Important though coins and banknotes may be in everyday life, it is safer and more convenient to make large payments by credit transfer or card. The money we use for such payments is the “book money” deposited in our bank accounts. You cannot touch book money because it is no more than a set of data in banks’ computer systems.

The term book money dates back to the early days of banking, when money changers noted their customers’ credit balances manually in their ledgers. Such records are now kept electronically. This “immaterial” book money is the basis for cashless payment systems. It is passed on from bank account to bank account in a kind of cycle, which is why it is often also referred to as “giro money” (from the Italian word “giro”, meaning “round trip”). In today’s economy, there is much more book money in circulation than cash. Unlike banknotes and coins, however, book money is not legal tender. Nevertheless, it is generally accepted in business transactions. Book money can be converted into cash by making a withdrawal at a bank counter or an automated teller machine (ATM). Conversely, cash becomes book money when it is paid into a bank account.

Book money in bank accounts is also referred to as a deposit. There are different types of deposit, which vary in terms of how quickly the depositor can access the money. Current account balances are referred to as transferable deposits and are primarily intended for payment transactions. Time deposits and savings deposits can only be accessed after an agreed period of time has expired or following termination of the account in question.

The fact that payments made from account to account in cashless form are more convenient and secure than cash payments is something that merchants and traders already recognised as far back as the Middle Ages. In northern Italy, in particular, they developed something akin to a banking system. This is why numerous technical terms relating to the monetary system are of Italian origin.

Banks play a key role in the monetary and economic system. They grant loans to households, businesses and the government, whilst also providing customers with a place to store and invest their money. In this context, banks work closely together to transfer payments quickly and securely from one account to another. They also offer a number of other money-related services.

Banking activities are subject to strict regulation. Anyone in Germany who, in a professional or commercial capacity, conducts the business activities that are defined as banking business – particularly deposit-taking or lending business – is considered to be running a bank. The necessary authorisation for doing so is granted by the European Central Bank (ECB) on the basis of a recommendation from Germany’s Federal Financial Supervisory Authority (BaFin). All banks are specially monitored and supervised by banking supervisors. This also applies to enterprises that conduct banking-related activities, such as leasing, buying and selling securities, or settling payments. They receive authorisation for this solely from BaFin.

The commercial banks and the Deutsche Bundesbank together form Germany’s banking system. The Bundesbank, as Germany’s central bank, has a fundamentally different role to that of the commercial banks. As a public sector institution, it is responsible for implementing the euro area’s single monetary policy in Germany, the primary objective of which is to safeguard price stability. As the “bank for banks”, it provides commercial banks with central bank money.

Furthermore, the Bundesbank is the only bank entitled to put legal tender (banknotes and coins) into circulation. Commercial banks, on the other hand, are usually private enterprises that provide money-related services with the aim of generating profits. Commercial banks offer their services to individuals, business enterprises and the government.

The aggregate balance sheet for all German banks reveals the size and structure of banking business as a whole. It shows banks’ assets on the left-hand side against their equity and liabilities on the right-hand side. The assets, which consist largely of loans granted and securities purchased, reflect the type of business a bank conducts (use of funds). By contrast, the liabilities indicate how these operations are financed (raising of funds).

Cash reserves are the banks’ cash holdings and their account balances at the Bundesbank, which can be exchanged for cash at any time. Compared with most other items, cash reserves are relatively small – much lower, even, than the overnight transferable deposits. This is because banks can afford to have relatively small cash reserves, since not all customers want to withdraw their money in cash at the same time. In addition, banks can obtain additional cash at short notice at any time via their direct access to the central bank (see Section 6.3.3).

Loans to domestic and foreign non-banks constitute the largest item on the assets side. This includes all loans to enterprises (e.g. for working capital and investment), to households (e.g. overdrafts on current accounts, instalment loans and real estate loans) and to public sector entities. Interbank lending also accounts for a fairly large share. Banks that have a surplus of central bank money at a given time lend this money to banks that need central bank money at that time. In doing so, the lending banks receive collateral from the borrowing bank – usually in the form of securities. Such loans are often only granted “overnight”. If a loan is granted, the lending bank’s claim corresponds to the borrowing bank’s liability. The money market is where banks’ supply and demand meet.

