Thus, characterizing the process as a "transfer" is not only misleading, but also incorrect, as in fact nothing is transferred.

The transferable bank deposit – A brief inquiry into its historical origins*

| Insight

Payment services and concepts like 'bank account', bank deposit' and 'account transfer' are central to the Fintech industry. However, not much attention is paid to what actually happens, from a legal perspective, when an interbank account transfer takes place. In order to better understand these concepts, it is helpful to investigate the historical origins of the transferable bank deposit.

In this article Morten Wilhelm Winther gives a brief account of the historical origins of the transferable bank deposit and explains, from a legal perspective, what takes place when an interbank transfer is executed.


On a first thought, it seems natural to explain the execution of a payment order as a transfer of a deposit (an asset) from one party to another. However, today there is broad consensus worldwide that «[a] check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment.», cf. the Uniform Commercial Code of the United States (1990), § 3-408 «Drawer Not Liable on Unaccepted Draft«. The UN Convention on International Bills of Exchange and International Promissory Notes (1988) and the Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes (1930), on which legislation throughout the world is modelled, assert the same principle. The assignment of funds is thus rejected as the legal principle underlying the transfer of funds.

Instead, the transfer of bank deposits is explained as a process pursuant to which the debt owed to the payer by his bank ultimately is replaced by a new debt owed to the payee by his bank. Thus, characterizing the process as a «transfer» is not only misleading, but also incorrect, as in fact nothing is transferred.

For such a system to be viable, the bank that comes to owe the payee must be confident it will be compensated by payer’s bank, which debt is extinguished (or, decreased); i.e. an interbank settlement system is a prerequisite for interbank money transfers to take place.

How did the modern legal concept of the transferable bank deposit emerge?  What are its historical origins? The English goldsmith banking system is often seen as the cradle of modern banking. Thus, it makes good sense to explore these questions from an English law perspective.

The medieval concept of bailment of money – the ancestor to the bank deposit

From a common law perspective, the origins of the claim to money deposited can be traced back to the genesis of the legal action to recover a monetary debt. The earliest legal action under English law for the recovery of a specific sum of money, as well as for a specific chattel, was modelled on the so-called praecipe writs. At the beginning of the thirteenth century, this legal action was a composite writ, including both «debt» (claim for a specific sum of money) and «detinue» (claim for a specific asset). However, towards the end of the thirteenth century, the writ was split. The writ of debt came to provide for the recovery of a specific sum of money and the writ of detinue came to provide for the recovery of specific goods.

The bailment of money, as a legal concept, denotes the delivery of money (notes and coins) for a particular purpose (e.g. safekeeping or for the delivery to a third party). At the beginning of the fourteenth century, it was not entirely clear what legal remedies were available to the bailor (depositor) against the bailee (the custodian) if the latter did not carry out his duties; i.e. what type of claim the depositor had against the custodian in the event the custodian breached his duties. There were two main types of bailment of money:

Bailment of money where the notes and coins were not mixed with other money

Bailment of money enclosed in a sealed bag (which could not be mixed with other money) was recoverable in detinue. In such case, the recoverable object was not a sum of money, but the bag (containing the money). In other words, if the bailee failed to perform his duties in such situations, the writ of detinue could be applied to recover the sealed bag with the money.

Bailment where the money was mixed with other money

Bailment of money where the notes and coins were mixed with other notes and coins were not recoverable in detinue. It was not clear what type of legal remedies were available to the bailor against the bailee if the latter failed to perform his duties in these situations. The legal action of debt (the writ of debt) was originally understood to relate to an obligation on a contract in connection with a real transaction, like a sale (a quid pro quo). Thus, originally there was some doubt as to whether the legal action of debt was applicable to the bailment of money, i.e. whether you were owed a sum of money by the party to which you delivered the money.

However, during the course of the 14th, 15th and 16th centuries, English case law established the availability of the legal action of debt against a custodian of money for safekeeping (the bailee) provided the custodian was not required to keep the money segregated. In such event, it was not possible to identify the specific notes and coins deposited, as they were fungible items of property. Consequently, the property in the notes and coins was, according to the English courts, altered. The depositor (bailor) effectively forfeited the right (in rem) he had in the actual coins and notes prior to the deposit. Instead, the deposit created a right (in personam) against the custodian. This gave, according to the courts, adequate grounds for debt, i.e. the custodian became liable to return a specific sum. The relationship between the depositor and the custodian became that of a borrower and a lender. This perspective was shared by common and civil law jurisdictions.

