When money is in transit in between banks, who gets the interest?

Question

It can take up to 3 business days to transfer money between banks and it could be even worst if it's an overseas payment, if it's on a weekend or public holiday. Many thousands of dollars are transferred daily so this could accumulate up to a lot of money.

When the money has left the source account but hasn't reached the destination account - what happens to the interest?

is it

1. paid to the source account until it lands in the destination account
2. paid to the destination account the moment the money is sent
3. Does the bank just get to keep it and if so, which bank? Destination or source bank?

Answer 1

The money is never actually in transit. All the transfers are done electronically, and records balanced out daily.

The reason a transfer may take multiple days is because these daily processes are, well, daily. It's an actual computer program that runs once a day (or maybe more often, but not all the time) and balances out incoming and outgoing transfers, in each institution. So a transfer from bank A to bank B may be seen like this:

Customer A initiates transfer from their account (CA)
               |
     Bank A deducts from CA to its internal account (CA->IBA)
               |
    Bank A instructs bank B to transfer money 
        to the benefit of customer B
               |
    Bank A and bank B summarize all the transfers between them
       and calculate the delta. Assume, for the sake of the
       example, that bank A ends up owing to Bank B
               |
    Bank B deducts from Bank A's account with bank B (EBA)
        to its own (EBA->BB)
               |
   Bank B credits customer B's account at bank B (BB->CB)
               |
     Customer B sees the money at their account

Note that IBA->EBA transfer may or may not happen regardless of any individual transaction.

It may take even longer if the banks don't talk directly to each other since it will then go through an intermediary(ies) that they both talk to. Usually this happens with smaller banks who set up an account with one of the larger banks to be the intermediary, and frequently with international transfers.

At any given time the money is at an account. It is never "in transit". However, from the point of view of Customer A and Customer B, there's a period where neither of them has the money.

Each bank actually uses the money while it sits in their account during this whole process, and benefits from that.