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As per this, there is always a middleman for transferring fund between two banks.

Why can't there be a direct communication between two banks? What problems would be arouse if there was direct communication between two banks? And thus, what problems are solved by having a middleman like PSP/PSO in between two different banks?

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    It seems to me that the very article you link to has more than enough explanation to answer your question...
    – AakashM
    Sep 24, 2023 at 20:27

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There are 25000 banks in the world. Banks to do not want to establish 25000 connections to each of the other banks. without payment networks, you would have situations where most banks would tell you “we can send or receive payments to/from these banks (a few dozen, maybe a few hundreds), but not the other 24000”.

That’s why there are payment networks. You connect to one, you get accès to thousands of other banks at once.

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Do you know how many banks there are? For direct transfers, each and every bank would have to link with every other bank.

That’s a LOT of interconnections. (The math racks up some pretty huge numbers, but I’m not sure whether you use factorials or exponents.)

This is why banks use centralized clearing houses: every bank connects to a single CH, simplifying much of the work.

It’s also why airlines and package delivery services use the hub-and-spoke model for organizing transportation.

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    Actually, the math uses "merely" squaring, so tens of thousands of banks amounts to "only" hundreds of millions of interconnections Sep 25, 2023 at 4:43

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