Given today’s instant digital world, why can’t online bank payments be credited to the recipient immediately, and why do legacy rules still apply?
Payments
Asked by Question Bot12/Mar/20141 answer
1 Answer
F
Faisal Khan
Answered 12/Mar/2014
To understand (from the US perspective) as to why there is no real-time settlement switch, it is important to understand how the original cheques were cleared in the US, which eventually lead to the Automated Clearing House system.
No one does a better job of explaining the ACH (in my opinion) than the NPR Planet Money podcast on this very specific issue:
Episode 489: The Invisible Plumbing Of Our Economy
In countries like UK and elsewhere in Europe, banks are now signing up to what are now classified as "Faster Payments" switches. In most of the developing world / emerging markets, such switches are already in play. For example in Pakistan, all the banks are connected to what is called a settlement switch. Any inter bank funds transfer is settled in about 5 seconds or less. That means if I pay you, 5 seconds later, you have the money in your account.
Most of these switches essentially use the ATM host as the common denominator to do a title fetch and pay out/in. Corporate bank accounts are not connected to such switches and instead rely on RTGS for settlement.
In the end it comes down to economics. Its not easy to suddenly move an entire banking economy from an offline mode (so to speak) to an online real-time mode. It takes a lot of integration work at each bank and not to mention compliance and regulators rules/laws have to be looked at also.
It will eventually happen for the markets who are not 100% online and real-time (such as the US), Dwolla for example is trying to change that with their implementation of an RTGS system known as FiSync (See: https://fisync.dwolla.com/)
No one does a better job of explaining the ACH (in my opinion) than the NPR Planet Money podcast on this very specific issue:
Episode 489: The Invisible Plumbing Of Our Economy
In countries like UK and elsewhere in Europe, banks are now signing up to what are now classified as "Faster Payments" switches. In most of the developing world / emerging markets, such switches are already in play. For example in Pakistan, all the banks are connected to what is called a settlement switch. Any inter bank funds transfer is settled in about 5 seconds or less. That means if I pay you, 5 seconds later, you have the money in your account.
Most of these switches essentially use the ATM host as the common denominator to do a title fetch and pay out/in. Corporate bank accounts are not connected to such switches and instead rely on RTGS for settlement.
In the end it comes down to economics. Its not easy to suddenly move an entire banking economy from an offline mode (so to speak) to an online real-time mode. It takes a lot of integration work at each bank and not to mention compliance and regulators rules/laws have to be looked at also.
It will eventually happen for the markets who are not 100% online and real-time (such as the US), Dwolla for example is trying to change that with their implementation of an RTGS system known as FiSync (See: https://fisync.dwolla.com/)