How Your Money Moves In The Banking System

Ever wonder why that six pack you bought last night doesn’t show up on your online statement until the next evening?

It’s worth noting that we can also describe the credit card schemes and even PayPal as Deferred Net Settlement systems: they are all characterised by a process of internal aggregation of transactions, with only the net amounts being settled between the major banks.

But this approach also introduces a potentially worse problem: you have lost settlement finality. You might issue your payment instruction in the morning but the receiving bank doesn’t receive the (net) funds until later. The receiving bank therefore has to wait until they receive the (net) settlement, just in case the sending bank goes bust in the interim: it would be imprudent to release funds to the receiving customer before then. This introduces a delay.

Interesting read, me thinks. HT

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