Payment by transfer of a bank balance is acceptable to a payee because it is secure against both theft and loss of market value and is verifiable. Payment by transfer of bank balances is mutually advantageous to the payor and payee because it is fairly inexpensive, so that the cost of making a payment does not eat up the gain to trade. Now consider what happens when there are several banks. It would probably be infeasible, and would certainly be inefficient, for each person to have an account at every bank. Unless two traders happen to have accounts at the same bank, no individual banker can make payments for them in the way that has just been envisioned.
Payment requires a way to get funds from one bank to another.
Over time, there will be payment flows from account holders at A's bank to account holders at B's bank and vice versa. Banks' ability to make such reductions of offsetting payments, known as bilateral netting , can keep the cost of making payments by interbank transfer almost as low as by transfer of balances within a single bank. During the period 1837-1913, the United States did not have a central bank. The regime of interbank payments just described was, in principle, how the U.S. payments system operated. However, since there were too many banks for it to be advantageous for every bank to have an account at every other one, a system of correspondent banking arose.