Credit Clearing and the Missing Middle, Part 3

Credit Clearing and the Missing Middle, Part 3

Clearing thrives when businesses outgrow the coins in their purse. In this instalment we move from mediaeval market fairs, as explored in the previous article, to purpose-built clearing institutions. From the Bank of Amsterdam in 1609 to the London bankers huddled in a Lombard-Street tavern in 1770, the idea was the same: share the maths, spare the money.

Over the following two centuries that simple notion scaled spectacularly, with each innovation and evolution shaving yet more risk and inefficiency out of the daily grind of payments, at least for those with access.

Why revisit all this history? Because it shows that clearing is a proven tool that can unlock trade whenever cash is tight and trust is precious. The settings in which clearing occurs have changed, and this story places our mission to make it mainstream in the 21st century into its proper context.

Here at Local Loop Merseyside we are lifting clearing out of the banking vault and offering it to ordinary businesses, so that the same efficiencies which power global markets can strengthen our local industries.

The Rise of Bank Clearing Houses

The first institutional clearing service emerged in the Netherlands in 1609, with the Bank of Amsterdam offering centralised ledgers for merchants. In 1636, financier Philip Burlamachi proposed a formal clearing bank in London, and by 1770 London’s bankers established the first dedicated institutional clearing house, the Bankers’ Clearing House, in a tavern on Lombard Street.

The new clearing house allowed clerks from multiple banks to meet daily in one place, exchange all cheques, and pay the differences in cash. This dramatically streamlined payments and is regarded as the world’s first large-scale interbank clearing system.

The idea soon spread internationally. In 1853, 52 New York City banks formed the New York Clearing House Association. Prior to this, banks had sent messengers to swap cheques only weekly, but the new clearing house enabled daily centralised exchanges. This stabilised the young American monetary system in an era before a central bank was established.

Modern History

Central Bank Payment Clearing

While private clearing houses handled cheques and trades, national central banks also developed comparable systems as technology advanced. In the United States, the Federal Reserve launched the Fedwire system in 1918, and the Automated Clearing House (ACH) in the 1970s for clearing electronic payments (replacing many paper cheques). In the UK, the electronic Bankers Automated Clearing Service (BACS) was introduced in 1968.

These systems marked the shift to digital clearing, where computers clear millions of transactions at a time.

Globalisation

In 1970, the New York Clearing House Association pioneered CHIPS (Clearing House Interbank Payments System) to clear large-value international payments among banks. This system slashes the amount of money that needs to change hands by upwards of 95%.

By linking New York’s banks with others in every major time zone, CHIPS helped to transform the U.S. dollar into the backbone of round-the-clock global finance. The CHIPS design built a dense web of relationships, letting corporates and central banks move funds across borders in minutes rather than days. Within a decade, daily volumes had surged past the trillion-dollar mark, foreshadowing the truly global clearing systems that continue to power financial markets today.

Another significant institution is the CLS Bank, launched in 2002 to reduce the risks associated with currency trading. CLS today settles over a million transactions on an average day, with an average daily volume in the trillions, yet because of clearing the required funding is a small fraction of that.

It stands as a modern example of clearing on a global, multicurrency scale, as well as the role clearing plays in building systemic resilience - the ability to withstand, recover from, and adapt to disruptions - in economic networks. During the 2007–08 financial crisis, CLS continued to function smoothly and kept the massive currency trading market stable even as other markets unraveled. Clearing systems again helped to stabilise the economy during the 2020 COVID-19 economic downturn.

Evolving on a separate track, the organisation now known as the London Clearing House (LCH) began in 1888 as the London Produce Clearing House. Distinct from the 1770 Bankers’ Clearing House, after successive reinventions and rebrands LCH widened its remit from produce to multi-asset financial services.

These changes presaged the LCH rise as a clearing giant, set the stage for it to become a powerful lynchpin of the global financial system. Since the 2000s, LCH’s influence has only expanded. By 2018, its SwapClear service was clearing a whopping $1,077 trillion ($1 quadrillion) in volume annually, nearly 9 times the size of the entire global economy (currently estimated at $115 trillion).

By clearing trillions of dollars in trade down to a sliver of actual cash payments, LCH and similar institutions allow money to flow with minimal risk. Taken together, today’s clearing leviathans form a nervous system for global finance, and their scale gives them enormous influence over how national and local economies such as Merseyside function.

Regulators now treat these clearing houses as ‘systemically important financial market infrastructures’ (FMIs), because a serious disruption in their processing would reverberate from global financial centres to local businesses.

In reviewing our journey through the history of clearing so far, from its origins in mediaeval merchant fairs to the backbone of modern global finance, we see a recurring pattern: those who are able to have consistently turned to clearing when other forms of finance proved inadequate. Clearing systems have consistently shown themselves to be viable, adaptable, and at times pivotal for economic resilience.

Indeed, while institutional and technological factors often shape how clearing is practised, the core logic remains constant:

Clearing reduces reliance on scarce cash and builds systemic resilience.

The global clearing system has evolved over centuries into an enormously complex web of institutions. In this article we’ve barely scratched the surface.

The sophisticated technology, processes, and coordination that clearing demands have acted as a barrier to its benefits being made accessible to small businesses and local economies until now.

Here at Local Loop Merseyside, building on centuries of history, we’re pioneering the use of clearing systems for everyday businesses, and finally making these enormous benefits available to them.

In the next edition of our Credit Clearing and the Missing Middle series, we’ll be exploring the Slovenian experience of government-led Loop Clearing, and the relevance of this to local economies such as Merseyside.

Between now and then, follow us on LinkedIn, sign up to our newsletter, and join us on our journey in building the most collaborative economy in the UK, one cleared invoice at a time.