Seriously why does it take “3 to 5” business days to take the money from my account when it’s all handled electronically?
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That would require that transfers in the banking system to be effectively instant.
That isn’t the case. It typically takes a few days for a transfer to complete.
Well actually they can! Outside of the US there are many countries offering instant domestic or even international payments, such as the UK, Singapore, India and most of the Euro Zone.
The reason it is slow in the US is simply that the system hasn’t kept up with the pace of technology change. Many large companies who rely on ACH have adapted their business processes to it (and are therefore unbothered by the delay) and newer, commercial alternatives like Venmo have emerged for individuals to make instant transfers to each other.
When the US revises the ACH system, we’ll see instant payments there too.
In the US there is daily processing of these payments through ACH. There are a variety of real time or faster payment options, but most banks are hesitant for two reasons. First, faster payments means faster fraud. With an ACH there is a period of time where claw ack may be possible. The second is cost, an ACH cost around $0.003, while an RTP transaction costs around $0.05. At the scale of even a small community bank that adds up.
For one billing system I’ve used, the processor had a rule that the customer needed to be notified of the charge 10 days prior to us running the draft. Charge amounts could vary month to month, so we couldn’t let them know in advance and then run it on the bill date.
While the others are correct about the ACH system, the real reason is different.
Ever noticed how the money is instantly subtracted from you bank account and hangs in the void a few days until it is put on the recipient’s bank account?
During this time the bank can use that money as they wish. Lend it to others, invest it, what ever. In that time they can make profit from your (and others) money. While this seems like an insignificant amount of money and time, if you multiply this by all the transactions happening, the banks have billions available to trade and speculate at every given moment.
OK, this is one of those things that can’t really be explained to a 5 year old, because it gets as much into philosophy as it does into technology.
Fundamentally, the essential concept in any financial system is trust (that all actors will do the right thing, every time).
In order to ensure that trust, there is a LOT of magic that goes on behind the scenes to make sure that every transaction is legal (defeating fraud), orderly (in that it’s processed in the correct sequence, and that money flows from A to B to C to D correctly), and auditable (allowing the interested parties on both ends of a transaction to see that the right thing was done from their perspective).
The ACH system (which is how almost all money in the world is moved around) is old, fairly cumbersome, and not particularly fast, but everyone in the world trusts it.
Old is not necessarily a bad thing – old means it’s well known, well understood, well studied, and has been corrected, adapted, and streamlined over time.
One of the biggest issues facing the “instant transfer” systems today is fraud – look at all the financial fraud around cryptocurrencies, Venmo, CashApp, etc.
When fraud is a major concern, trust is eroded.
For an individual, when I don’t trust something, I simply abstain from using it.
But if I’m a bank, I have to use *something.* Refusing to participate in the financial system means that I won’t be a bank for long.
As a result, I use what I trust the most, so that my customers will likewise trust the system.
The US banking system does operate an instant transfer system themselves, Zelle. But, generally, companies don’t like using Zelle, because they have to pay fees that are significantly higher than the ACH system charges, and those fees add up.
If the Zelle alliance would drop those fees to be on-par with ACH, you’d see more adoption. BUT, the Zelle alliance can’t afford to drop their fees, because their expenses are quite a bit higher on a per-transaction basis than the ACH system is (remember, when you’ve had 40+ years of optimization, you get pretty good at doing what you do as inexpensively as possible).
To your question, the reason it takes 3-5 days is because the ACH system isn’t instant, and they don’t process things on weekends and US federal holidays. Almost all ACH transactions clear in 1-2 days, but by combining a holiday with a weekend, you get an extra 3 days in there, so they quote that into the range as buffer.
Because banking payments between different banks aren’t just messages that get sent back and forth like emails or text messages. The (current-old) system is set up in such a way that banks ‘batch’ their transfers to different banks and send them to a central processing entity several times per day at set hours for all banks. That central entity then unpacks those batches, and packs all the different transfers for the same bank together into new batches that get sent to the banks at other set times. It is then up to the receiving banks to input those batches into their system, and send any necessary replies BACK through a batch to the central entity before it goes back to the original bank. Most of these banking systems also don’t work during weekends or holidays.
That system works just fine…. It’s just slow, since a payment made at the end of the day can take up to two business days before you get a confirmation of the payment, depending on how fast everything gets processed.
It’s why there’s a concerted effort to move to a instant payment system between banks, but it’s real hard to make sure this all works at the same level of certainty and security, Europe is getting there. Some banks allow you to make a limited amount of instant transfers per x time, others ask for a small fee for every instant transfer.
If you specify your bank account as the method of payment, then the payment will be processed via the ACH network, which is a batch processing system.
While the ACH network does support same-day processing, it costs more to do this, so most billers just use the overnight option instead. The reason they say 2-3 days to settle is because:
1) The banks may not settle items on the next day because it is the weekend or a holiday, and your bank may not settle ACH items on those days; or
2) The debit to your account is deducted from your account the next day, but your biller doesn’t know 100% for sure the funds are good and that the debit to your account was successful until 3 days later. This is because the bank has up to 2 banking days to reject the transaction for Non-Sufficient-Funds. This is just how the ACH Network system was designed and how the current rules for returning items work.
If you really want the money out of your bank account immediately, just pay with your debit card. Those transactions work on a different payment network, and the process and rules for that network are designed for immediate settlement 24/7/365.
It will cost your billers a lot more to charge you using this network, so billers often prefer to use the ACH network instead. As an example, a biller might pay a nickel or less for an ACH debit to your bank account, whereas a debit card transaction might cost them 10-15 cents per transaction plus a small percentage of the dollar amount debited from your account. ( like .05%). So the biller would have to pay twenty cents on a $100 transaction using a debit card vs. as little as a fraction of a cent to debit your account using the ACH network.
Pay using your credit card, and things get really expensive for the biller. Now, those transactions cost the biller as much as 3% of the amount charged so that you can get your reward points.
FEDNow fixes basically all of these problems. It will be a Godsend and is arriving soon.
https://www.frbservices.org/financial-services/fednow/about.html
Lobbyists pay millions to ensure laws and regulations aren’t changed that would force banks to pay billions to update their systems 🤷♂️
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