2- Money doesn’t MOVE!

Photo by steve pancrate on Unsplash

When you log in to your online banking account and make a RM100 transfer to your friend, how does the money actually get “transferred” from your bank account to your friend’s bank account? How is money “moved” from your bank account to your friend’s bank account?

To explain this, let’s assume Alice wants to transfer RM 100 to Bob. There’ll be two cases under consideration.

  1. 1st case: Alice has a bank account at HSBC bank and Bob has a bank account at HSBC bank too. 
  2. 2nd case: Alice has a bank account at HSBC bank but Bob only has bank account at Citibank.

Let’s look at the 1st case: Alice a bank account at HSBC bank and Bob has a bank account at HSBC bank too.

Here’s how the money is “moved” from Alice’s HSBC account to Bob’s HSBC account:

  1. Let’s say Alice already has RM100 is her HSBC bank’s account.
  2. To transfer RM 100 to Bob, Alice logs into her HSBC online banking account, fill up an online transfer form with transaction amount as RM 100 and recipient bank account number as Bob’s HSBC bank account number. 
  3. Alice later confirms the transaction. Alice saw her bank balance reduced by RM 100 and Bob sees his bank balance increase by RM 100 immediately.
  4. Here’s how the money “moved”: When Alice confirms the transaction, Alice basically sends an instruction to the bank’s computer system, telling it to reduce her bank balance by RM100 and increase Bob’s bank balance by RM 100 (The bank’s computer system can do this seamlessly as Bob’s bank account number is given by Alice in Step 2). 
  5. So, in this way, we thought that money is “moved”! 
  6. In reality, money doesn’t move from Alice bank account to Bob’s bank account! The bank computer system simply decreases Alice bank account balance by RM100 and increases Bob’s bank account balance by RM 100.
  7. Only the numbers changed. No money is “moved” around.  

So far, things are easy because both Alice and Bob has bank accounts at the same bank.

Let’s look at the 2nd case: Alice has a bank account at HSBC bank but Bob only has bank account at Citibank.

Alice has no choice but to transfer RM 100 from her HSBC bank account to Bob’s Citibank’s account. This is also known as inter-bank transfer. Historically, there are two ways to achieve interbank transfer.

1st way:

Here’s how the money is “moved” from Alice’s HSBC account to Bob’s Citibank account:

  1. Let’s say Alice already has RM100 is her HSBC bank’s account.
  2. To transfer RM 100 to Bob, Alice logs into her HSBC online banking account, fill up an online inter-bank transfer form with transaction amount as RM 100, recipient bank as Citibank recipient and bank account number as Bob’s Citibank account number. 
  3. When Alice confirms the transaction, Alice basically sends an instruction to the HSBC bank’s computer system, telling it to reduce her bank balance by RM100 and increase Bob’s bank account at Citibank by RM 100. 
  4. Here’s the trick: After receiving instruction from Alice, HSBC bank’s computer system will reduce Alice’s bank balance by RM100 and increase Citibank’s bank account at HSBC bank by RM100. (Yes, just like us, Citibank can open a bank account at HSBC bank also)
  5. After that HSBC notified Citibank that it has increased Citibank’s bank account balance at HSBC by RM100.
  6. Then, in response, Citibank increase Bob’s bank account balance at Citibank by RM 100. 
  7. Alice saw her HSBC bank balance reduced by RM 100 and Bob sees his Citibank’s account balance increase by RM 100.
  8. The premise of this type of interbank transfer is Citibank must have a bank account (with more than RM100 deposited) at HSBC. 
  9. Or the other way round HSBC must have a bank account at Citibank, it works similarly (but with some differences in Step 4-6, challenge yourself to figure it out!) 

2nd way: 

Here’s how the money is “moved” from Alice’s HSBC account to Bob’s Citibank account:

  1. Let’s say Alice already has RM100 is her HSBC bank’s account.
  2. To transfer RM 100 to Bob, Alice logs into her HSBC online banking account, fill up an online inter-bank transfer form with transaction amount as RM 100, recipient bank as Citibank recipient and bank account number as Bob’s Citibank account number. 
  3. When Alice confirms the transaction, Alice basically sends an instruction to the HSBC bank’s computer system, telling it to reduce her bank balance by RM100 and increase Bob’s bank account at Citibank by RM 100. 
  4. Here’s the trick: After receiving instruction from Alice, HSBC bank’s computer system will send an instruction to the computer system of Central Bank of Malaysia (CBOM). 
  5. Remember, commercial bank are banks for us (the normal people: household and firms) while central bank is the bank for the commercial banks.  Every commercial bank operating in Malaysia will have their own account at CBOM, which is known as central bank reserves account.  
  6. The commercial bank handled the cash it collected from us (at the cash deposit machine) to the CBOM and in exchange for “numbers” in their central bank reserves account. (just like us handle the cash to the commercial bank in exchange for “numbers” in our bank account)
  7. Continuing the story from Step 5: HSBC bank’s computer system will send an instruction to the computer system of CBOM, telling the computer system of CBOM to reduce its central bank reserves balance by RM100 and increase the central bank reserves balance of Citibank’s by RM100. 
  8. After the computer system of CBOM decrease the HSBC central bank balances by RM 100 and increase Citibank’s central bank balances by RM100, HSBC bank has RM100 less in central bank reserves balance, Citibank now has RM100 more in central bank balances. 
  9. Immediately, HSBC’s bank computer system gets notified by CBOM to reduces the bank balance of Alice at HSBC by RM 100. At the same time, Citibank’s computer system gets notified by CBOM to increase Bob’s bank account at Citibank by RM 100.
  10. Alice saw her HSBC bank balance reduced by RM 100 and Bob sees his Citibank’s account balance increase by RM 100.
  11. Again, “money” doesn’t really move from Alice’s HSBC bank account to Bob’s Citibank’s account. It’s all about crediting and debiting numbers done efficiently by computer system. 
  12. The premise of this type of interbank transfer is both HSBC bank and Citibank must have central bank reserves account at the CBOM. (which they always have) 

Conclusion:

Money doesn’t “move”! No money is “moved” or “transferred” when you transfer your money in your bank account to other people. The “transfer” is completed simply by decreasing (debiting) and increasing (crediting) account balance using computer system of the bank.

References:

  1. A Simple Explanation Of How Money Moves Around The Banking System

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