When someone makes an electronic transaction, does that transaction result in the movement of physical money from one place to another?

419 views
0

With so many transactions being electronic these days (I never carry more than $40 and might have the same $40 all month) how much are all these electronic transactions resulting in the actual physical movement of bills and coins from A to B? If I pay someone $100 who banks with a different bank is my bank actually sending their bank a $100 bill or is a lot of this just happening in a computer network without actual physical assets moving around?

In: Economics

No, almost all bank transactions are electronic.

When you use a card or do a transfer, the banks exchange digital records. Not quite cryptocurrency, but digital transactions nonetheless.

While there are some institutional uses for cash, the primary users are people, and sometimes people on behalf of business. Or business making deposits of the cash they got from people, or for transacting with people.

No. Physical cash is a minor portion of all money, and electronic transactions result in changes on bank ledgers only.

no, there is no physical money changing hands. In fact, the funds often don’t even leave your own financial institution.

Financial institution’s have agreements with eachother, to honor value transfers. In essence, bank A calculates the total volume of funds outgoing to bank B each day. Bank B does the same. At the end of the day, the two banks compare balances. Whichever bank owes money at the end of the day, transfers those funds to the Bank that is OWED money.

Settlement happens in the form of one or two macro-transactions per day. These transactions can reach into the billions of dollars.

Of course, there are thousands of banks globally, and they cannot all have reciprocal agreements with eachother. Bank holding companies (typically the largest global Financial institution’s, think JP Morgan, Deutsche Bank, NBAD, etc.) Have agreements with eachother. They essentially extend these agreements to smaller local banks who then settle with the large international institutions instead of with the reciprocal bank.

The more removed that transacting relationship, the less control the institution will have. That’s partially why you often cannot cash checks from third party financial institutions unless you or the issuing account holder have an account with the bank at which the check is cashed. It can take several days before the funds associated with that check are actually cleared with the FI, and banks don’t like risk.

The only time that banks physically send money to eachother, is when they are engaging in a purchase or sale of currencies. This might happen if a bank has a stockpile of foreign currency, runs low on cash, or needs to increase or reduce it’s cash reserves for some other reason.

Try looking Vsauce’s video “How Much Money Is There On Earth” up. At some point in the video, electronic transactions are explained in detail 🙂