Open Mike: Who’s Looking After MY Interest?

This post is by Ron Dawson from The Online Photographer

[“Open Mike” is the often off-topic Editorial page of TOP, in which Yr. Hmbl. Ed. vents his ire and solves world problems about which he actually knows nothing.]

May I just mention something that makes me angry? When banks and other financial rapscallions* hold on to my money day after day because “transfers can take up to five business days.”

I think we all know what’s going on here. It never takes them five days to remove money from my bank account when it’s money they get to keep. They do that transaction in a few seconds. I noticed at my grocery store the other day that it happens faster than ever, in fact. They’re holding my money for five days when it suits them because five days of interest on my $500 (or whatever) doesn’t mean anything to me, but multiply it by millions of customers and billions of transactions and it means a whole lot to them.

[UPDATE Friday morning: the transaction in question is a purely electronic transfer from me to me; I’m trying to put money from my bank account into my PayPal account, which I use as petty cash for online purchases. It’s now Day 6, fifth “business day” (as if everything shuts down on weekends—the computers running the system all go home, put their feet up, and throw a shrimp on the barbie.) The bank cleared the funds four days ago. PayPal Customer Service says it has to go through ACH and there’s nothing to be done but wait.]

Meanwhile, I’m inconvenienced.

But not for long enough to really make a stink about it.

It’s theft, actually; but only temporarily. Like a bully who steals your lunch money but then gives it back to you after a bit of taunting, after you get good and upset but before you have a meltdown and go rat to the teacher.

This is just the kind of thing you’d hypothetically need a well-functioning government for. A fair and evenhanded government would step in and say, ah ah ah, no fair. That’s not your money. It’s his. Give it to him when he asks for it. No fair keeping it for yourself for days and days.

And this would be a good situation for a systematic fix. When you have a problem, find the source of the problem, then fix that. So in this case, the financial institutions are claiming that they need to hold the funds for up to five business days because they need to yatta yatta yatta—you know, whatever their self-justifying bullshit might be. So the regulators would simply allow financial institutions to hold customers’ money for as long as they need to—but would require said institutions to pay the owner of the money interest if they have to hold the money for longer than some reasonable period of time, say, 24 hours. The institutions would then very naturally either a.) stop finagling, or b.) figure out a way to transfer the funds faster so as not to have to calculate, account for, and pay fractions of cents in interest on billions of transactions.

And, problem solved. Completely. Forever.

/rant, and yes, I feel better now,


*Sorry, I meant to type “institutions.”

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Featured Comments from:

Gary Merken: “Drives me nuts. In some places (not all), you make a purchase on a debit card. It hits your bank instantly. You go out to the parking lot, realize ‘Oh man, I already have one at home; I don’t need this one,’ and go back in to return it. You hand over the same debit card again. ‘It’ll be refunded to your account in three or four business days.’ What? You took my money in less than a second. Why three or four business days to get it back? ‘I don’t know; I just work here.’”

James: “It actually does take three days. It’s because ACH [Automated Clearing House —Ed.] (a quasi-governmental institution) uses antiquated IT. As in, it was built in the ’70s and they are still using that antiquated hardware. There are some newer payment rails like Fednow, that are only now being introduced.

“And when it’s their money to keep, you want the money gone immediately. I went through a great deal of my twenties and thirties having to keep a separate ledger of my actual payments in my head because they wouldn’t take the money they were charging me fast enough. Otherwise, I’d overdraw, and they’d get even more of my money.”

Brian H: “If these are ACH transactions, this is typically caused by the overnight batched nature of the way the system works. When you deposit a check or otherwise cause money to be transferred out of someone else’s account and into yours, your bank puts an entry onto a file that gets sent to the Fed’s central clearinghouse once a day. Overnight, that entry is forwarded to the second bank, letting them know what happened. They have a chance to reverse the transaction for a multitude of reasons, but the most common are insufficient funds or that the account being debited no longer exists. Technically I think they have something like seven years to reverse the transaction, but usually this happens within a day or two.

“This ‘day or two’ combined with the lag introduced by the overnight batching is where the five days comes from. If your bank has reason to believe that the reversal is unlikely, they can release the funds to you sooner, but there is some risk involved with that (for both you and the bank).

“There are other payment ‘rails’ (as those in the business like to call them) that don’t have this problem, but they have their own downsides. Wire transfers are instant and irreversible but expensive. Same-day ACH still operates in batches, but there are more of them per day, so the whole cycle time is shorter. FedNow and RTP are two newer competing real-time payment rails that are also gaining adoption, but until more banks support them, they may or may not be an option for a given transaction.

“FWIW, I actually don’t think the banks make interest on the funds while they’re ‘in transit,’ but I may be wrong about that.

“Source—I work for a FinTech company that sells a product for initiating and managing money transfers using these different rails.”

Robert Roaldi: “Who has more power these days, voters or industry lobby groups? I’ve said this before, but these days we all more or less behave as if culture (i.e., our society) is a support system for commerce, whereas it should be the other way round.

“Just an example. Several cities here in Ontario have greenbelts associated with them. These are areas of land on which development was prohibited to allow for green space, wet lands, nature reserves, etc. But there is almost constant pressure by land developers to obtain exemptions so they can build some commercial structure or other. Society has previously decided via legislation to not use that land for that purpose, so you’d think that would be the end of it. But there is always ‘pressure’ from developers. What does that mean, ‘pressure’? The only reason they can exert pressure is because they own legislators who try to do their bidding. This should not ever even come up. But when an industry group wants something done, they know how to proceed. And when they don’t want something done, like streamline payment clearance, well they know how to stall that. Most people more or less obey; we know who’s boss, implicitly.”

Luci: “‘It takes up to five business days for money to be transferred’ is…not quite true. But it is helpful to notice that there are at least three if not four entities involved, each with their own terms and conditions (and own agenda): your bank, the clearing mechanism (it may very well be NACHA), PayPal’s bank and finally PayPal. The ACH leg of the journey is most likely done during the same day, but only if your bank sends the payment between certain hours during the day. Send the money later and then your bank takes the money from your account, keeps the money overnight in one of their accounts and the next day sends the money via ACH to PayPal’s bank. Then PayPal will take their time to actually fund the money from one of their accounts to your account.

“I tend to believe that ACH is the most innocent party here (despite what other people have commented) and PayPal is the villain. The banks themselves may be somewhere in between. Yes, they can debit your account and keep the funds for themselves overnight, which, summed up over their entire customer base, may amount to quite some big numbers, but what they can do over that time with the money is for them to decide. At times, it can be more advantageous for them to park the money with the Federal Reserve for some overnight interest. I know for sure that was happening in my country with at least one bank, because the central bank had at the time quite a high interest rate (for monetary policy reasons) and that particular bank decided to abuse their customers that way. When enough people moved their accounts to other banks, they eventually dropped the ‘strategy.’

“Anyway, the US is catching up, adopting what other parts of the world call instant payments (via banks, not card companies). I think you may want to have a look at banks offering FedNow service.

“(Sorry for the long comment, but the topic itself is fascinating and there are many things to say here, even for the best-case when everythings goes as planned. Of course, the whole mechanism is designed to withstand the myriad of things that can go wrong, and that by its nature involves allowing for verification processes that in the end can add up. Behind all these steps there are mountains of legal contracts that also have to be observed.)”