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Money Transfers: How Do Banks Work & Move Money?
Banks are one of the most effective institutions you can rely on when it comes to keep money in a safe environment, without getting the risk of having them stolen. Banks offer various types of money saving options, accounts and investment tools, so that they can provide various types of services to people, both for payment purposes and for money protection.
Payments are made possible in many ways: for example, by using debit, credit or prepaid cards. In addition to this, one of the most useful services you can use in order to pay someone is by using money transfer procedure. Here comes one of the most interesting aspects regarding how do banks work: how are they physically able to move money from one institution to another? How can people and companies exchange money through different banks? The answer is simple but, in order to give it, we need to analyze two different situations.
Money Transfers between two Customers of the same Bank
Transferring money between two customers of the same bank is quite simple, as no real "transfer" is made at the fact. Let's take in exam a customer A who is going to send $1000 to a customer B. They are actually customers of Citibank, so this situation shows a money transfer between two accounts hosted by the same financial institutions.
In order to understand this situation, we should start by thinking about what happens when we load our account with money. When you deposit cash on your banking account, you are basically borrowing it to your bank, so that this last one is going to have a debt with you: having $2000 dollars on a Citi banking account means Citi has a debt of $2000 with you. If customer A moves $1000 to another Citi account (owned by customer B), he is basically telling the bank to reduce the debt with him and increase it with the other customer.
At the fact, no real money transfer is made and Citi is not receiving or sending money from and to the outside. All operations are made on the same banking systems, so there is simply an adjustment of balances. That is the reason why a money transfers made between two customers of the same bank is usually processed in the same day. Money transfers processed on the same bank are immediate in many cases.
Money Transfers between two Customers of Different Banks
When two customers of different banks are exchanging money, the fact is a little more complex, but not as much as you imagine. When a money transfer is made through the same bank, only the two customers and the bank are engaged in the operation. If the banks are different, another figure comes out: the central bank. Central banks are connected with all the commercial banks, making it easy to exchange money among them. So if customer A (Citi customer) is sending $1000 to customer B (Bank of America customer), he is basically starting this process:
- Customer A reduces his credit with Citi ($1000);
- The $1000 Citi has in extra, are sent to the central bank. Citi is basically giving those money to the central institution, without stipulating a credit with it;
- The central bank now has $1000 in extra: at the same way, it is going to giving those extra money to Bank of America;
- Now Bank of America is having $1000 in extra: it uses them to increase his debt with customer B, who will see those money credited on his banking account.
Money Transfer Through Same Bank
Money Transfer Through Different Banks
No real transfer is made
Transfer is made through a central bank
Balances are adjusted in a day
Balances are adjusted after money has been successfully moved to the other bank
Relationships are only among the bank and the two customers
Relationships are among the two banks, the two customers and a central bank
Central banks play a main role in global economy. If someone is asking you "How do banks work?", the answer is that they work by constantly sending inputs and outputs to a central bank and then, to other banks. We are still taking in exam situations involving banks of the same country. In this case only a central bank is taken in exam. If we transfer money between banking accounts on different countries, we are following the same way. In this case, two central banks are involved: that of the sender's country and that of the recipient one. A middle passage will consist in the two central banks exchanging inputs and outputs before passing them to the commercial institutions.
For many people learning how do banks work is nice, also because it often happens not to think about it enough. Banking activities are something part of everyday life. Like many other common activities, we do not always think about the passage which makes these possible. By thinking about it, we start discovering that all the world is connected by a big network of banks. Without this big network, banks would be useless.
Did you already know how do banks work when they are going to transfer money between two parts? You can comment this article by telling your experience.