How are electronic money transfers verified?

90 views

What safeguards are in place to prevent people from making fraudulent transactions? Additionally, are there methods by which someone can create counterfeit electronic currency as is done for paper currency?

In: Economics

I used to work at a bank. There are several answers to your question, depending on country or if the transfer is international. I will give you a generic case, which works with a few modifications in most countries.

Money transfers are made through a central clearing entity. Usually this is a country’s central bank or an international organization.

When you transfer money, the originating bank (the one the money is coming out of) will verify if you have funds, and if you do it will notify that the money needs to go somewhere else. All banks do this, so the clearing agency knows about all the transactions to and from all banks.

At some point, the clearing agency will run balances on all those transactions. So if Bank A is transferring $1000 to some accounts at Bank B, and Bank B is transferring $500 to some accounts at Bank A, then only $500 needs to actually be transferred, plus the information about the accounts that should receive the money. If the destination account does not exist, then the money is returned using the same process.

The actual transfer is electronic, each transaction simply adds or subtracts money from each bank’s account with, for instance, the central bank.

Internally, there are several mechanisms to prevent fraud. When I was in banking, physical and electronic access to the resource that manage the transactions were tightly controlled, and depending on the type of operation and the amount, could require the approval of several people, who each had independent passwords. In our case, to actually make a fraudulent transaction would require at least 4 people working together to pull it off. Of course this doesn’t make it impossible, but it makes it a lot less likely if you need 4 different fairly high level officials at the company to agree to commit a crime.