My understanding was that any bank-to-bank transfer (be domestic or international) has to go through the Federal Reserve (why does a private institution have to be privy to all transactions?), and it is this step that essentially introduces the latency in ACH?

In that case, how do the for-a-fee wires allow you to transfer money between accounts in a few minutes (Are there separate cash flow "backbones" that are based on ACH but take on the risk on crediting the money faster, before they actually receive the money - like payday advance?)

  • What is an ACH? And further, where did you get this "understanding" from? – sdg Dec 23 '11 at 21:06
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    @sdg ACH == Automated Clearing House. See en.wikipedia.org/wiki/Automated_Clearing_House – duffbeer703 Dec 23 '11 at 21:09
  • @sdg This understanding is something I just came up with. Which kind of bank-to-bank transfers do not have to go through/via the Federal Reserve? – f1StudentInUS Dec 23 '11 at 21:25
  • Why do you care how the money gets there? Federal reserve is not the only institution on the way, especially for SWIFT transactions. – littleadv Dec 27 '11 at 8:43

ACH transfers are the evolution of paper check clearing houses. Transactions are conducted in bulk and do not immediately settle -- the drawer and drawee still retain liability for a period of days or weeks after the transaction date. (I'd suggest looking to the legal definition of a check or draft to understand this better.)

A for-fee wire transfer still goes through an intermediary, but settle immediately and irrevocably. Wire transfers are analogous to handing cash to someone.

In the US, the various Federal Reserve banks are involved because they are the central banks of the the United States.

In the past, bank panics were started or exacerbated when banks would refuse to honor drafts drawn on other banks of questionable stability. Imagine what would happen today if your electric company refused to accept Bank of America or Citibank's check/ACH transactions? Wouldn't you get withdraw every penny you could from BoA?

During the 1907 banking panic, many solvent banks collapsed when the system of bank "subscriptions" (ie. arrangements where small town banks would "subscribe" to large commercial banks for check clearing, etc) broke down. Farmers, small business people and individuals lost everything, all because the larger banks would not (or could not) risk holding drafts/checks from the smaller banks.

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  • WHen you say 'for-fee wire transfer still goes through an intermediary' which intermediary are we talking about and how does this allow them to settle within an hour vs the ACH? Also, does this mean you can cancel an ACH just like you can place a 'stop order' on a check you have issued? (On a lighter note, I wake up everyday with a resolve to withdraw every penny from my BoA account, but the 3 I have in there seem too much of a hassle :-D ) – f1StudentInUS Dec 23 '11 at 21:26
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    There are a bunch of wire networks... for US Domestic transfers examples include FedWire and CHIPS. International transfers go through the SWIFT network. These networks are faster because the subscriber banks have accounts that are debited in real time. I believe that it is possible to "recall" a wire transfer, but I'm not familiar with the mechanics of how such an action works. (I think that it is a "best effort" process.) – duffbeer703 Dec 24 '11 at 5:00
  • Why don't the credit unions use the SWIFT network? None of the three I am a member of have the SWIFT number and require a three step process for international transfers! – f1StudentInUS Dec 24 '11 at 6:15
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    @f1StudentInUS SWIFT network costs money, and CU's are not designed for international transactions. ACH transactions cannot be canceled, but can be reversed if fraudulent (as long as they're not settled). Wire transfers cannot be reversed. You can request a refund, but it will be a separate transaction, and your request may not be fulfilled if the recipient refuses to refund. – littleadv Dec 27 '11 at 8:42
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    @f1StudentInUS International money transfer is out of the scope of services provided by smaller financial institutions. You can "relay" wired funds via a coorespondent bank. (ie a US bank with an established relationship with the foreign institution) Note that other options like Western Union may be more convenient. – duffbeer703 Dec 28 '11 at 3:21

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