What is Clearing? Definition, Benefits, Types, and How it Works

What is Clearing?

Simply put, clearing is the process of exchanging transaction data between participants (usually between banks) for calculation and settlement at a specified time.

According to the Indonesian Dictionary (KBBI), clearing is the settlement of accounts between banks by transferring balances from one party to another who is entitled to the funds.

For example, you write a check from Bank A, which is then given to the recipient who has an account at Bank B. Before the funds are transferred, the banks need to reconcile the data, verify the validity of the transaction, and then settle the payment. This process is called clearing.

Why is Clearing Important? Its Benefits

Clearing is not just an administrative process. It has several key benefits, including:

1. Automating inter-bank transaction processes
2. Reducing errors and fraud risks
3. Providing certainty for bank customers
4. Reducing operational costs between financial institutions
5. Helping regulators oversee national financial transactions

With a well-organized system, clearing maintains stability and efficiency within the banking ecosystem.

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How Does Clearing Work?

Here are the stages of clearing as per Bank Indonesia:

1. The bank collects transactions from customers (such as checks or giro).
2. Data is sent to the clearing institution (which could be Bank Indonesia or another designated institution).
3. Data reconciliation and balance calculation are performed between banks.
4. Funds are transferred from the sending bank to the receiving bank.
5. The results are reported to each bank.

This process can take place daily, depending on the policies and types of clearing used.

Types of Clearing

1. General Clearing

General Clearing is a type of clearing organized and supervised directly by Bank Indonesia. This process occurs at the national level, where banks exchange transaction data through a pre-determined system.

Since it is centrally supervised, general clearing follows strict and uniform operational standards, making it ideal for resolving inter-bank transactions across various regions in Indonesia.

2. Local Clearing

Local Clearing is conducted within specific regional or local areas and is not directly supervised by Bank Indonesia. However, it still adheres to the regulations set by Bank Indonesia.

In practice, local clearing allows for faster and more efficient transaction settlements between banks within a particular geographic area.

3. Inter-Branch Clearing

Inter-Branch Clearing happens between branches of the same bank. This system helps facilitate financial transactions in areas where the same bank has multiple branches.

Since it remains within the same institution, inter-branch clearing is generally simpler and more efficient than general or local clearing, although it still follows internal procedures.

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Is Clearing the Same as a Transfer?

How Does Clearing Work in Bank Indonesia?

Bank Indonesia, as the monetary authority, plays a critical role in the national clearing system.

1. Banks send their transaction data to Bank Indonesia's system.
2. Bank Indonesia reconciles the data and calculates the balances that need to be settled.
3. Bank Indonesia transfers the funds between banks according to the calculated results.
4. All of this is done electronically for faster and more accurate processing.

BNI Clearing System (SKBNI)

One example of a clearing system in Indonesia is the SKBNI (National Bank Indonesia Clearing System). This system has two main transaction types:

1. Debit Clearing: Funds are debited from the customer's account, for example, when making a purchase using a debit card.
2. Credit Clearing: Funds are credited to the customer's account, for example, when receiving a transfer from another bank.

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Clearing Mechanisms and Systems

Mechanisms:

1. Submission Clearing: Sending instruments like checks/giro for settlement.
2. Return Clearing: If a transaction is rejected, it is returned to the sender.

Systems:

1. Manual: Using manual processes (rarely used today).
2. Semi-Automatic: A mix of manual and automated processes.
3. Electronic: Using computer systems for the entire process.
4. Fully Automated: Entirely digital without human intervention.

Clearing Instruments

1. Checks: A written order from the account holder to their bank to pay a specified sum to the recipient (check holder).
2. Bills of Exchange: A negotiable document ordering a third party to pay a specified sum to the recipient at a specified time.
3. Giro: A written order from the account holder to transfer funds from their account to the recipient’s account. Unlike checks, a giro cannot be directly cashed.
4. Debit Notes: Documents used by the sending bank to debit the receiving bank’s account during the clearing process.
5. Other Warrant Articles: Non-cash payment instruments approved and regulated by Bank Indonesia, such as transfer documents or certain electronic instruments.

Clearing vs RTGS, Which is Faster?

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Conclusion

Clearing is an essential system that supports the banking world behind the scenes. From check transactions to inter-bank transfers, everything is regulated through the clearing system to ensure smooth and secure operations.

With evolving technology, the clearing process is becoming faster and more efficient. So even though we don’t see it directly, clearing plays a crucial role in keeping financial transactions running smoothly every day.