Ever wondered what happens behind the scenes when you pay $100 in USD and the seller receives EUR on the other side of the world?

Let’s demystify foreign exchange (forex) from a system architecture perspective. 🧠🌍

📦 Real-World Example: USD → EUR

Let’s say Bob (a buyer in the U.S.) pays $100 USD, and Alice (a seller in Europe) wants to receive EUR.

Here’s what typically happens under the hood, using PayPal as a third-party payment provider:

1️⃣ Bob sends $100 USD

→ Money moves from Bob’s bank (Bank B) to PayPal’s account in Bank P1 (USD account).

2️⃣ PayPal initiates currency conversion

→ It works with its forex partner (Bank E) and sends the $100 to its USD account in Bank E.

3️⃣ Currency exchange takes place

→ Bank E's funding pool exchanges $100 USD for €88 EUR (rate-dependent).

4️⃣ PayPal’s EUR account in Bank E is credited with €88 EUR.

5️⃣ PayPal moves €88 to its EUR account in Bank P2.

6️⃣ Finally, Alice’s account in Bank A receives the €88 EUR.

📌 Result: Seamless user experience — but a multi-layered technical operation.

🌐 What Powers This Behind the Scenes?

The Forex Market is a massive, hierarchical engine of liquidity:

🔹 Retail Layer – Where platforms like PayPal operate

→ They often pre-purchase currencies to avoid delays and reduce volatility.

🔹 Wholesale Market – Managed by large banks and forex providers

→ Handles bulk currency swaps and orders from many retail sources.

🔹 Top-Level Participants – Major multinational banks

→ These are the ultimate liquidity providers, moving billions daily.

📈 When liquidity in Bank E's funding pool runs low, it goes upstream:

  • 📤 Sell USD to the wholesale market
  • 💶 Buy EUR in return
  • 🔁 Those EURs are cycled back to refill the retail layer

🧠 Why This Matters

Understanding how FX works helps you see:

  • How payment gateways, banks, and FX providers cooperate
  • Where delays, fees, and rate differences arise
  • Why platforms hedge currency risk using pre-purchased reserves

💬 Have you ever experienced a surprise fee or rate while making an international payment?

Let’s chat about what might have been happening in the background!