How Money Really Works, Part 7: What Happens When You Pay

7. What really happens to your money when you pay

You tap your card, and a network gets to work. Here is what happens when you pay, in seven steps. Number seven: what really happens to your money when you pay? However you pay, the same thing happens to it.

A central bank's explainer says a payment is, simply, the movement of money from one person or organisation to another. The same explainer says whatever way you pay, some value you hold is transferred to someone else. You can send it yourself, or someone else, such as your bank, can send it on your behalf. In short, a payment is a transfer of value, letting people and businesses settle what's owed in a safe, reliable way.

Another explainer from the same central bank says it may seem as if money is magically transferred from your bank account to the shop. But a whole network of processes and systems makes that transfer possible. That explainer says these networks are commonly called the plumbing of the financial system. A central bank's explainer says that for digital payments, most of the technology is run by specialist firms.

Banks connect to those systems and use them to serve their customers. With a card, a central bank's explainer says, you notice your balance has gone down a few hours or days after you tap. The amount leaves your balance and reaches the shop's account through that network. The systems behind a payment, and the rules they follow, vary from place to place.

Paying by card takes seconds, and what happens in those seconds comes next. Subscribe for the next parts of this series: every source here is a central bank, the BIS or the Financial Stability Board, linked below.

6. What happens in the seconds after you tap your card

Number six: what happens in the seconds after you tap your card? You tap for a coffee, and the reader says accepted before the money leaves your bank. A central bank's card explainer says paying by card only takes seconds, whether you buy groceries or a laptop. As you tap, the same explainer says, the card conveys information about the purchase to the card reader.

Sometimes you are asked to insert your card and enter your PIN, as an extra security check. Then the reader beeps and says the card is accepted. Meanwhile, the company that provides the card reader tells the card network about the payment. The card network then works with your bank and the reader company to move your money to the shop's account.

If you pay online or make a big payment, the explainer says your bank needs to authorise it. That payment then shows quickly in your account. For a small purchase like a coffee, the explainer points to a large gap in time. The gap sits between the money leaving your account and the money actually leaving your bank.

What happens at the till depends on the rules of the place you pay in. Those payments still have to be settled between the banks, and the day's tally comes next.

5. Do banks move every payment one by one

Number five: do banks move every payment one by one? For card payments they do not, and the banks work out the difference between them. Payment systems are a set of common rules and procedures, a central bank's explainer says. Those rules support the transfer of funds between people, businesses and financial institutions.

The same explainer says not all accounts are at the same provider. So when the shop's account is at a different bank, your bank owes the shop's bank the value of your payment. The explainer says this creates a level of risk, so a payment system uses an intermediary called a settlement agent. That settlement agent handles the final settlement of funds between providers.

Since many people and shops use the same banks, the card network works out, at day's end, what each bank owes the others. Then it calculates the difference. A central bank's card explainer says this avoids thousands of transactions through the day. It also says less money needs to move overall.

For example, if one bank owes another bank 100 units and is owed seventy back, one payment of thirty settles both. So one payment replaces two. The card explainer adds that once a day, the card network tells the central bank what the customers' banks owe the card reader companies. Your payment at the shop becomes one small part of that daily tally.

How often banks settle, and under which rules, depends on the place and the system. The last four cover the central bank, payments in seconds, payments across a border and the full price of sending money. The difference still has to be paid somewhere safe, and the central bank's accounts come next.

4. Where do banks finally settle what they owe each other

Number four: where do banks finally settle what they owe each other? You follow the money into the accounts that banks hold at the central bank. Banks and other institutions can hold accounts with the central bank, according to its own explainer. Those accounts are used to settle money moved between them.

Balances in these accounts can be used to move money in real time between account holders, the same explainer says. This delivers final and risk-free settlement, and a central bank as settlement agent adds a financial stability advantage. Final settlement between banks happens once or more each business day, depending on the payment system. The same explainer says one card system settles in twenty-four-hour cycles, and weekend and holiday cycles settle the next business day.

A central bank's explainer calls its settlement service an electronic record of all the money sent and owed between banks and financial firms. The same explainer says it makes sure everyone gets what they are owed and has enough to pay what they owe to others. The card explainer says that when you buy something expensive, you want to know when the seller gets the money. That is why, it says, the central bank runs its own system for big payments, and those happen much quicker.

