What is an interbank system?
The interbank system is a global network of financial institutions for trading currencies and other derivatives, such as stocks and bonds, directly with each other on a gross or net basis. While some interbank trading is conducted by banks on behalf of wholesale customers, most interbank trading is proprietary trading, i.e., it is conducted for the banks’ own account. Banks use the interbank market to manage their own currency and interest rate risk as well as to take speculative positions based on research.
Examples of interbank systems
One of the pioneers is “iDEAL”, by far the most relevant payment method in the Netherlands. This is an interbank system that is covered by all major banks in the Netherlands. With iDEAL integration via Adyen, billwerk supports this payment method, which is used for 60% of all online transactions in the Netherlands. Giropay is the name of the official online banking implementation of the German banks. With 40 million shoppers, this interbank system is used to process around 16% of all online transactions.
SEPA payment traffic system: From “Single Euro Payment Area” to interbank system
SEPA is an initiative of the European Union to integrate payment transactions in order to simplify bank transfers between countries that use euro as their currency. As of 2020, 36 countries are part of SEPA. The project involves the development of common financial instruments, standards, procedures and infrastructure to enable economies of scale. SEPA is a scheme that enables interbank payments not only within a country, but throughout the euro area. It aims to reduce the overall cost to the European economy of moving capital around the region.
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A major advantage of the further development towards an interbank system is the user-friendliness and security in times of online transactions, for example in the field of e-commerce or subscription offers.
Basically, the user goes through three steps until the online transaction is successful:
- Entering bank data: As soon as the buyer wants to buy something, he is redirected to the online banking environment, for example from Giropay or iDEAL. There he enters his bank details.
- Entering the code: Depending on whether the buyer orders with a smartphone or on a desktop, he enters the code he received via SMS or second authentication.
- Confirmation: After the confirmation is successful, the buyer is redirected from the confirmation page of the online payment method to the merchant page. The purchase is complete and the product or service can be delivered.
Giropay: German payment system that enables payment everywhere
There are several platforms that integrate and facilitate payments everywhere. In Germany, the most widely used platform is Giropay, with around 16% of all online purchases using it as a payment method. Giropay is based on online bank transfer and has been optimized specifically for the needs of e-commerce, e.g. to prevent shortfalls. Giropay offers advantages for both the buyer and the merchant, as it is an extremely secure and fast payment method for both parties. The customer only gives basic information to his bank and the merchant has the security of the payment. Giropay is connected to the Austrian eps online bank transfer, enabling interoperability between the systems of the two countries.
iDEAL: The Netherlands shows the way
In the Netherlands, there has been an interbank platform called iDEAL since 2005, which works similarly to Giropay. It is also an online banking service that allows customers to pay via direct transfer from their personal bank account. iDEAL offers merchants a cheap and risk-free payment method in real time. For customers, it offers the familiar environment as the online banking pages of a regular bank. A high level of security is achieved through two-factor authentication. The service providers also do not receive sensitive information such as account number or credit card number from the customer. This is intended to ensure greater trust between merchant and customer.
Conclusion: Interbank systems enable secure online payments
The global interbank system is increasingly integrated throughout the payment system. Since the institutionalization of the European Union, the Eurozone allows easier transfers and bank transfers between countries. SEPA is a tool that has emerged to facilitate integration, transfers and payments between banks in different countries, but also within an EU country. In addition to these macro systems, more local and digital systems such as Giropay in Germany and iDEAL in the Netherlands are now simplifying business processes and user behavior. These payment platforms enable greater security for merchants and the customers who use them. These methods are increasingly used due to their security and the growth of online purchases and offers of products and services.