What is a Clearing Bank?

A clearing bank participates directly in a country's payment systems. It processes payments between banks and settles them across accounts held at the central bank. In the UK, clearing banks connect directly to payment schemes such as Bacs, CHAPS and Faster Payments, and settle those payments through accounts at the Bank of England.

That direct connection separates a clearing bank from other banks and payment providers. Most financial institutions in the UK don't hold this access themselves. Instead, they route payments through a clearing bank that does.

This guide explains what clearing banks do, how clearing and settlement work, which payment schemes are involved, and how clearing banks differ from other types of bank.

Clearing bank meaning

The term comes from "clearing": the process of exchanging payment instructions between banks and working out who owes what to whom. When money moves from an account at one bank to an account at another, the two banks need a reliable way to exchange the payment details and then settle the resulting obligation. Clearing banks are the institutions that do this directly.

A UK clearing bank typically has three defining characteristics:

• Direct scheme membership. It is a direct participant in one or more UK payment schemes, such as Bacs, CHAPS, or Faster Payments
• A settlement account at the Bank of England. Payments between direct participants settle in central bank money, across accounts held in the Bank of England's Real-Time Gross Settlement (RTGS) service.
• The infrastructure and controls to process payments at scale. Direct participation carries technical, operational and regulatory requirements that go well beyond holding a banking licence.

Few institutions meet all three requirements. As a result, many banks, building societies, fintechs and payment companies access the UK's payment systems indirectly, through a clearing bank acting as their sponsor or agency banking provider.

How does a clearing bank work?

It helps to separate the two things a clearing bank actually does: clearing and settlement.

Clearing

Clearing is the exchange and confirmation of payment instructions. When a customer of Bank A pays a customer of Bank B, the payment message states who is paying whom, how much, and to which account. That message passes through the relevant payment scheme, which validates and routes it, and calculates the obligations between the participating banks. In some schemes, the many payments flowing in both directions between two banks are netted, or offset against each other, so only the difference needs to move.

Settlement

Settlement is the point at which money actually changes hands between banks. For UK payment schemes, this happens across settlement accounts held at the Bank of England in its RTGS service. Settling in central bank money discharges the obligation between two banks with the most secure form of money available: a claim on the central bank itself, rather than on another commercial institution.

A worked example

Suppose an employer banks with Bank A and runs payroll through Bacs. The payment instructions go to the scheme, which processes and distributes them to each employee's bank. The scheme calculates each bank's net position. At the settlement point, the Bank of England moves funds between the banks' settlement accounts, and each employee's bank credits the employee's account. The employer and employees only see their own accounts change. The clearing and settlement between the banks happens in the infrastructure connecting them.

The UK payment schemes clearing banks operate across

Clearing banks in the UK participate in some or all of the following schemes:

• Bacs: the scheme behind Direct Debit and Bacs Direct Credit, used for payroll, supplier payments and bill collection. Payments follow a three-day cycle and are processed in bulk.
• Faster Payments: near real-time payments, available 24/7/365, used for most day-to-day bank transfers in the UK.
• CHAPS: the Bank of England's same-day, high-value payment system, commonly used for time-critical and large transactions such as property completions and treasury flows. There is no upper transaction limit.
• Image Clearing System: the digital cheque clearing scheme, operated by Pay.UK, which processes cheque images rather than paper.

Bacs, Faster Payments and the Image Clearing System are operated by Pay.UK, the UK's retail payments operator. CHAPS is operated by the Bank of England. Each scheme publishes its list of direct participants, so the current set of institutions clearing directly in each system is a matter of public record.

Direct and indirect access: why most institutions use a clearing bank

Direct participation in a payment scheme requires meeting the scheme's technical and operational standards, maintaining connectivity and resilience requirements, and, for settlement, holding an account in the Bank of England's RTGS service. For many institutions, the cost and complexity of direct participation outweighs the benefit.

The alternative is indirect access: connecting to the schemes through a direct participant. This is often called agency banking or sponsor banking. The clearing bank processes and settles payments on behalf of the indirect participant, which might be a smaller bank, a building society, an e-money institution, a payment service provider or a fintech.