The explainer adds that in that system, there is no risk the receiver's bank will not get the money. After the central bank moves the money between the banks' accounts, the card reader company can send it on to the shop's bank. That move between accounts at the central bank is final. Which firms can hold these accounts differs where you live.

That's four of the seven, and one idea makes the last three easier: a payment is a transfer of value. Some systems now carry a payment all the way through within seconds.

3. How can a payment arrive within seconds

Number three: how can a payment arrive within seconds? You send money from your account, and it lands in the other account almost at once. Instant payments make funds available in the other account within ten seconds, a central bank's explainer says. The same explainer says one instant payment scheme is available twenty-four hours a day, 365 days a year.

With traditional retail payments, the BIS says, the funds usually reach the other person one or more days after they leave your account. Those payments could also be started only in certain places at certain times. By our count, twenty-four hours a day for 365 days is 8,760 hours a year. Every one of those hours is a time when a payment on that scheme can move from one account to another.

So where both banks offer it, the person you pay can use the money within seconds, even at night or on a holiday. Which banks offer instant payments differs where you live, so not every account can send or receive this way. If you want the full picture on prices, the video on protecting your money from inflation is linked on screen. In one breath: value moves, what happens at the till, the day's tally, the central bank's accounts and payments in seconds.

Inside one place, seconds are possible, and across a border the chain gets longer.

2. Why does money sent abroad take a longer road

Number two: why does money sent abroad take a longer road? For a payment abroad, the chain between you and the receiver gets longer. A payment abroad can pass through intermediaries on the way before it arrives. The Financial Stability Board says payments across borders face four challenges: cost, speed, transparency and access.

The Financial Stability Board says linking payment systems directly addresses the friction of long transaction chains. The same report says linking systems can reduce the number of intermediaries, increase the speed of payments and reduce costs. The Financial Stability Board set official targets, most of them for the end of twenty twenty-seven. One target is for 75% of cross-border retail payments to reach the recipient within one hour.

The rest of those payments are meant to arrive within one business day. Another target is a global average cost of no more than 1% for a cross-border retail payment. No route is meant to cost more than 3%. By our count, a 1% cost on a one-thousand-dollar payment is $10.

The Financial Stability Board's twenty twenty-five report says the speed of money sent to families abroad has improved globally. Routes, fees and rules differ where you live, so the targets describe goals, not every payment. Speed is half the story, and the full price of sending money abroad is the last one. How much do you think it costs, on average, to send $200 to family abroad?

1. What is the full price of sending money abroad

Number one: what is the full price of sending money abroad? It is more than the fee you see. One Financial Stability Board target says providers should show payers the total cost by twenty twenty-seven, including the fees of any intermediaries. The exchange rate and currency conversion charges are part of that total cost too.

That links straight back to part six, where we saw that an exchange rate is a price. The Financial Stability Board's twenty twenty-five report says sending $200 to family abroad cost 6.5%, as a global average. The same report says the average cost of sending $500 was 4.3%. By our count, 6.5% of $200 is $13.

By our count, 4.3% of $500 is $21 and fifty cents. The report also says digital services for sending money abroad were cheaper on average than cash-based ones in twenty twenty-five. For sending $200, the official target is an average cost of no more than 3% by twenty thirty. That date comes from a United Nations goal, which also says no route should cost more than 5%.

By our count, at 3%, sending the same $200 would cost $6. Fees and exchange rates vary from place to place and from one service to another. And that is where your money goes when you pay, from the tap to the full price. So, seven steps: value moves, what happens at the till, the day's tally and the central bank's accounts.

Then payments in seconds, the longer road across a border and the full price of sending money. Today, you can open a central bank's explainer on card payments, linked below, and follow your own payment through it. Which of the seven surprised you most about your last payment? Tell us the number in the comments.

Results vary, rules differ where you live, and this is information only, not financial advice. This is Wealth Filings. If you want to see part eight, subscribe now: it shows what a share is and how the market prices it. Next on Wealth Filings, How Money Really Works, part eight: how the stock market works.