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How an international money transfer works 💸

Being able to instantly transfer money from your Revolut account to your friend on the other side of the world is a great feature, but have you ever wondered what makes this possible?

Behind the scenes, your money moves differently to how you might expect, and in some cases, it doesn’t even move at all. Read on to find out why. 🤓

How does a bank store my money? 💰

Many people think a bank account is the same as having a small deposit box inside a safe and that client funds are stored in individual deposit boxes at the bank.

In reality, the bank holds all the money in one place, but it keeps individual records for every customer it has. The bank simply debits and credits accounts by updating these records, without actually touching the money unless it has to, but more on this below. 🤔

How does a money transfer work behind the scenes? 💱

In general, banks offer 2 types of money transfers:

  • Transfers between two accounts held at the same bank, known as Intra-bank transfers;
  • Transfers between two accounts held at different banks, called Inter-bank transfers.

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Intra-bank Transfers 🏦

Something interesting happens when you transfer money from your bank account to your friend’s account held with the same bank - the money doesn’t ever leave the bank in question.

The bank simply updates their records, subtracting the amount from your account (ie. debiting your account) and adding the same amount to your friend’s account (ie. crediting their account).

Inter-bank Transfers 🏦➡️🏦

Interbank transfers require funds to be moved between the two banks and this is where things get more complicated.

There are two main ways to do a interbank transfer. The first is for the banks to hold accounts with one another. The second involves both banks holding accounts at a “Central Bank”. But the best way to explain this is through an example:

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Let’s assume John wants to send Alice £20. John has an account with Barclays, while Alice chooses to bank with Lloyds. To manage the transfer, both banks need to have a relationship established. The easiest way to do this is for Barclays to hold a commercial account with Lloyds, and Lloyds to hold a commercial account with Barclays. Once they have this relationship in place, this is how the transfer would work:

  1. Barclays (John’s bank) will debit John’s personal account by £20.
  2. John’s bank will credit Lloyds’ commercial account held with Barclays by £20.
  3. Lloyds (Alice’s bank) will credit her personal account by £20.

Bank-Transfer-1

Notice that in this scenario, the banks have been able to transfer wealth without physically moving any money! 😲

Don’t worry if you didn’t get it the first time, just keep reading through and it will all start to make sense. 🤓

But what happens if John and Alice’s banks don’t hold accounts with each other? In that case, both banks need to find another institution (usually also a bank) where they both hold an account. This third bank acts as an intermediary between John and Alice’s banks and allows the transaction to take place. Behind the scenes, such a transfer would look like this:

Let’s call Johns’s bank ‘Bank 1’ and Alice’s bank ‘Bank 2’

  1. Bank 1 will debit John’s personal account by £20.
  2. Bank 1 will ask the intermediary bank to debit their account (Bank 1’s) by £20 ➖, and credit Bank 2’s account by £20.
  3. Bank 2 will credit Alice’s personal account by £20.

Bank-Transfer-2

Every country has a dedicated intermediary bank which all other domestic banks must hold an account with. This is called a Central Bank (ie. the Bank of England) and one of its purposes is to provide a relationship that allows all the different banks to transact with one another, allowing you to easily transfer money between different banks.

But why does everyone trust the Central Bank? Well, in theory, the Central Bank should never run out of money (as it can print it!) and should therefore always be able to meet their debts. 🤑

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International Transfers

So far, we’ve explained how money transfers work between two accounts held with either the same bank or with different banks, all based in the same country. But what happens when you transfer money across borders?

The high-level concept we’ve outlined above is still the same, however there is no true Central Bank for the world, so a solution must be found. Apart from this, things get a little more complicated as we start to add multiple currencies, but we'll explain that in the next post. Stay tuned! 😉

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