How do payment systems work?

What is money?

Money has three functions. It is a unit to express value, we use it to save, and we pay with it, of course. Before money, we bartered with goods and services. But paying with money is a much more efficient method of payment than bartering if everyone accepts money.

Payments: cash and non-cash

Payments constitute all transactions to pay for goods and services. In this respect we make a distinction between cash and non-cash payments. Payments using cash money are called cash transactions. Electronic payments are non-cash transactions.  Cash is the term for the banknotes and coins in your wallet. And non-cash money is the money in your payment or savings account. Sometimes we spend money and sometimes we receive money, for example if we sell goods or receive income. Consumers, companies and governments all use non-cash and cash money.

If you pay in cash, you give coins or banknotes to the seller of the product you are purchasing. The transaction is completed on the spot. But the money has to come from somewhere. So banks order euro banknotes from DNB. Cash-in-transit (CIT) companies collect it and take it to ATMs and retailers. That is how shops get their change.

You can withdraw cash from ATMs and at some bank branches. At some machines you can also deposit money as a consumer. It will then be credited to your bank account. In addition, there are machines specifically intended for shopkeepers to deposit receipts. CIT companies take that money to a cash sorting centre. There, the money is checked to see if it is genuine, unsoiled and undamaged. The approved notes directly re-enter circulation through an ATM. The remaining notes go to DNB for an additional check, where damaged and soiled banknotes are immediately shredded. What happens if we find counterfeit banknotes? Then we send them onto the National Analysis Centre for inspection. But the banknotes that we okay are bundled and readied for orders from banks.

When you pay online or in a store, there is a lot going on behind the scenes. A chain of notifications and actions is set in motion by banks and other parties, ultimately resulting in the crediting or debiting of amounts to the accounts of the buyer and seller. In this chain there is also a transaction between the seller’s bank and the buyer’s bank. Fund transfers between banks in the EU are effected through DNB and the other central banks using a dedicated payment system: TARGET2. For these transactions, commercial banks need collateral.

De Nederlandsche Bank (DNB) has the statutory task of promoting the smooth operation of the payment system. We ensure that payment transactions are secure, efficient, reliable and accessible through our supervision, oversight, our own operational role in the payment system, our cash task and our role in the National Forum on the Payment System (NFPS). Our oversight staff supervise institutions that facilitate payment and securities transactions. We also pay special attention to resilience against cyberattacks through our Tiber-NL programme.

It is our objective to make it easy for everyone to make payments. However, for a large group of people such as some of the elderly, the blind and the deaf making payments can be a challenge. That is why we work with other organisations that represent different groups of consumers, retailers, payment service providers or banks. We do this in the NFPS, a platform dedicated to an efficient, reliable and accessible payment system.