Is Your Bank Handling Transfers Well?

A Little Bit of Money

Thought Experiments on Cross-Border Payments - Of Couriers, Bankers, and Bitcoiners

Series 27: Is Your Bank Handling Transfers Well?

Not So SWIFT Payments – Money Transfers That Do Not Move

To move funds across borders, accounting entries based on the age-old Nostro-Vostro system are used to balance liquidity among banks when an international wire takes place. Money very rarely moves physically. Most of the time, money only moves virtually – on the map, so to speak. For this reason, banks have to maintain correspondent banking relationships. 

Correspondent banking means connectivity and liquidity

In turn, the big players in the correspondent banking world stay connected with all kinds of processing services, including domestic clearinghouses, international clearing organizations, central banks, and of course, with the Society for Worldwide Interbank Financial Telecommunication, otherwise known as SWIFT. Its members are over 10000 banks around the globe – from local banks to multinational financial institutions. All of them form a network by maintaining accounts with each other. Contracts guarantee connectivity and liquidity at various levels.  

Brinks Armored Vehicles Moving Cash from Bank to Bank

SWIFT provides connectivity and financial messaging services. It’s important to understand that SWIFT doesn’t move cash. That's what companies like Brinks do, transporting banknotes in armored vehicles from bank to bank all over the world. SWIFT's messaging services allow banks to send standardized messages back and forth and communicate account balances and financial statements to each other. 

Wiring Funds is Like Jumping Hurdles

In fact, many different financial institutions are involved in the movement of cross-border payments, and each one has its own rules, fee schedules, and priorities. The time it takes for payments to reach their destination, or the fees incurred along the way, can vary widely due to these multiple obstacles. The terms of the correspondent relationships, the time windows, and the cut-off times of back-office processing determine how quickly money is on its way.

Bank Accounts Talk to Each Other 

For funds to be transferred from one bank account to another, two bank accounts must "talk" to each other. These "conversations" are formalized through bilateral agreements between banks. Under the hood, centralized banking systems and bank clerks manage the movement of funds on behalf of their customers and do the "talking" part. In addition, banks maintain infrastructure and protect your funds. Most of these activities are automated, but not all. So, in essence, it's not the account holders who "talk" to their counterparty directly when entering a payment into their online banking, but the intermediary banks handle the transfers behind the scenes.

Bitcoin Peers Talk Directly

With Bitcoin, it's different. You are your own bank. Mr. John Doe and Mrs. Jane Doe can talk directly to their peers. A few clicks are all it takes to make a P2P transfer in an hour or less. The blockchain serves as a trusted technology intermediary, allowing payers and payees from any country to connect and transact globally. However, you will need your own Bitcoin node and wallet to operate decentralized, and you will need to take care of cybersecurity yourself if you want to transfer your money completely independently of a centralized platform.

To be continued. Further Reading:

J. Clark and A. Essex. “CommitCoin: Carbon Dating Commitments with Bitcoin.” In 16th International Conference on Financial Cryptography, Kralendijk, Bonaire, pages 390-398, February 27-March 2, 2012.

D. Ron and A. Shamir. “Quantitative Analysis of the Full Bitcoin Transaction Graph.” Cryptology ePrint Archive, Report 2012/584, 2012.

G. Johnsen. Bringing down the banking system: Lessons from Iceland. Springer, 2014.

B. Geva. The Law of Electronic Funds Transfers. LexisNexis, 2015. 

Bussmann Oliver, October 2016, "Blockchain: Swift enough?",