In addition, banks have large-scale holdings of marketable securities, which they use as an income-generating liquidity reserve. If they need central bank money, they can deposit these securities as collateral as part of refinancing operations with the central bank or with commercial banks. Banks also acquire securities with the aim of realising price gains. Additionally, banks hold shares in other banks and enterprises. In doing so, they provide these banks and enterprises with long-term equity capital and, in return, generally gain the right to have a say in the running of these entities as well as a share in their profit and loss. Tangible fixed assets (e.g. buildings or machinery) play almost no role for banks in terms of value and are therefore recorded under “Other assets”. The largest share of “other assets” is accounted for by claims arising from special trading activities. Through these trading activities, banks give their counterparties the ability to hedge against certain risks or to profit from changes in the market prices of certain goods without having to purchase them directly. In addition, banks use these trading activities themselves to hedge against certain risks.

Liabilities to banks and non-banks dominate the liabilities side of the balance sheet. Liabilities to banks result from direct lending between banks, while liabilities to non-banks are the overnight transferable deposits, savings deposits and time deposits of enterprises, households and public sector entities. Bank debt securities – including mortgage Pfandbriefe, public Pfandbriefe and certificates – are securities issued by banks themselves. Buyers of these debt securities provide the bank with money for a limited period of time, which is why these securities constitute debt capital for the banks. In other words, banks not only buy and sell securities, but also issue them themselves in order to obtain funding.

Much like “other assets”, “other liabilities” mainly include liabilities from special trading activities. Through these trading activities, banks give their customers the ability to hedge against certain risks or to profit from changes in the market prices of certain goods without having to purchase them directly. Banks’ capital consists of shareholder capital and reserves. In Germany, the precise nature of this share capital depends on the legal form of the bank in question (e.g. joint stock company (AG), registered cooperative society (eG), or limited liability company (GmbH)). Undistributed profits are transferred to the reserves.

In order for book money to be able to fulfil its function as a means of payment, the banking system ensures that it can be transferred from one account to another. In the case of cashless payments, the payment information is transmitted electronically and triggers bookings on the accounts involved. The payer’s account balance goes down, while the payee’s account balance goes up. If both have their accounts with different banks, the payment has to be “transported” and booked between the two banks concerned.

To this end, banks electronically transmit payment orders with all the information necessary for the payments. The payments are then booked to the relevant accounts, with the book money “flowing” from one account to the other.

In retail payments, everyday payments are carried out with somewhat smaller amounts (e.g. telephone bills, salaries or rent payments). To facilitate such payments, the banks concerned need to be linked to each other. For this purpose, banks can use their own giro system or the giro system of their banking group (e.g. savings banks). Giro systems in Germany are interconnected, allowing payments to be forwarded to banks in other banking groups.

Alternatively, banks can settle payments via another bank or via what are known as clearing houses. These clearing houses record and settle the mutual claims and liabilities of banks. To support cashless retail payment transactions, the Deutsche Bundesbank also operates its own clearing house (RPS/SEPA-Clearer).

Via this clearing house, even banks that are not integrated into the German giro system have access to cashless payments with all other banks in Germany and Europe.

In the euro area, a single currency and a common means of payment for cash transactions has existed in the form of the euro since 2002. In order to also harmonise cashless euro payments, the Single Euro Payments Area (SEPA) was introduced in 2014. It comprises all European Union countries as well as Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, Switzerland, the United Kingdom and Vatican City in addition to Jersey and the Isle of Man, amongst others. Within the European Economic Area (EEA: EU plus Norway, Liechtenstein and Iceland), SEPA payments no longer make a distinction between national and cross-border payments as far as fees and maturity, say, are concerned. Payments outside the EEA may be subject to higher fees.

For cashless euro payments within SEPA, an International Bank Account Number (IBAN) must be used. The IBAN is structured differently in each individual country and consists of a maximum of 34 alphanumeric characters. A unique IBAN is assigned to every account. In Germany, an IBAN has 22 alphanumeric characters and is structured as follows:

The first two characters are the country code, followed by two check digits and the eight-digit German bank sort code. The last ten digits are the account number. If the account number has fewer than ten digits, it is placed at the end of the IBAN and the missing digits between the account number and the bank sort code are filled with zeros.