This explains how the bailor-bailee debt relation is the ancestor to the modern day relationship between a banker and a customer as to deposited money; that of debtor and creditor.

The bank deposit

During the Middle Ages, the goldsmith was a popular custodian for safekeeping of various valuables, including money. He acted with the authority to mix the money deposited, but was to begin with not authorized to use the money at his own discretion.  However, subsequent to the legal developments in English case law described above, he started accepting deposits with full authority to make use of deposited money by lending it to others. Being free to use the money, he became a borrower, so as to be liable to the depositor in debt. Thus, he in effect became a banker – and, according to many, the founder of modern banking.

The emergence of the transferable bank deposit

A third party to which the bailor transported the bailed funds was, unlike the bailor, not deemed to be in a position similar to that of a lender. (The third party had not deposited any notes or coins with the bailee.)

What was the legal position of such third person (the payee) towards the custodian (bailee), and towards the payer (bailor)?

  • Was the action of debt available to the payee against the custodian?
  • When was the payer’s debt to the payee discharged?

The payee’s right to sue the custodian in debt was uncertain during the 14th, 15th and 16th centuries. Medieval authorities pointed to the lack of privity, i.e. a lack of contract between the payee and the custodian, as the most decisive argument underlying the resistance to the payee’s debt remedy.

However, at the turn of the seventeenth century the payee’s right to sue the custodian in debt was finally established, but only in relation to one specific situation, namely where money was bailed with the purpose of being paid by the bailee to the payee in discharge of a debt owed by the payer to the payee (i.e. the bailee/custodian functioned as a payment service provider).

A framework pertaining to the discharge of the payer’s debt to the payee in the situation described above evolved, and by the beginning of the eighteenth century it could be concluded that bailment of money gave rise to:

  • a debt owed by the custodian to the payer (the precursor to the bank deposit);
  • control of the funds passes to the payee upon the delivery of the funds (money) to the custodian (bailee);
  • a debt owed by the custodian to the payee;
  • the conditional discharge of the debt owed by the payer to the payee (conditional payment).

Payment by the custodian to the payee discharged:

  • debt to the payer; as well as
  • debt to the payee; and
  • it gave absolute discharge to the payer’s debt to the payee.

Pragmatic considerations seem to have been instrumental in leading medieval law to recognize the payee’s debt remedy against the custodian. In addition, the payee’s debt remedy against the custodian seems consistent with property concepts, i.e. that property rights in the money were conferred upon the payee as soon as the bailee received them.

However, the law of the bailment of money regressed during the nineteenth century in the sense that the common law that governed the bailment of money began requiring not only the bailee’s (custodian’s) agreement with the bailor (depositor), but also his agreement with the payee (privity). This undermined altogether the efficacy of the bailment of money as a mechanism for transferring funds from the payer to the payee.

Thus, having laid down the fundamentals of the bank deposit, the medieval bailment of money, as a legal principle, failed to form the legal foundation for its transferability. Transferability could have been premised on the assignment (cession) to the payee of the debt owed by the custodian to the payer. However, this did not happen since, under common law, debt was viewed as a strictly personal obligation and its assignment was prohibited.

A question arises then as to whether any other legal doctrines could form the legal basis for the transferability of funds deposited with a custodian (bank).

The transferable bank deposit in modern law

Today, it is universally accepted that a payment order in relation to a bank account does not entail an assignment of funds. The payment order does not confer any rights on the payee against the payer’s bank. The prevailing legal perspective (both in common law and in civil law) is to treat a payment order as a mandate, given by the payer to the payer’s bank.

In line with this generally held view, a much cited ruling by the British courts in 1989 (Libyan Arab Foreign Bank vs Bankers Trust Co) rejects the assignment view of an account transfer. The ruling holds that an interbank account transfer means the process by which some other institution comes to owe money to the payee and the obligation of the payer’s bank to the payer is extinguished or reduced for as much. A transfer is, pursuant to the ruling, a somewhat misleading word when used to describe what takes place, since the original obligation is not assigned, but a new obligation by a new debtor is created. That is, the «transfer» is not actually a true transfer but instead a transformation; the extinction (or reduction) of one debt between two parties, and the creation (or increase) of a debt between two other parties.

The source of the historical information in this article is «The Payment Order of Antiquity and the Middles Ages: A Legal History» (Hart Publishing, 2011) by Benjamin Geva.