How digital money works
Most people routinely use digital money without realising it. Today’s payment and banking systems function over the internet, whether the transaction happens in a bank, app or web browser. Even in-store card machines need WiFi, a mobile network or wired broadband to process a plastic card payment.
This means the following everyday products use money digitally for transactions:
- Credit, debit and prepaid cards
- Mobile wallets (storing a virtual card or virtual money)
- Bank accounts and online current accounts
The money stored in these accounts, e-wallets and cards participate in a global payment system ensuring no one spends the same money more than once, and that the correct amount of money belongs to the correct owner at all times.
Consequently, digital money is more like a ledger system between banks, card issuers and card networks such as Visa and Mastercard, with a series of authorisations and messages pinging between them when a transaction occurs. This results in a debit in the payer’s account and credit for the recipient each time money is moved via a card transaction, bank transfer, Direct Debit or other everyday transaction.
So money is not physically moved like a parcel sent across the internet. Digital transactions, like described above, are more like account entries, continually updated through centralised databases when money is spent or received.