I’m not sure about you – but my Whatsapp messages go through fairly instantly.
I mean, if my communication were any more instant, they would break the space-time continuum and slip an instant into the future. With a Facebook status, I can communicate the exact same thought to hundreds of the globally-dispersed simultaneously. And with Twitter, I know what’s happening in the news long before a newspaper puts those stories into print.
But somehow, amidst all the blitzing haze of Real Time, bank transfers take 2 to 3 working days.
But why though? And then there are those times when you call your bank, and they can’t tell you where the transfer is, or what happened to it, and that speeding it along is no longer possible. And no sir, unfortunately, you’ll just have to wait.
But I can live-stream DSTV’s Box Office on my iPhone. And get an instant Tax Assessment online from a government body.
How Did This Happen?
Here’s a Planet Money podcast that’s 100% worth listening to: Episode 489 The Invisible Plumbing Of Our Economy.
If you’d asked me about slow bank transfers a few years ago, my answers would have been something like: “maybe they’re trying to prevent fraud” and/or “maybe there’s an internal control mechanism that stops people from sending money to the wrong people?”
Both of those are nonsensical.
First off, fraud is covered by insurance.
And as for the internal control story – I think that’s my version of the financial tooth fairy. There are no teams of lemmings sitting in hidden offices poring over lists of daily transactions to check that they’re, well, um, what you meant to send? Uh no.
Cheque Out The Backstory
To explain why bank transfers take so long, we need to step back half a century to a time when your options for settling a bill were limited to the following three:
As favoured by the mafia.
Which I’ll get back to in a moment.
3. Wire Transfer
The instant and expensive way of doing things.
In the modern world, you’ll find that not much has changed. You can still pay by cash (although this now includes paying by debit card). You can still pay by wire transfer (although this now goes by the fancier name of RTGS*). And if you want, you can still pay by cheque, although these are now electronic and are called Electronic Fund Transfers** (EFTs). And, sometimes, BACS transfers***.
*Real Time Gross Settlement
**although RTGSs are also a type of EFT – so there is some terminology confusion.
***Bankers’ Automated Clearing Services.
And I think you’d be surprised at how much of the current delay is actually rooted in the transition from physical cheques to electronic cheques (or EFTs).
Which brings me to…
A Not-So-Short History of the Processing of a Physical Cheque
Let’s say that you’re a 1950s housewife who’s just received her new chequebook from her husband. You sit down at your writing desk at 10:15 sharp for a ten-minute session of bill-paying. With flawless penmanship, you fill in the payee, amount, and double-cross off the corner as non-transferrable. You sign with flourish, slide the cheque into a crisp white envelope that you’ve already addressed, and seal it with a flick of pink tongue.
You snap your fingers at the messenger boy, who quickly runs it down to the post office to make the 10:55 delivery with time to spare.
Later that day, your cheque arrives at the Water Board, where the clerk stamps it, makes an annotation in his ledger, and then snaps his fingers at another messenger boy, who takes the cheque and deposits it at the Water Board’s bank (let’s call it First National Bank).
What happens next:
- The FNB clerk places the cheque in the box of unprocessed cheques.
- At the end of the day, all the cheques received by FNB that day (including yours) get bagged and taken by truck to a central Clearing House, where the trucks of all the other banks are waiting.
- The Clearing House staff sort and redistribute the cheques to the banks that are making payment. They give yours to the bank that holds your account (say, Standard Bank).
- A tally is kept of all money that needs to change hands, and the banks then settle the net amounts with each other in cash.
- Your cheque is then returned to Standard Bank, where a processing clerk stamps it as “paid” and sends it back to you in a brown envelope.
About two weeks after you first sent it, your cheque returns to your doorstep. The messenger boy places it on your writing desk, whereupon you carefully notch off the cheque stub as paid, and place the cheque in the neat box-file with the floral edging.
And in the transition from Physical Cheque to Electronic Cheque…
The system has remained almost exactly the same.
- The bank deducts the money immediately from your account.
- The bank batches all the payment instructions it receives and sends them to the Clearing House at the end of the day.
- The Clearing House tallies up the payments.
- The banks settle with each other.
- The recipient bank takes the payment notification from the Clearing House and credits the beneficiary’s account.
To be clear, this entire process is now electronic. The Clearing House is a room of computers run by the Central Bank. And the banks “settling” with each other happens automatically between the banks’ accounts at the Central Bank.
But the process is still done in batches. So if you miss the end of day batch, then your payment will only start the process the following day. And the Clearing House has its own operating hours (some clearing houses run 24 hours a day – but the ACH run by the Federal Reserve, for example, works on bank office hours…).
Somehow, Google’s Gmail servers manage an unquantifiable number of emails each day (certainly more mails than the banking system has payments), and it somehow manages to do it without batching them.
But banking servers apparently need operating hours…
Have you ever?
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.