A journey of your money
A somewhat boring journey of a thing we take for granted every single day.
We pay for things electronically nowadays. Have you ever wondered where all your money is stored physically? To answer that question, let’s follow the journey of your money.
The beginning of the journey
The journey of your money starts when you deposit your physical money — call it banknote — into a bank account. It could be yours, your friend’s, or anyone else’s. Assuming that you deposit it into your own bank account, the bank will take your money, and the balance of your bank account will be increased accordingly. Note that your physical money is now just a digital representation in their database.
When you think about it, at this point you don’t have your money anymore — it now belongs to the bank, but the bank keeps track of how much money you deposited into your bank account, and promises to pay for things on behalf of you when you tell it to.
After the bank receives your paper money, it’s up to the bank what to do with it. For example, it could keep the physical banknotes in its super secure vaults, lend it to people who borrows money, invest it in businesses, or keep it in the bank’s bank. Apparently, a bank also has a bank.
The banker’s bank
A bank, specifically commercial bank, owns a bank account in a bigger bank. This bigger bank is called the central bank. In Indonesia, the responsibility of central bank is held by Bank Indonesia.
Let’s say that the bank you deposited your money into — let’s call it Moneybank for the sake of this article — decided to put the banknotes into Moneybank’s account in Bank Indonesia. The same thing will happen, Bank Indonesia will take the physical banknotes and keeps track of how much money Moneybank should have. Moneybank no longer possess the physical banknote, but instead it is given a promise by Bank Indonesia so that when Moneybank wants to have the money back, Bank Indonesia will give it.
This is where things get interesting. Bank Indonesia is the only institution which has the authority to print and destroy Rupiah banknotes. Consequently, when Moneybank deposits the physical banknotes to Bank Indonesia, BI can choose to destroy them afterwards, and print them again when Moneybank wants them back. It doesn’t matter how much physical banknotes are in possession of Bank Indonesia. What matters is the record of how much money each bank should have.
Moving the money around
As you can probably tell, money must be able to be used in order for it to be, well, useful. And for money to be able to be used, it must be able to move from places to places. For example, when you want to buy a drink from a store, you hand your money to the store in exchange for that drink. Your money moves from you to the store.
In terms of modern banking, the process of moving the money takes form of Electronic Funds Transfer (EFT) — we usually just call it transfer. So how does EFT work?
First scenario: sending money to accounts within the same bank
Let’s say that you want to transfer Rp 5 million from your Moneybank account to your friend’s Moneybank account. You give an order to the bank to move Rp 5 million from your account to your friend’s account. Moneybank will simply deduct Rp 5 million from your account, and add Rp 5 million to your friend’s bank account.
From your perspective, the money has moved from you to your friend. From Moneybank’s perspective, however, the money still belongs to Moneybank. Remember that the moment you deposited your money, it technically belongs to the bank.
Second scenario: sending money to accounts in a different bank
Now imagine that you want to transfer Rp 5 million from your Moneybank account to your friend’s account in another bank, say Coinbank. First, Moneybank will deduct Rp 5 million from your bank account. But, it doesn’t have the authority to add the balance of your friend’s bank account. Instead, Moneybank will send a message to Coinbank to add the balance of your friend’s bank account, and along with it, a promise that Moneybank will give Rp 5 million to Coinbank later. At some time, Coinbank will exchange all the promises it has for money, in a process called clearing.
One of the likely scenarios of how Coinbank performs the clearing would be by showing Moneybank the promises it has, and ask Moneybank to transfer the funds to Coinbank’s account in Bank Indonesia through Real Time Gross Settlement (RTGS) system.
How banks exchange those messages and do clearing, however, deserves its own article. You can read this story if you want to dig deeper:
Unlike the first scenario, from Moneybank’s perspective, the money moves out to Coinbank. This is why usually interbank fund transfer comes with a cost, since it takes more effort to move the money out of the bank.
Electronic wallet
For quite sometime, we keep our money in a bank account. Recently, though, there have been e-wallets like GoPay, OVO, LinkAja, and Dana emerging in the market. I couldn’t find anything on how these e-wallet providers actually keep their users’ money, but I’ll try to make an educated guess.
In order to receive and send money, e-wallet providers must be able to exchange payment messages and perform clearing just like conventional banks. There are two possible ways for this to be the case:
- The e-wallet provider becomes a bank — in this case, the e-wallet provider is considered as a bank and exchange messages as if it were a bank. Every user’s account is considered a bank account. This is probably the case with BTPN’s Jenius, as every Jenius account has a corresponding BTPN account number.
- The e-wallet provider partners with a bank — in this case, the e-wallet has an account in one or more partner banks. The funds of all users of the e-wallet are kept in one account that is registered to the e-wallet provider. The partner bank can’t practically distinguish which person has how much money. This is probably the case with other e-wallet providers like GoPay, as your GoPay account doesn’t have its own bank account number.
So what happens when you top up your GoPay account?
As you probably know, not all banks have the ability to top up your GoPay account. This is because the banks must be able to exchange payment messages with GoPay.
Imagine that you want to top up your GoPay account for Rp500k from your Bank Mandiri account. When you committed the transaction, Bank Mandiri will send a message to GoPay stating that user with phone number 08xxxxxxxxx has paid Rp500k for top up. Bank Mandiri will deduce Rp500k from your account (plus some amount of service fee) and GoPay will increase the balance in your account by Rp500k. If GoPay has a bank account in Bank Mandiri, the money can probably be transferred directly to the account, considering that the sender’s account (yours) and the recipient’s account (GoPay’s) are on the same bank. If it doesn’t, however, at some time, GoPay can ask Bank Mandiri to transfer all the money to GoPay’s account in another bank using the same mechanism as normal interbank transfer.
Conclusion
So, to answer the question, where’s my money when I pay electronically? The answer is, who knows? It could be sitting in a vault of a regional bank, or invested in various business, or just completely nonexistent — only living as ones and zeros in a database, lying somewhere in a sea of computers. Who cares anyway? The banks and central bank have devised a set of protocols, rules, and methods to ensure that you can use your money conveniently, without ever needing to think about how it all works.
Sidenote
If you think about it, money itself doesn’t have any value. Money on itself cannot make you stay alive. The things that can be exchanged for money are. The worth of money relies solely on the trust of people using it — a belief that the total amount of money is limited. That’s why any sane central bank in the world would go through great lengths to keep things that way; to make sure every single increase in balance is accompanied by a corresponding deduction in balance. This is why in a conventional monetary system, central bank is required — to make sure no one cheats the system, no one makes money out of nowhere.
And then, a new technology called Blockchain was born. Blockchain allows people to do transaction with one another, without the need of central bank playing the referee. The idea is that, instead of one entity watching every single transaction, everyone can do it and decide whether someone cheats or not based on a majority vote. That’s where the value of Bitcoin comes from: the belief that Bitcoins are limited and no one can practically cheats the system.
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