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Re: How do bank payments actually work?

From: Joseph Potvin <jpotvin@opman.ca>
Date: Sat, 23 Jan 2016 10:04:37 -0500
Message-ID: <CAKcXiSoQCEWGV55EyOtfwHaGQZ3_7AtgRO0eXrJ4j_hVRXp4Zg@mail.gmail.com>
To: Web Payments <public-webpayments@w3.org>, Interledger Community Group <public-interledger@w3.org>
Cc: tomblomfield@gmail.com
Two comments on the published description...

1. "Banks pay a few pence per transaction, although no bank currently
charges customers for this service."

It's worth noting that this charging structure is suitable for transactions
greater then, say, about 2£. It would require a different transaction fee
structure to handle micropayments.

2. "Three times a day, VocaLink will send a message to all participant
banks informing them of their position. To “settle” the funds, participant
banks have accounts at the Bank of England. They will either make a single
payment to FPS (if money has flowed out of their bank), or receive a single
payment (if the net transfer of funds is in their favour). This payment at
the Bank of England is just another double-entry in a ledger; the bank’s
settlement account is debited and the FPS account is credited with the same

I think perhaps this is mis-stating the operation by using words "make a
single payment to FPS" and "receive a single payment". I'm fairly certain
these are accounted for as loans, to which the "Bank rate of interest" is
applied. Please correct me anyone thinks I'm wrong about how this
particular settlement system works. I think that while the mechanics remain
true that it's "just another double-entry in a ledger", these show up in
the books as off-setting loaning and borrowing by the Central Bank, and
they include an interest rate which needs to be taken account of.

For those of you creating test environments, taking account of this factor
complicates the model in two ways. First directly, you would need to attach
some sort of index (the interest rate) to the inter-bank transactions.
Second, you would need to create an policy-motivated actor (agent) who
makes decisions about that index.* [I'll proceed a bit off-topic here just
to illustrate...] This is because this  "the Bank Rate" which is the
benchmark by which a Central Bank motivates increases or decreases for all
interest rates of the given currency zone. The 'fun' start to happen when a
central bank decreases an interest rate in order to simultaneously
incentivize capital investments (its cheaper to borrow) and decrease forex
traders' demand for that currency (better returns on static deposits are
found elsewhere) in a period of competitive currency devaluations, all of
which artificially stimulates that country's export market. Well, they've
all been doing that for a while, and have run out of room at the bottom.
But they keep going!
<http://www.bloombergview.com/quicktake/negative-interest-rates>  *

[Back on-topic...]  Any model of payment must be a simplication of complex
reality, so this is not a critique of the published description as far as
it goes. I just raise a caution that with a title like "How do bank
payments actually work?", this summary of some of the mechanics of the
system inevitably has to leave out much of how bank payments actually work.

I've c.c.'d the author, Tom Blomfield, in case he'd like to comment.

Joseph Potvin
Mobile: 819-593-5983

On Wed, Jan 20, 2016 at 6:03 PM, Melvin Carvalho <melvincarvalho@gmail.com>

> Interesting post on the inter ledger element of banking.
> https://getmondo.co.uk/blog/2016/01/20/how-do-bank-payments-work/
> Im thinking of simulating this on a testnet for people to play around
Received on Saturday, 23 January 2016 15:05:28 UTC

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