.

Makes settlement more efficient

One reason clearing houses handle settlements so effectively is because of a process called “netting.” In this strategy, the clearing house offsets obligations and calculates a single net amount. This “net” is what each institution needs to pay or receive.

For example, Bank A owes Bank B $100 million, while Bank B owes Bank A $90 million. The clearing house would just reduce those payments to a net $10 million payment from Bank A to Bank B. This lowers liquidity requirements: participants know their obligations in advance, and the clearing house avoids unnecessary movement of funds.

What happens to settlement finality without a central authority?

Transaction data can still clear without an automated clearing house payment, but the certainty behind these settlements shifts.

Finality instead depends on bilateral trust, with transactions hinging on the credibility of counterparties. No central agency stands in the middle to absorb or manage counterparty risk. Each participant’s creditworthiness becomes nonnegotiable, as both sides of a trade need to deliver what they owe.

Here are a few ways removing clearing houses from the equation increases settlement risk:

• Bilateral counterparty risk. Each side in a transaction now has to factor in the possibility that the other party won’t fulfill their obligations.
• Reversal and rejection. The potential for transaction challenges, rejections, and reversals makes it difficult for parties to treat funds as permanently available.
• Zero-hour insolvency. Clearing houses can provide insolvency protections. Without them, if a counterparty becomes insolvent at the time of settlement, funds can wind up entangled in proceedings.
• Loss of netting. The loss of a netting mechanism forces counterparties to increase their liquidity. They must settle high-value transfers on a gross, transaction-by-transaction basis.

Where the clearing house model reaches its limits

Although the clearing house model works well, it wasn’t designed with continuous global settlement in mind.

For instance, the deferred net settlement (DNS) model only processes batches of accumulated transactions within defined intervals. And while the real-time gross settlement (RTGS) model settles single transactions as they happen, it’s subject to each domestic payment infrastructure's operating hours and rules.

These models work well within the current financial infrastructure for liquidity and risk management. However, they don’t fit today’s need for 24/7 availability across borders and different banking systems. Digital native solutions like stablecoins offer a solution, stepping in to expand global value transfer reach.

Coastal Financial Corporation ran into this issue with its cross-border settlement services. They needed to meet the expectations of an always-on digital economy without replacing their compliance infrastructure. To do this, they’re building a stablecoin settlement layer with Tempo. Coastal’s compliance infrastructure, including messaging, KYC/AML screening, and bank-to-bank confirmations, stays in place, while settlement moves onchain. Tempo’s native memo fields support structured payment data compatible with ISO 20022, which helps teams reconcile stablecoin payments with existing systems.

It’s a question of specialization. The traditional clearing house model will remain an essential part of global finance. Yet, when continuous, cross-border payments are a priority, a programmable onchain settlement layer can serve as a practical, complementary rail.

How stablecoin rails deliver settlement finality

One way stablecoin rails can provide settlement certainty is through fast, final onchain settlement. Once the network confirms a transaction, it’s done. On a network without re-orgs, there’s no chance that a payment will roll back.

Rather than having to wait for a later settlement process to complete, participants know that a transfer has settled. There’s no need to establish an origination through a clearing process and wait for a separate settlement window.

The global payroll provider Deel built its private contractor wallet on Tempo. On Tempo’s Layer 1, network fees are paid in stablecoins at sub-cent rates, and Deel sponsors those fees so workers never need a separate gas asset. The stability in this payment model is incredibly important for companies like Deel, which manages payment flows for over 40,000 businesses across 150 countries. Compared with fees that vary across correspondent banks, stablecoin network fees are predictable and easier to budget.

How Tempo approaches settlement

Tempo takes a payments-first approach to settling stablecoin transactions. Our Layer 1 is purpose-built for payments, with near-instant settlement and no re-orgs. Transactions settle according to clearly defined network rules, so counterparties know when onchain funds are theirs.

Beyond clear settlement, Tempo lets businesses pay network fees in stablecoins, with sub-cent fees. When businesses know they don’t have to deal with fluctuating cross-border fees or volatile digital assets, they have a far easier time forecasting their budgets. Tempo also makes it easier to reconcile all this payment data into existing systems like treasury and ERP, thanks to structured metadata and memo fields compatible with ISO 20022.

FAQ

Is a clearing house the same as a settlement system?

Clearing and settlement are two distinct steps. First, clearing determines and confirms each party's obligations and nets them into a smaller amount. Settlement only takes place alongside the final movement of funds between counterparties.

Do stablecoin rails replace clearing houses?

Stablecoin rails don’t take the place of clearing houses. Rather, onchain rails complement them, and blockchains offer solutions for 24/7 availability and cross-border payments.

What makes onchain settlement final?

The defining trait of settlement finality is that it’s locked in once the transaction clears. When settlement occurs on a blockchain without re-orgs, counterparties know there’s no chance of an onchain reversal.

How is finality with a central authority different from finality without one?

With clearing houses, counterparties can rely on the third-party institution for transaction finality. For networks without a central authority, however, transaction completion depends on the network’s rules and counterparty trust.

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Contact the Tempo team to find out more about how Tempo’s stablecoin settlement layer can bring your cross-border payments into the always-on economy.