The ability of private companies such as banks and e-money institutions to issue money helps create competition, innovation and a wide range of services in the financial system. But despite regulation, supervision and various government guarantees, privately issued money is not risk-free in the same way that government-issued money is. Here, the role of the central bank is crucial to ensure that money retains its full value when the payer's money is converted into the recipient's money, for example when they have different banks. Central bank money is the only form of money that is completely risk-free and therefore always accepted between banks. Interbank transactions are therefore normally settled via the banks' accounts at the central bank, although there are exceptions for card payments, for example (see section “The payments infrastructure works well”). This is one of the reasons why financial institutions, such as banks and e-money institutions, have access to central bank reserves in payment systems such as RIX. In these systems, central bank reserves are automatically moved between banks when payments are made between customers of different banks, see Illustration 5.

Illustration 5: How settlement of a payment works between two people with accounts at different banks

Note. Simplified scenario involving an instant payment between customers of two different banks. 

(1) Person A wants to make an immediate payment to person B. They have different banks and therefore use different money. (2) Bank A reduces the balance of person A’s account at bank A and transfers central bank money to bank B in RIX. (3) Bank B receives central bank money and increases person B’s account by the corresponding amount.