Stating an IBAN is sufficient for all domestic and cross-border SEPA payments within the European Economic Area. For payments outside the EEA, for example to Switzerland, a Business Identifier Code (BIC) may also be required. This is a kind of international bank sort code that consists of eight or eleven characters.

For cashless payments, bank customers in the SEPA zone have a choice between credit transfers and direct debits. These forms of payment can be initiated by various methods, e.g. by using a debit card, a credit card or even a mobile phone.

A credit transfer is always initiated by the payer, who instructs their bank to transfer a certain amount from their account to another account. The payer’s account balance is debited, while the other account is credited. A SEPA credit transfer can be used for credit transfers in euro.

For credit transfers, banks provide their customers with standardised, electronically readable paper-based forms (paper-based credit transfers). However, credit transfers are made much more often via online banking or using branch-based terminals (paperless credit transfers).

If you want to make a credit transfer via online banking, you must first log in to your bank’s online banking system using your personal identification number (PIN) or password. The credit transfer itself usually has to be confirmed with a transaction authentication number (TAN), which is generated using a card reader or sent by the bank to a mobile phone at the customer’s request, for example.

A standing order is a special form of credit transfer. It is useful when it is necessary to make regularly recurring payments of the same amount, such as rent payments. The payer issues a single instruction to their bank to transfer a fixed amount to another account at regular intervals.

Currently, it usually takes one day for the transferred amount to become available on the other account. With instant payments (real-time payments), cashless euro payments are settled within seconds around the clock. Unlike the present retail payments, the money is available to payees immediately after the payment has been sent. Thanks to instant payments, these payments are processed independently of banks’ operating hours, i.e. also at night or at weekends. When used in conjunction with mobile phone applications, in particular, instant payments allow for cashless payments between individuals and enterprises to be made in a matter of seconds, whether online or at a retail outlet. Like cash, this makes delivery-versus-payment transactions possible. Purchased items, such as a second-hand car, can be taken straightaway because the seller sees the payment arrive on their account immediately.

TARGET Instant Payment Settlement (TIPS) is a component of the TARGET-Services platform, designed for the settlement of instant payments. Euro payment orders are settled in central bank money within ten seconds. This is possible 24 hours a day, 7 days a week, 365 days a year. This service therefore gives banks the opportunity to offer their customers real-time payments.

With a direct debit, a payer authorises a payee to debit an amount from their account to be credited to the payee. Direct debits are particularly suitable for irregular payments or payments of varying amounts, such as fluctuating monthly telephone charges. Since the creation of SEPA, direct debits are now collected using a standardised procedure. This requires a SEPA direct debit mandate for the collection of SEPA direct debits. It includes both the payer’s consent to the payee collecting the payment and the instruction to the payer’s bank to execute the payment.

SEPA core direct debits are available to consumers and businesses. Core direct debits with a valid mandate may be returned (“refunded”) at the payer’s request up to eight weeks after the debit date without the payer having to state a reason. If there is no mandate, this deadline is extended to 13 months. A SEPA B2B (business-to-business) direct debit is only possible for payments between enterprises. In this case, the payer is not able to reverse the payment.

To be able to use direct debits as a payee within the SEPA direct debit scheme, the payee requires a creditor identifier for unique identification.

In Germany, this identifier is 18 characters long and can be requested from the Bundesbank via the internet. The unique mandate reference is an identifier of a mandate that is individually assigned by the payee. Together with the creditor identifier, it allows for clear identification of the payee that has collected the direct debit.

The payee is obliged to issue a pre-notification informing the payer of the settlement date and direct debit amount in good time (usually at least 14 calendar days before the settlement date) so that the payer can respond to this and ensure they have sufficient funds on their account.

Besides cash, it is also possible to pay at POS using a debit card. The most frequently used debit card in Germany is the girocard (formerly known as the EC card), which is issued to the account holder when a current account is opened in Germany. It is called a debit card because the payer’s account is debited by the payment amount. To initiate a payment transaction, an electronic point-of-sale (POS) terminal reads the chip on the card for the data needed to collect the amount from the account.

