New fiber optic wires can carry a two-hour movie in 31 millionths of a second. Hedge funds already make trades in a fraction of that time. And when you pay a bill online, money disappears from your account at high velocity.
So why does money take so long to appear in your account? Why, when you want to move cash from one account to another, is it faster to walk it there — even if it’s a really long walk?
Behind every check written, card swiped and paycheck delivered is an antiquated payment system that isn’t real time. About $80 trillion a year flows by fits and starts through a Rube Goldberg-like set of interlocking payment networks. The most prominent is the Automated Clearing House, or ACH, now celebrating its 40th birthday. These networks carry funds electronically, yes. But they often only sync up with banks once a day. In other words, if you miss today’s only flight off Kiribati, then you have to wait for tomorrow’s.
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It can take a customer of a U.S. bank more than three days to transfer funds to another U.S. bank. Banks haven’t seen an advantage in speeding that up, even though the lag is painful for businesses and families. Purchases don’t always clear before a store owner has to pony up for more inventory. Families get hit with overdraft fees when checks really are in the mail.
The old networks are even slowing down new, real-time networks. Technically, digital money is no different than bits in an email. Networks like PayPal, Google Wallet and Venmo treat money the same way and with the same speed as email. Then these speedy networks hit a wall: the old, leisurely banking networks. Roommates paying rent or diners splitting a check can swap money on Venmo in seconds. But then they might wait two days for it to transfer over to their bank accounts.
Not only do the U.S.’s almost-7,000 banks wait to settle transactions with each other in batches, they only work business days. Even if your money catches today’s flight, in other words, it can miss a connection and spend all weekend in limbo.
What the U.S. needs, the Federal Reserve said last month, is an entirely “new infrastructure” to keep banks connected day, night and through the weekend. Then last week, the Clearing House, a group owned by the largest banks, said it would build a real-time payment network. It didn’t specify a time frame or release cost estimates. It did say your bank would credit your account immediately and settle up with the payer’s bank later. The Fed estimates businesses could save $10 to $40 billion with a more efficient network.
It could spur lots of other innovations — or what seems like innovation in the laggard world of electronic funds. A farmer dropping off lettuce at a restaurant could go home to find payment already in his account, for example; he would have the money as instantly as he did in Roman times when cash was king. Better yet, if money moved faster, struggling businesses and poor families would have more wiggle room to manage cash and stay out of debt.
Banks have been procrastinating on an upgrade. They worry changing over 1970s-era networks will be a big hassle. A 24/7 system will need to sync with bank’s old batch systems, which are designed to need maintenance on Sundays. And, if popular enough, real-time payments could threaten banks’ annual collection of $30 billion in overdraft fees and more than $12 billion in card fees.
Three dozen other countries already have a real-time payment network. Either governments forced banks to speed up, or private networks saw a business opportunity. Japan’s is more than 40 years old. Meanwhile, 316 million Americans wait for a time when computers and fiber optic cables will be as fast as old, cold cash.
