One picture is worth more than a thousand words. This is what happens when you buy a product using PayPal or a bank card — under the hood.

To understand this, we need to digest two concepts:

📌 Clearing – calculates who pays whom, and how much.

📌 Settlement – is when real money moves between reserves in the settlement bank.

👤 Let’s say Bob wants to buy an SDI book from Claire’s shop on Amazon.

🔹 Pay-in Flow (Bob pays Amazon):

  1. Bob buys a book on Amazon using PayPal.
  2. Amazon sends a money transfer request to PayPal.
  3. PayPal, which has Bob’s debit card token, transfers money on his behalf to Amazon’s bank account in Bank A.
  4. Bank A and Bank B send transaction statements to the clearing institution.
    • This reduces the number of actual settlements.
    • If Bank A owes Bank B $100, and Bank B owes Bank A $500 → only $400 is settled.
  5. The clearing institution sends clearing & settlement info to the settlement bank.
  6. Actual money movement happens between reserve accounts at the settlement bank.

🔹 Pay-out Flow (Amazon pays Claire):

  1. Amazon informs Claire she’ll get paid soon.
  2. Amazon sends a money transfer request from Bank A (its bank) to Bank C (Claire’s bank).
    • Both banks record the transaction, but no real money moves yet.
  3. Bank A and Bank C send transaction statements to the clearing institution.
  4. The clearing institution sends clearing and settlement info to the settlement bank.
  5. 💰 Money is transferred from Bank A’s reserve to Bank C’s reserve.

🧠 Three Layers in Play:

  1. Transaction layer – where online purchases happen
  2. Payment and clearing layer – where payment instructions/netting happen
  3. Settlement layer – where actual money moves

✅ The first two are information flow

💰 The third is fund flow

These flows are asynchronous — which is why reconciliation is critical for consistency across systems.

🌍 It gets even more interesting when Bob shops internationally, like in the Indian market:

  • Bob pays in USD 💵
  • But Claire (the seller) receives INR 🇮🇳

So much happens behind that one simple "Buy Now" button!