Two different payment methods can be used at this point, which differ in terms of the payment guarantee and the cost to the retailer. In one method, the customer authorises the payment by entering a personal identification number (PIN) at the terminal. This is followed by online checks to ensure that the card is not blocked and that the cardholder has sufficient funds to pay the amount in question. If both of these checks are passed, a credit transfer is initiated – the retailer is guaranteed the payment as the payer cannot later request a reversal of the payment from their bank. However, the retailer has to pay higher fees for this greater level of security.

In the other payment method, the customer authorises the collection of a SEPA direct debit from their account by providing their signature, which must match the signature on their card. Retailers that use this payment method pay lower fees but have no guarantee of actually receiving the money. This is because the bank will only execute the direct debit if the account to be debited contains sufficient funds. However, with the customer’s signature, the retailer obtains the customer’s consent to the release of their data in the event of non-payment. It can therefore assert its claim through other channels. In addition to payments at a POS, debit cards usually also offer the option of withdrawing cash from ATMs using a PIN.

When paying with a credit card, the account is usually not debited immediately but at a later point in time, for instance at the end of the month. The credit card company thus grants the cardholder an interest-free loan for a certain period of time. If the outstanding amount is not paid or not paid in full on the settlement date, the cardholder must pay interest on the unpaid amount. The credit cards offered by various credit card companies (such as Mastercard or VISA) are usually issued by banks. The holders of such a card are able to make cashless purchases at all stores connected to the global credit card system as well as withdraw cash at ATMs using a PIN. When making payments at a POS, the customer must authorise the payment by entering a PIN in the POS terminal or by signing a receipt. Credit cards are also a means of payment for online purchases, in which case the corresponding credit card data have to be entered.

The contactless method, which works via NFC (near field communication), makes payments more convenient. If a card is equipped with an NFC chip, it is held close to the POS terminal in order to transmit the payer’s data. This procedure generally does not require a PIN to be entered for amounts up to €50. The actual payment process takes less than a second. While this method means that payment is easier and faster, it also dispenses with security measures such as entering a PIN or checking a signature. Most mobile phones are now equipped with NFC technology so that they can be used to make “contactless” payments at the POS.

For online shopping, retailers usually offer a variety of payment methods, such as credit transfers, direct debits or credit cards. Furthermore, specially developed online payment methods such as “giropay” or “Sofortüberweisung” are also available options. Both services use an online banking application to automatically generate a credit transfer to the retailer. As a result, customers no longer have to enter the data required for payment into a credit transfer form themselves, but simply confirm the transfer with a transaction authentication number (TAN).

Another widespread online payment method is “PayPal”. In order to pay with PayPal, customers need a PayPal account. The online purchase is processed via this user account. PayPal requires customers to have prepaid credit on their user account, or it collects the payment amount from the customer’s bank either directly or via a credit card account. PayPal is offered in many countries around the world and can therefore be used across borders as well. A comparable payment method for customers is “giropay”, which was developed by German banks for the domestic market. Using this method, the payment amount is settled directly via the current accounts held with each bank.

In cashless payments, security aspects play an important role for all parties involved. One such key aspect is the check carried out by banks and payment service providers to verify whether the payment was actually initiated by an authorised person. Traditionally, personal signatures have been used for this, but now there are numerous other methods available, some of which have also been designed for online banking and online payment transactions. These methods are based on the criteria of possession (debit or credit card, mobile phone), knowledge (PIN, password) and biometrics (fingerprint, iris recognition, facial recognition). To ensure a high level of security, at least two of these criteria should be checked during a payment transaction.

How much money actually exists? This question has no clear answer. Because the lines between the different types of deposit and short-term financial instruments are blurry, a range of monetary aggregates that differ in broadness have been defined. Practical monetary policy usually looks at the monetary aggregate that appears to be most appropriate for fulfilling monetary policy objectives.

As a general rule, cash and book money held by non-banks (enterprises, households and public-sector entities) are always defined as the money supply. This does not include cash that banks store in their vaults or their balances with the central bank or other banks. Monetary aggregates are linked to aggregate demand for goods and services, making them important economic variables that can shed light on future price developments. Because money can be used not only as a means of exchange and payment but also as a store of value, the Eurosystem defines three types of money supply (monetary aggregates) that build on each other but differ in how quickly bank customers can access the money, i.e. how “liquid” it is. These monetary aggregates are referred to as M1, M2 and M3, with the letter “M” standing for the word “money”.

