In order to understand how Verify Payments technology works; it is important to understand the underlying mechanisms it utilizes. We have explained in our previous posts why credit cards are hated and what makes other payment methods unsuitable. In this post, we dive into bank transfers and their various types.
Banks manage your balances through managing your records either by debiting or crediting. When you engage a bank transfer there are mainly two type of transfers that could happen. The transfer could either be an “intra-bank transfer” or an “inter-bank transfer”.
Intra-bank transfers (Same-bank)
Intra-bank transfers are within the same bank and are quite simple. Assume we have Bob and Alice, who both have accounts at the Emirates NBD (ENBD) bank. When Bob sends money to Alice; the bank (ENBD) simply debits (reduces) Bob’s account balance and credits (adds to) Alice’s account balance. A simple record operation. In this case the only thing that changed are the internal balances for each of the account holders.
Inter-bank transfers (Across banks)
Inter-bank transfers are between different banks. These types of transfers are not as simple as the intra-bank transfers. This type of transfers can either be direct or indirect. A direct inter-bank transfer means that both banks interacting maintain an account for the other bank, i.e Bank A has an account in Bank B and vice versa. The indirect inter-bank transfer is when both banks interact using another party/parties (be it banks or other financial entities).
The key insight is that for a transfer to take place, the source and destination banks must have accounts at a single entity (i.e. a single set of “books”).
Let us explore how each of the two types work starting with direct inter-bank transfers.
Direct inter-bank transfer
As previously mentioned this type of bank transfers is when each of the banks hold an account in the other bank. Let us go back to Bob and Alice. Assume Bob owns an account in Emirates NBD and Alice owns an account in Mashreq Bank and both banks are in the UAE. Also assume that Emirates NBD has an account with Mashreq Bank and Mashreq Bank has an account at Emirates NBD.
In this case when Bob (Emirates NBD) transfers money to Alice (Mashreq), Bobs Bank ENBD debits (subtracts) Bob’s account and credits the Mashreq bank’s account it has. ENBD then let’s Mashreq bank know, and Mashreq bank will credit Alice’s account on the other side.
Indirect inter-bank transfers
Now not all banks own accounts in other banks. That is why when we transfer money and in various occasions we are asked for what is called the intermediary entity/bank or even a correspondent bank. Intermediary banks are for cases where a bank does not have an account on the receiving bank. Again going back to our example where Bob wants to send to Alice. In this case Emirates NBD does not have an account in Mashreq Bank and vice versa. When a transfer happens Emirates NBD would debit Bob’s account and would inform the intermediary bank where both banks have accounts in say it is Standard Chartered; Emirates NBD will request Standard Chartered to debit their account and credit Mashreq bank’s account it (Standard Chartered) has and accordingly Mashreq bank would credit Alice’s account.
That is the general flow that is mostly used when going cross-border too. Also usually when the banks are in the same country where it is managed and regulated by its Central Bank the intermediary in many cases would be the Central Bank rather than another third bank or another financial entity for within same county transfers.
Now when we transfer money cross border we also need to consider another important point aside from whether each a bank has an account on the other bank; that is currency.
Let us assume Bob lives in the UAE and has a bank account in Emirates NBD and that Alice lives in Bahrain and has an account in the National Bank of Bahrain (NBB). When Bob transfers to Alice we need to consider two cases as previously stated. Whether banks have a direct relationship or an indirect relationship and also the currency.
Cross border direct inter-bank transfers
Let us start with the direct inter-bank transfers. Assuming Emirates NBD has an account in NBB and vice versa. Bob’s bank Emirates NBD will send a SWIFT transfer message to Alice’s NBB bank in Bahrain and accordingly the debiting and crediting of accounts would happens just as previously explained. Bob’s Emirates NBD bank will debit Bob’s account and credit NBB’s account it has; NBB on the other end in Bahrain will credit Alice’s account. Notice that we mentioned SWIFT? We have wrote about it here; It is important to know what it does and I advise to read read about it here. In short SWIFT allows banks or financial entities to securely communicate using a unified and standard protocol. SWIFT does not move the money, it is just the messaging bit between entities.
Cross border indirect inter-bank transfers
Now what if Emirates NBD did not have an account in NBB and vice versa a.k.a. an indirect inter-bank transfer. This where where the intermediary bank and SWIFT plays a major role.
So Bob’s Emirates NBD bank in the UAE will send a transfer SWIFT message to Alice’s bank (NBB) in Bahrain and given there aren’t accounts for either banks; SWIFT in this case will reach a bank where both banks have accounts in (let us assume it is Standard Chartered).
Emirates NBD will debit Bob’s account and ask the intermediary bank to debit its account in Standard Chartered and credit NBB’s account also in Standard Chartered. Standard Chartered takes its fee for facilitating the process. NBB will then credit Alice’s account.
It is worth noting that sometimes more than one intermediary bank is necessary for a transaction to complete (this is particularly acute in remote parts of the world); in some cases the central banks are involved as another intermediary bank in the process. Since wires generally operate on a netting basis (usually daily), it becomes clear why cross border transfers are slow.
If a different currency is involved than the exchange rate is usually done at either bank at the lowest rate possible.
Banks networks are highly established and Verify Payments add a layer on top to facilitate better access and utilization of banks by providing real-time payments using banks transfers.
We’re always on the lookout for great developers! If you’d like to join a team on the bleeding edge of financial technology, send us a note → jobs@verify.as
You can always shoot us your questions here, or in telegram, reddit, twitter, facebook or linkedin.