What is a Net Settlement?
In banking, net settlement is simply the sum of the day's credits and debits.
How Does a Net Settlement Work?
Let's assume XYZ Bank has the following activity today:
Outflows:
Cash withdrawals $400,000
Debit card transactions $500,000
Credit card transactions $300,000
Total $1,200,000
Inflows:
Check deposits $275,000
CD purchases $100,000
Cash deposits $125,000
Total $500,000
Net settlement = $500,000 - $1,200,000 = -$700,000
Why Does a Net Settlement Matter?
Banks send their net settlement data to each other and to Federal Reserve bank banks in order to collect or pay amounts due from or to one another. A clearinghouse typically handles the actual transaction between entities. Payments usually occur at the end of the day so as to include all transactions for the day.
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