The monetary aggregate M1 includes cash circulating outside the banking sector as well as the overnight deposits (transferable deposits) of non-banks. M1 is thus the money that is available at any time. It therefore comprises the means of payment that have a very high level of liquidity.

Time deposits are funds that are invested with banks at a fixed interest rate for a predefined period of time. They cannot be accessed during this period. When they mature, they are usually credited back to current accounts, which means that they are converted back into transferable deposits.

Savings deposits are deposits that are typically open-ended and can only be accessed after a certain notice period. Interest rates on savings deposits are generally variable, i.e. they fluctuate in line with general interest rate movements. Unlike transferable deposits, time and savings deposits therefore cannot be accessed for payments at any time.

In addition to the monetary aggregate M2, M3 also includes assets issued by banks and financial institutions with a comparable level of liquidity to the bank deposits contained in M2: bank debt securities with original maturities of up to two years, money market fund shares, and repurchase agreements.

Bank debt securities are securities for which the issuing bank undertakes to repay the nominal value of the debt security when it matures. Buyers receive interest on their invested capital. Money market funds sell fund shares (money market fund shares) to investors and invest the funds they receive in short-term assets such as corporate securities. Investors can return the shares to the fund at any time and are then credited with a transferable deposit on their bank account.

Repurchase agreements, as included in M3, are used to conduct “repo” transactions between banks and non-banks. Banks use these to raise funds at short notice, where – similarly to pawnbroking – the bank sells an asset (e.g. a security) to a non-bank against payment of a sum of money with the obligation to repurchase the asset after a certain period of time. Repos are short-term financing instruments generally with a maturity of no more than one year, and frequently of just a few days. From an investor’s perspective, these short-term investments can be converted into deposits relatively quickly and are therefore an alternative to liquid bank deposits.

Nowadays, there is much more book money in circulation than cash. People often imagine that book money is created only by paying cash into an account. But this overlooks the fact that the cash had previously been withdrawn from an account, meaning that the book money was already there before. So the question is, who creates the book money? It is the banks, when they grant loans, for instance. In a nutshell, the creation of book money is an accounting process.

When Bank A grants a loan, it credits the loan amount to the current account in the form of a transferable deposit. For example, if a loan of €1,000 is granted (e.g. with a maturity of five years, 5% p.a.), the transferable deposit on the current account held by Customer 1 with Bank A increases by €1,000. This has created new book money. Bank A records the claims on the borrowers on the assets side of its balance sheet and the newly created transferable deposits as liabilities on the liabilities side. When the loan is repaid, the corresponding book money is then “destroyed” again.

Book money is also created when a bank purchases an asset, such as a security. The accounting process is then much the same. The asset is recorded on the assets side and the purchase amount is credited to the seller’s current account as a transferable deposit – new book money has been created. Banks thus create new book money “out of thin air”, as it were. However, the money they create does not belong to them, but to their customers. From the bank’s perspective, its customers’ transferable deposits are a liability – it owes them this money. Customers can use the credited amount for credit transfers or withdraw it as cash.

The creation of central bank money follows the same principle. If commercial banks require central bank money (e.g. in order to obtain cash for cash withdrawals by their customers or to make payments to other banks), they can procure it from the central bank in the form of a loan. The central bank then checks whether the conditions for lending have been met. As a rule, the central bank only grants a loan if the bank secures it by providing collateral (e.g. securities). If this condition is met, the central bank credits the amount borrowed to the bank’s account with the central bank in the form of a transferable deposit. In this case, central bank money has been created. The monetary base M0 has expanded. When the bank pays back its loan to the central bank, the monetary base M0 contracts again.

In addition to lending and crediting, there is also a second way in which the central bank can help provide banks with transferable deposits, i.e. central bank money. In this case, the central bank purchases an asset from a bank (e.g. securities, gold or foreign currency) and credits it with the proceeds of the sale. This also creates central bank money.