Since 2018, the Bank of England has also allowed eligible non-bank payment service providers to apply for direct access to some payment schemes, a route some larger fintechs have taken. Even so, indirect access through a clearing bank remains the most common arrangement for regulated firms that need to send and receive payments at scale.

Clearing bank vs commercial bank

The two terms describe different things, and a single institution can be both.

A commercial bank is defined by the services it offers customers: accounts, deposits, lending and payments for individuals and businesses. A clearing bank is defined by its position in the payments infrastructure: direct scheme participation and settlement at the central bank.

The UK's largest high-street banks are both. They serve customers as commercial banks and clear payments as direct scheme participants. But the categories don't fully overlap:

• Many commercial banks are not clearing banks. They serve customers but access payment schemes indirectly, through a clearing bank.
• A clearing bank may serve only institutional clients rather than the general public, focusing on providing payment and settlement infrastructure to other financial businesses.

A related distinction is the clearing house: the body or infrastructure that operates the clearing process itself, such as Pay.UK. A clearing house is not a bank. It's the network the clearing banks participate in.

A brief history of UK clearing banks

The term dates back to eighteenth-century London, when clerks from different banks met to exchange cheques and settle the differences, a practice formalised in the Bankers' Clearing House in the early nineteenth century. For much of the twentieth century, UK clearing was dominated by a small group of large banks, often referred to as the "big four" high-street clearing banks.

That picture has changed. Cheque volumes have given way to electronic schemes, clearing has moved from paper exchange to data exchange, and access has widened. New, technology-led clearing banks have entered the market over the past decade, and eligible non-bank payment providers can now apply for direct scheme access. The result is a larger and more varied set of direct participants than at any point in the clearing system's history, though still a small group relative to the thousands of financial firms that rely on them.

Which banks are clearing banks in the UK?

There is no single official register titled "clearing banks", because participation is defined per scheme. The accurate, up-to-date answer sits in the schemes' own participant lists: Pay.UK publishes the direct participants in Bacs, Faster Payments and the Image Clearing System, and the Bank of England publishes CHAPS participants.

In practice, the UK's direct participants include the major high-street banking groups, a number of international banks, and a smaller group of specialised, technology-led clearing banks. This second group focuses on providing payments and settlement infrastructure to other regulated businesses rather than serving the general public.

Bank of London sits in this second group. It is a Directly Connected Settlement Participant, with direct access to Faster Payments, Bacs and CHAPS. Through agency banking and infrastructure-as-a-service, it lets other banks, fintechs and payment firms launch branded payment services without holding direct scheme membership themselves. It also sponsors sort codes for financial institutions that want to keep their own brand identity, and provides indirect scheme access to third-party institutions that connect to UK payment schemes through it rather than joining directly.

Frequently asked questions

Is every bank a clearing bank?

No. Holding a UK banking licence does not make a bank a clearing bank. Only direct participants in the payment schemes, with settlement accounts at the Bank of England, clear payments themselves. Other banks access the schemes indirectly through a clearing bank.

What is a non-clearing bank?

A non-clearing bank is a licensed bank that is not a direct participant in the payment schemes. Its customers can still send and receive payments as normal. The difference is that those payments are routed and settled through a clearing bank acting as its agent.

What is the difference between a clearing bank and a clearing house?

A clearing house operates the infrastructure through which payments are exchanged. In the UK, Pay.UK operates Bacs, Faster Payments and the Image Clearing System. A clearing bank is a participant in that infrastructure. The clearing house runs the network; the clearing banks move money across it.

How does a payment clear between two banks?

The payment instruction is exchanged through the relevant scheme, each bank's obligations are calculated (netted, in some schemes), and the resulting amounts are settled across the banks' accounts at the Bank of England. The paying and receiving customers see only their own account balances change.

Do fintechs and payment companies need a clearing bank?

Most regulated payment firms, including e-money institutions, payment institutions and many smaller banks, access UK payment schemes through a clearing bank, an arrangement known as agency banking. Some larger non-bank payment providers have taken up direct scheme access since the Bank of England opened this route in 2018, but indirect access remains the most common model.

What does "settlement in central bank money" mean?

It means interbank obligations are discharged across accounts held at the Bank of England, rather than at a commercial bank. A claim on the central bank carries no commercial credit risk, which is why the UK's payment schemes settle this way.

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