why do banks need an extra day to process paychecks after ‘bank holidays’ when almost everything is automatic/digital?
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I presume OP is asking about the United States and there are a lot of great answers about that. But as a fun fact many other systems work completely differently. Europe is now implementing instant transfers (under 10 seconds), any time, any day of the week, even for international transfers, for free. So I’d say the real reason is that banks resist innovation and change.
[https://www.europeanpaymentscouncil.eu/what-we-do/sepa-instant-credit-transfer](https://www.europeanpaymentscouncil.eu/what-we-do/sepa-instant-credit-transfer)
edit: Thanks for the replies below. It’s good hearing about how thing work and how they’re improving all around the world.
Just to add one more non-tin-foil, non-banks-are-evil comment here. The modern automatic digital system is a convenience layer built on top of a much older system that is much slower.
This is actually why the idea of a “digital dollar” is so great. Not because the US Gov would be making a “cryptocurrency” (they wouldn’t be) but because it would finally replace all that outdated infrastructure and enable the kind of automatic digital operations to really happen.
They don’t.
Australia put legislation in to have all electronic transfers being instantaneous.
The banks were fully in compliance Day 1 without a trouble in the world.
It’s important to note that all the replies about bank batch transactions are US specific. Many (possibly most) banking systems around the world are much more modern, and they do provide instant and secure transactions.
In fact, many US banks join little collectives and utilize modern systems with each other, it’s just the central system that is antiquated.
Because they can (government lets them)
Many/Most? developed countrys no longer have such delays because governments stopped them and if a certain bank lacked the technical ability (IT) their regulator forced them to upgrade.
Every excuse you might see is just that, an excuse
Only real exception is international transfers (different governments/regulatory authorities and generally an intermediary or 3 between can slow things down)
In the old day, banks took all of their checks to a clearing house. Bank reps sat across the table from each other and passed ledgers back and forth to do the actual accounting for all the changes that occurred for the previous day. A bank holiday would delay this process by one day.
Basically due to tradition, we still follow that standard even though it’s now fully automated.
If you have a really common name, or sorry to say, a common middle Eastern name, there is a good chance you are getting flagged on the OFAC list when dealing with banks. This makes it go into like extra checks to make sure you are who you are. The OFAC list is to prevent like terrorist and money laundering and stuff like that. FYI for people.
1 US has a middle age baking system
2 We use checks and not wire transfer
EU is on its way to have an instant wire system across 27 nations.
Paychecks, at least in the US, run on the ACH system which relies on some manual checks for typos and fraud. This means that they can only get processed on business days. If the day they normally get processed is now a holiday, then it can’t get processed until the next business day
Banks operate on a system that the Fed controls and payments flow through this system to the corresponding bank. Unfortunately, an entire nations payments system can’t just be instantaneously updated. The Fed is currently in the process of piloting a new system in which we won’t have to worry about holidays or weekends, called FedNow.
Like others have said in this thread, governments don’t work quickly, changing a national system is costly, and security risk to financial world is high.
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