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How Are Interbank Payments Made?

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Banks need to pay each other all the time, sometimes because a customer
has instructed the bank to make a payment on their behalf, sometimes
because a bank needs to pay another bank as a result of its own trading or
lending activity. Here we are going to look at the bank to bank payment
that arises when a customer wishes to make a payment to someone else
who banks elsewhere.
We easily understand physical payments that are made directly when you
pay in cash for something without a third-party intermediary. This can be
described as ‘peer-to-peer’ as you simply hand over cash to the other
person. There’s no one in the middle, you don’t need to instruct or pay a
third party, and no one can stop the payment. The cash payment is also
resistant to censorship. If you are the recipient, you can be reasonably
confident, upon inspection, that the banknote or coins are unique (i.e.,
not counterfeit copies), otherwise you should not accept them and there
is no transaction. It is also obvious that the payer hasn’t spent that same
cash already (else they wouldn’t have it to give to you), and furthermore,
they can’t use the same cash to simultaneously pay you and someone else
(because physical cash can’t exist in two places at once). Of course—this
is all intuitive.
As soon as you move into the digital world, things become a little more
complex. Digital assets are easy to copy. Unlike physical cash you can’t
give a digital asset (e.g., a file) to someone as a currency payment. Well,
you can, but they won’t value it because they can’t tell if it is unique. They
can’t be sure that you will delete it once you have sent it to them, and they
can’t tell if you have sent, or will send, a copy of the file to a different
person53. This problem with digital assets is called the ‘double spend’
Wikipedia54 describes double spending as:
…a potential flaw in a digital cash scheme in which the same single digital token can be spent
more than once. This is possible because a digital token consists of a digital file that can be
duplicated or falsified.
The digital money world deals with this by using a bookkeeper who is an
independent third party, who, because they are regulated, can be trusted
to maintain accurate books and records and abide by certain rules. For
example, you trust that PayPal is not creating PayPal dollars out of thin
air because each PayPal balance must be backed by an equivalent balance
in its bank, and you trust that the regulators will do their job and shut
PayPal down if they are not behaving. You also trust that when you
instruct your bank to make a payment, the amount of money leaving your
account is the same as the amount that is entering the recipient’s account
(less fees, of course).
So, with any form of digital asset, you need a trusted bookkeeper to
maintain a list of who owns what and who plays by some well understood
and trusted rules. They often have a licence from an authority that gives
them some credibility and increases your confidence that they are
carrying out their activities according to certain standards.
Now, let’s dive into how the movement of bits and bytes and debits and
credits produces the effect of money moving instantly from one person to
credits produces the effect of money moving instantly from one person to

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How are Payments Made?
How does digital money move from one bank account to another? When
Alice wants to pay $10 to Bob, does Alice’s bank simply subtract $10 from
her account and tell Bob’s bank to add that $10 to Bob’s account? And
then how do the banks settle that $10 up between them?
It can be complex. Let’s build this up by looking at the following
1. Same bank
2. Different banks
3. Cross border (same currency)
4. Foreign exchange

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