How do banks settle international transactions?


Say that I am located in Country X and I buy something from Country Y. I pay using my debit card, and money is deducted from my bank account.

How does the money actually flow to Country Y? What does the process look like?Do banks fly bags of cash over to one another of each month?

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I’m assuming you’re paying in country y currency.

Your bank buys the currency off the international currency exchange (or from your banks foreign currency holdings). Your bank pays the merchant, and charges you for the amount and usually plus a foreign transaction fee.

Theres a difference between currency in circulation and currency used for digital transactions. It’s not a 1 to 1 mapping.

Let’s say I own a restaurant, and I occasionally run out of onions.

And there’s another restaurant near me, and they occasionally run out of onions.

So I go that restaurant, speak to the owner, and we work out a deal.

Anytime they run out of onions, they come to me and I give them some. Anytime I run out of onions, I go to them, and they give my some.

Now we keep a tab and settle yearly.

At the end of the year, if I gave them 3,500 lbs of onions, and they gave me 3,450 lbs of onions.

If a 50lb bag of onions costs $20, that means onions are 40¢ a lb. This means they owe me $1,400 and I owe them $1,380.

Now we could pay each other nearly $3,000, or they could pay me just the difference of $20. Or we can forgo money entirely, and they can just pay me with 1 bag of onions and/or free dinner. This is the really important – it’s big money or dinner.

This is how checks/cheques and money transfers at banks works. If someone at Bank A cashes a check written from Bank B. Bank A will give you their own money, and they know that Bank B owes them. Eventually Bank A will owe someone at Bank B money so it will cancel out. Sooner or later though, one bank has to send a truckload of money to another.

At the international level banks have partner/affiliate banks and they maintain Vostro/Nostro accounts in other countries which they’ll settle with Forexes like CLS.

So if you use your debit card in a foreign country – your bank will pay them through a Nostro account, which is a bank account setup in that country. If your bank doesn’t have a Nostro account there, they will pay someone who does.

These Nostro/Vostro accounts are funded through the Forex market.

This ultimately becomes a major political issue. If we keep getting things from China, then we have to supply China with either things or dollar bills.

We give China things like soybeans, pork, airplanes, computer chips, plastics made from oil, and cotton.

If China keeps raking up US dollars though, then this means their investors can come to the US and start buying up houses which they can then rent out for high prices to make up for that. So it’s big money, or pork and beans (soy) for dinner.

If you have a high trade deficit, it can devalue your currency. Then people in your country will struggle, because foreigners can use the money you gave them to buy whatever they want from your country.

Currently SWIFT (Belgian) is the main network banks use to talk to each other. Now the US/Europe/NATO holds immense power which let’s us effectively be the world police.

If we have a problem with a country, we can cut them out of SWIFT/CLI and make the lives of their people hell. For example when the Taliban took over Afghanistan, cutting them out the banks means the people there can’t easily buy food or medicine from other countries.

The other problem though, is that we can only do this so much before it backfires.

Afghanistan is one of the most strategic countries in the world because it connects Iran, Russia (via Xinjiang), China (via Xinjiang), and India (via Pakistan).

Xinjiang is where the Uighurs live.

Afghanistan has lithium and gemstones as natural resources, and lots of seasonal produce – in fact apples, pears, citrus, grapes, watermelon, figs, cherries, plums, mulberries, almonds, pistachios, mint, cumin, carrots, and rhubarb are all native plants to Afghanistan and grow wild there.

Other native wild plants in Afghanistan is Marijuana (Kush), Poppies (Opiates), and Ephedra (Sudafed/Crystal Meth).

As a result Afghans will now export these by land to countries like China which it borders in exchange for other food items, medicine, etc. They also have a bunch of US weapons and equipment that could be of interest to Russia, China, and/or Iran.

However now there’s speculation that Brazil, Russia, India, and China can make their own money system. Iran, Venezuela, Afghanistan, and many African nations will probably support this as well.

Banks own accounts known as Vostro and Nostro accounts at other banks throughout the world and have what are called correspondent banking relationships.

So if you’re in say Canada and want to Send Money to a Bank in Austria, it may take a few bounces.

It’s likely your Canadian bank has an account with a big German bank where they hold Euros, and the German bank has a relationship with the Austrian bank.

So You bank takes your money, charges you FX, then instructs the German bank to send some Euros to the Austrian bank.

Then periodically, they do transfer money to and from those accounts to refill them or empty them.
This can be done by moving it electronically between accounts sometimes, buying currency on markets or…yes, a lot of times banks do indeed physically fly money to the other country.
You’ve probably seen in heist movies and stuff the idea of just planes totally loaded with physical currency, and yes that happens.
That’s particularly a thing in countries that deal with a lot of US Dollars or Euros but where that’s not their local currency.