When it comes to the impact of today’s technology on the financial world, the general rule is speed. High speed servers can now facilitate mega-million dollar stock market trades in milliseconds. Debit and credit card transactions usually record within an hour or less. But if you want to electronically transfer a mere $100 from one bank account to another, be prepared to wait. Not minutes or even hours. We’re talking many, many days.
How many days? As an experiment, this column recently initiated a series of computer generated deposits between four different bank accounts. The amounts were not large by any standard (certainly nothing even remotely close to what individual investors trade in the stock market on a daily basis). Two of the banks were large institutions, with both physical branches and online banking. The other two were strictly online banks.
The deposits were made over the course of eight weeks. The shortest amount of time it took for one deposit to appear in a particular account was four days. The average time was six days. One deposit did not appear for nine days. Covered wagons crossing two mountain ranges could have made these deposits faster than this.
The reasons for the delay depend a lot on who you talk to, so this column did exactly that. The following question was posed to several experts very familiar with the nation’s banking system: why is it in today’s high tech era that it takes multiple days to transfer modest amounts of money between bank accounts owned by a single individual?
In the United States, transfers of depositor funds between banks are normally run through a single system called the Automated Clearing House (ACH). This system was established in 1972 as a collaborative venture between the California’s banks and the regional Federal Reserve and quickly grew to encompass the rest of the country. The ACH network is governed by NACHA (National Automated Clearing House Association), so that’s where this column went looking for answers.
According to NACHA’s Michael Herd, the system was designed to move money in the next banking day and that’s still true today. “It’s primarily a one day system,” said Herd. But one source of the delay lies in the term “next banking day.” Let’s say you live on the West Coast and missed last Friday’s noon cutoff for moving depositor funds. Well, this was a three-day weekend and the banking system doesn’t do electronic processing on weekends or national holidays. So now your deposit isn’t going anywhere until Tuesday morning. You just “lost” three days.
In addition, according to Herd, both the bank where your funds are kept and the bank receiving your deposit employ a complicated set of third party process firms who scrutinize every transaction. This can add more time as these entities search for signs of fraud or verify that you indeed have the money at all. Security flaws in the computerized age make banks very nervous and several observers believe that financial institutions have gone to absurd lengths to protect assets. ACH has no control over additional delays that banks may choose to add on top of the transfer process.
But at the heart of the ACH issue is that the system runs on batch processing which made sense when consumers wrote checks for everything, but is clearly outmoded in today’s instantaneous world of online, checkless, and paperless transactions. Batch jobs are stored up and then executed at times (such as the evening) when computers may be less busy. “Tying everything into a batch system is why it takes so long,” says Ben Milne, CEO of Dwolla. “There’s a huge varying delay there.”
Milne’s company is seeking to turn ACH and how banking deposits are made completely upside down. His firm – Dwolla – is a payment network that can transfer money from one bank account to another without batch processing while eliminating the “middle men,” the servicing bureaus that account for so much delay. Transactions are encrypted and analyzed for potential fraud as they pass. “At the end of the day, systems like ours will become the fabric that we all exchange money on,” says Milne.
Perhaps mindful of competitors like Dwolla or simply because they are growing uncomfortable with the delays in processing bank deposits, the Federal Reserve has sent signals that they are looking into finally reforming the ACH system. The Fed has introduced a faster process called FedACH SameDay, but the new system is voluntary and only a handful of banks use it because of a lack of supporting software.
There are few sectors in our society today that have been untouched by the need for new technologies and the rapid pace of change. That the banking industry remains wedded to a transaction process that goes back to the presidency of Richard Nixon is one of the more remarkable stories of our time. It’s hard to believe that another fifty years will pass before we see real change and the ability to make faster deposits electronically. But then again, true to the banking credo, time is money.