Much like Alice, I live my life on the other side of the Looking Glass. If my communication were any more instant, it would slip an instant into the future and render itself telepathic. I can communicate the exact same thought to hundreds of the globally dispersed at the same time. And I know what’s happening in trial proceedings ages before Reuters issues a news bulletin, never mind the time it takes for a newspaper to put that story into print.
Patience is no longer a virtue, because being passed over is the only thing that comes to those who wait.
More than that, expecting patience from me is the ultimate unforgivable. Especially if you’re my Internet Service Provider.
Yet somehow, in all the blitzing haze of Real Time, bank transfers take 2 to 3 working days.
But why though? And then 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 this a few weeks ago, my answers would have been something like: “maybe it’s got something to do with fraud” and/or “maybe there’s an internal control mechanism or something?” Both of which are nonsensical.
Firstly, fraud is covered by insurance. Secondly, have you ever tried to stop a transfer once you’ve clicked the send button? I just don’t believe that it’s possible.
And as for the internal control story – 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 exactly? It’s just a list of numbers. Uh no.
Cheque Out The Backstory
So let’s step back in time, to around half a century ago, when your options for settling a bill were limited to the following three (not including “not paying it”):
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 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 the waiting 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.
- All the cheques are then sorted and redistributed to the banks that are making payment. Yours gets given 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 is done automatically between the banks’ accounts at the Central Bank.
However, 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…).
Gmail’s 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.
And servers don’t need operating hours – they’re computers!
How RTGS differs
Real Time Gross Settlement transfers are “gross settlement” because the full amount that leaves your account also leaves the bank’s account at the Central Bank, and then lands in the recipient bank’s account, and finally in the beneficiary’s bank account. This happens almost instantaneously.
BACS transfers (or standard ETFs) are “net settlement” because the daily transfers paid out from the bank are offset by the daily transfers received in from other banks, and only the net amount at the end of day is settled.
So back when computers were more bulky and bandwidth was less wide, I can see how the net settlement process may have been cheaper for customers. But today…that seems less reasonable.
Everything should just happen in real time. It’s actually better for the bank – because the bank would know its exact cash position at any point during the day.
The Cannibalisation Theory
And yet, in the articles that I’ve read on this, whenever banks have been given the option of more real-time solutions, there has been general reluctance. With excuses like “staff would have to be retrained on the new system”. And compatability issues and so forth.
Here is another possibility: RTGS transfers are far more expensive than standard BACS transfers. An RTGS might set you back ± $30 where a slower transfer could cost mere cents.
Given that, why would any bank risk sacrificing its RTGS revenue by making its other payment processes faster?
But I’m probably wrong. I’m sure that the real hack here would be the retraining of staff…