New services have been created to make sending someone cash as easy as sending an email, but sending someone cash in real time via email will NOT become a reality until ACH is either modified or replaced. ACH, stands for Automatic Clearing House, and was developed long ago to help banks transfer funds without having to physically mail checks between each other. The wait time for the transfer to take place is usually 3 days. BTW, I bet the United States Postal Service stood in opposition to the development of ACH back then. Do any of you historian readers have anything to corroborate that claim?
As the below market database article indicates, any bank official and even the federal reserve knows there has to be a better way to securely transfer money in real time. Despite the criticisms of ACH being too sluggish for modern times, we have been using it for over 4 decades! Conservative types all recognize ripping out and replacing a financial system that has worked just fine for that long is fraught with peril. It is likely that security breaches would be widespread if we suddenly switched the way we send money. ACH was definitely designed for a different era, but is has held up well and proved itself to be a reliable financial platform and infrastructure.
There’s just one problem: the technology banks use to move money dates back to the 1970s. So while the Internet makes it possible to transmit 10 books across the country in several seconds, moving 10 bucks can take several days. And demand for instant payment services isn’t nearly strong enough to convince the banking industry to join the 21st century, experts say. (Actually there is a very high demand for instant payment)
ACH prevents the immediate transfer of you funds due to a built in holding period to verify that the money is in your account.
Despite their simple interfaces, the new offerings from Square Inc., Google and Fiserv cannot overcome the fact that the most widely used system for transferring money from one bank to another for bill payments or personal transfers is one that hasn’t been updated since bell bottoms(that was in late 60s, early 70s) were in style. “We’re still dealing to some extent with systems that are built for a different era,” says Tom Roberts, senior vice president of marketing for electronic payments for Fiserv, a company that offers technology services for financial institutions, including Popmoney, a service that lets people send money to each other using their emails or phone numbers.
Roberts was speaking of the Automated Clearing House (ACH), the national electronic transfer system created in the 1970s to give banks a secure way to transfer funds that was more efficient than the old system of physically mailing checks from one bank to another. ACH is what nearly all U.S. banks use to process direct deposit payments, person-to-person transfers, bill payments, and other transfers.
Here’s how it works. When an account holder puts in a request to send cash through a service like PayPal, the bank puts a hold for that amount on the sender’s account. However, it isn’t sent right away. Instead, the money is held in the sender’s account until the following business day or later, depending on the service. Some programs use a waiting period to confirm that there is enough money(built in security which may not be present in instant payment systems) in the account to cover the payment. After the waiting period, the money is deposited into the recipient’s account.
But these transfer requests don’t happen in real time. A typical person-to-person payment on PayPal or through Popmoney, which partners with several major banks, takes three business days to settle. That’s business days, meaning things are at a standstill on the weekends and on banking holidays. So a transfer initiated on a Friday is generally expected to be completed by Monday or Tuesday at the earliest–and later if any of the weekdays during that time happen to be a federal holiday.
Requests are also only processed by the ACH once a day(this is the fly in the ointment that frustrates may folks who want the transfer to consummate in real time), so any transfers submitted after a set cutoff time won’t be initiated until the following business day. (The exact cutoff times will vary by bank but many typically require transfer requests be made before 5 p.m. or 7 p.m. ET.) “Nighttime and weekends can make it seem longer than what it is,” says Roberts. “We’re dependent on the banking system to be up and running.”
Even top banking officials say there has to be a better way. The Federal Reserve last month released a consultation paper calling for a more efficient payment system. The paper recommended that banks work together to develop a real-time payment system, citing higher demand and the decline in the use of checks. Possible improvements included creating a new system for real-time wire transfers, enhancing debit card networks, speeding up the ACH system or creating an entirely new payment system. The paper noted U.S. banks are moving toward a faster payment system thanks to initiatives rolled out in the private sector, but the programs aren’t widespread enough to lead to a real-time transfer system.
But it isn’t clear how much the Fed’s attention(probably just lip service) to the matter will speed the process along. “The Federal Reserve is a great leader but they don’t have the power to mandate anything,” says Steve Kenneally, vice president in the center for regulatory compliance for the American Bankers Association. “They can use their bully pulpit…but ultimately they don’t control the check books and the board rooms that make these decisions.”
To be sure, some money transfer services are processed more immediately. ACH transfer requests made by two account holders at the same bank can be completed within minutes.(should have always been this way) So can some of the new services that rely on debit card networks instead of ACH, such as Popmoney Instant, which requires the recipient to have a debit card registered with Popmoney or for the sender to know the recipient’s debit card number. And some online transferring services, like Square Cash, which was rolled out this month, can be processed in one or two business days. But many of those new, quicker offerings aren’t used widely enough to make the option available to all consumers, the Federal Reserve noted.
A true upgrade will require most banks, or at least most of the major banks, to invest in developing a more efficient system, says Kenneally of the ABA.(American Bank Association) That can be tougher to pull off in the U.S., which has roughly 14,000 banks and credit unions, than it is in areas like the U.K., which has a few hundred banks, he says. Another factor is cost: because ACH payments are processed once a day they’re cheaper than wire transfers, which are more labor intensive, says Kenneally. And the ACH system, while sluggish by some measures, works fine for most bill payments that can be planned for and initiated on time, he says. “When you know two weeks in advance and are using an online bill pay, it’s fantastic for that,” says Kenneally.