So the other day, I was making a electronic transfer from Fidelity to my HSBC Direct savings account and that got me thinking, what exactly goes on behind the scene of a electronic transfer. They go by many names including wiring money, electronic fund transfer, direct deposit, etc. How exactly does a EFT work? I mean metaphorically, it’s like bank A is sending money to bank B, but this being electronic and all digital, there is no real money being transferred.
Back in the days, when bank A sends money to bank B, little cars delivers sacks of money from bank A to bank B.
But nowadays, everything is digital and I would assume no actual money (paper bills, rare metals, etc) are actually being transferred between banks, making it more safe and secure. There are movies showing those armored trucks delivery big loads of cash, but I believe that is just transferring money from the branches into the main bank, or vice versa. Like when I write a Bank of America check and the payee deposits it into his Washington Mutual account, all they do is notify Bank of America and they transfer the money over. I think these days, they don’t even send the check back, but just make a scan.
But how exactly is money electronically transferred.
Within the same branch or even the same bank, it’d be easy. Bank of America oversees the entire transaction and the deduct money from account X and deposits that same amount into account Y. But to deduct money from account X in Bank of America and deposit that amount into account Y in Washington Mutual, it just seems to be changing the balance, however, it doesn’t appear to be as simple as it sounds.
What really happens as I imagined would be Bank of America takes money out of account X and puts it into their own. At the end of the day, thousands or millions of transactions occur between the 2 banks and only the difference is transferred. Afterwards, Washington Mutual will deposit the amount from the transfer into account Y.
It appears to be something quick and simple, but there needs to be some overseeing agency to make sure that Bank of America does indeed deduct that amount from their balance and Washington Mutual only increases that amount from their balance. If not, what is to say, that Bank of America “claims” to have transfer money to them, but not in fact deducted their own balance. The way I see this working is that each bank has an account with lets say the Federal Reserve, and they are basically making transfers of funds within the same bank (Federal Reserve). I can see that working, since the accounts have to be checked and balanced.
But I’m curious if anything tangible is actually transferred. Are money in forms of coins and dollar bills at the end of the month moved between banks. Bills and coins are just tender, and I don’t see why electronic numbers can’t completely replace them. If the banks deposit all their bills to the Federal Reserve, then it’s essentially the same.
Ungsunghero then brings up a good point. What about international transfers. How does money actually flow between countries? If I decided to transfer $100,000 to my Swiss account, what really happens? The transfer may take a few days, but how does the money leave the USA and enter Switzerland? Do we ship them bags of bills? gold? Is there any overseeing agency like the Federal Reserves that monitor international transactions?
Just something that’s been bouncing in my head.