45

I own accounts at two different Romanian banks.

When I transfer money to another account at the same bank, the money is transferred immediately. However, when I transfer money to an account at a different bank, the transfer is processed the next working day.

Why is it not done instantly?

  • 11
    Presumably it depends on the banks. When I transfer money from on UK bank to another it's basically instant. – Robert Longson Jul 25 '18 at 7:26
  • 14
    @RobertLongson In the UK, Faster Payments were introduced a few years ago, and lead to payments in most cases taking less than 2 hours (and usually a few seconds). Before Faster Payments were introduced, it took several days to process a payment via BACS (it was quicker via the more expensive CHAPS system). In the Eurozone, payments now have to take less than one working day (it used to be much longer before that). There's talk of forcing banks to reduce this. Some banks in France are starting to implement a same-day payment scheme as well. – jcaron Jul 25 '18 at 11:55
  • 8
    @Adelin Yeah, the US is basically in the Dark Ages where person-to-person bank transfers are involved. – ceejayoz Jul 25 '18 at 16:59
  • 4
    @jamesqf - if that's really the case, then how do the banks in other countries (non US) do it? Also: 1) It's not their (the bank's) money. 2) Accountholders don't have control over how much money a bank keeps on hand. Aside from regulations requiring minimums the amount on hand above that is decided by the bank. If they choose to hold a small amount, and it causes issues, they could increase it. Lower amount is their choice and is likely fueled by greed. – Kevin Fegan Jul 26 '18 at 0:06
  • 11
    No one already spelled it out clearly, so I'll do it: the banks have no incentive to change this system, not only because it is a complicated change, but also because they gain money from it: every time you transfer some money, it disappears for 1-2 days and none of the two parties will get any interest on it. So nothing will change unless someone forces them (government or EU). – Federico Poloni Jul 26 '18 at 10:13

11 Answers 11

78

Because banks still rely on processes and software that were established many decades ago, when constant, semi-instant communication was not technologically possible. Instead, you would have batch processes that run on huge mainframe computers overnight.

Changing these processes is extremely difficult, because there are so many things tying into it - taxes, regulations, all kinds of bookkeeping that ensures money cannot just appear or disappear somewhere.

  • 4
    The Automated Clearinghouse (ACH) system that banks use to transfer funds was established during the 1980s. It is antiquated and needs to be replaced, but that upgrade will take congressional legislation to become reality. – pearcewg Jul 25 '18 at 19:21
  • 39
    @pearcewg Question is about Romanian banks, so what does congress have to do with it? – Mast Jul 26 '18 at 5:37
  • 22
    @pearcewg Why would a Romanian bank listen to US congressmen? – Aron Jul 26 '18 at 8:07
  • 5
    Related Planet Money episode: The Invisible Plumbing Of Our Economy. Discusses US and UK situation, but it's broadly applicable to the situation in many places worldwide. – Jonathan Jul 26 '18 at 10:13
  • 3
    As a software engineer I would like to add that the bottleneck is in the bureaucracy, and not the technology. Changing things wouldn't be extremely difficult per se, rather costly instead – Felipe Jul 27 '18 at 14:12
22

Actually, its a bit more complicated than the other posts suggest.

Transferring money between two banks is a rather complicated thing, as you are really just transferring information about the value, so you need to address issues of trust and double-spending.

To minimize the necessary transfers it may make sense for a bank to collect some more orders and then do a set off with the other bank against transfers in the other direction.

A fairly comprehensive explanation can be found here

  • In other words, you're saying there are IT-technical challenges, and accounting-technical challenges, in addition to the general idea of establishing trust. Hmm. – jpaugh Jul 25 '18 at 14:37
  • 3
    Accumulating orders has nothing to do with "issues of trust and double-spending" though, it's entirely due to liquidity, performance and programming complexity reasons. – Michael Borgwardt Jul 25 '18 at 21:56
  • 2
    And yet in some countries it happens in seconds. So maybe it isn't actually that complicated, or maybe it is but that's not the problem here. – AakashM Jul 26 '18 at 7:42
  • 3
    @AakashM The technology isn't (that) complicated; getting the "legalese" in place, so that all parties are happy that if something goes wrong they won't be out of pocket, is much more of a drawn out process. – TripeHound Jul 26 '18 at 8:42
  • 3
    Within the same country, in most modern well-organized countries, all banks keep accounts with the central bank and any obligations they have with each other can be settled through these accounts with the central bank. If these accounts fall below certain limits, there are mechanisms to replenish them. There is no excuse for in-country money transfers to take more than a few seconds - apart from money grabbing (not paying interest on funds in-transit, for example) – Erwin Bolwidt Jul 26 '18 at 11:55
9

It depends on transfer agreements between banks. SEPA is an initiative providing such agreements, albeit at a European level.

When you transfer money between accounts within the same bank, the bank has complete control and knowledge of the funds and their availability. Therefore, the transaction is instant because the bank can guarantee the availability of the funds, and there is no third party involved.

When transferring between two different banks, unless the banks have agreements guaranteeing the funds availability, there can be transfer delays until the funds from the originating bank are received by the destination bank. Any third-parties in between (typical for international transfers) will likely add to the delays.

  • 2
    But OP specifically asked about two banks in the same country. "Waiting until funds are transferred from origin bank to target bank" cannot be the reason, because it is the same class of problem: Why isn't that done (virtually) instantaneously? – Alexander Kosubek Jul 26 '18 at 11:20
  • @Alexander Kosubek My comment is actually for same country transfers, where explicit agreements between banks are required unless a national system is already implemented. Sometimes the funds are deliberately delayed for the banks to use them. For instance if you get interest, delaying the funds one day or more can save the bank some of the interest to pay you. The third party option is also clearly identified as a typical international issue. – zuz Aug 23 '18 at 7:13
4

Because obviously the same bank just puts an enry into their ledger.

But when money is transferred between two banks things become more complicated, and may go through systems that do not send the data in real time.

SEPA has an instant mode that is rolled out now,but it does only apply to EUR ;)

4

They make you wait because they profit of it.

All the time that banks don't make the funds available they can draw interest on those funds.

In the Netherlands and other countries in Europe, where interest at the moment is negative, transfers are instant between banks.

  • 1
    This answer contradicts other answers, which provide sources (such as @Daniel's). Furthermore in my concrete experience, transfers between countries in the EU still take time. Therefore I'm downvoting this answer, as it makes an unfounded claim incompatible with other, better justified answers. – equaeghe Jul 26 '18 at 11:20
  • 3
    I can only agree with @equaeghe regarding the quality of the answer. It is the only one that really makes sense, though. There are no reasons to not make money transfers (virtually) instantaneous, except one: There is no profit to make by doing it. When negative interest is high enough, I expect all bank transfers to be instantaneous, except if the receiving bank has a way to delay them... – Alexander Kosubek Jul 26 '18 at 11:25
  • There used to be a bank in The Netherlands which explicitly admitted to this practice. They charged no fees for services for which other banks did, but instead would keep your money for a couple of days before completing the bank transfer. – gerrit Jul 26 '18 at 13:26
  • An upvote from me. The answer lacks sources, but this could very well be the only right answer. The banks tell people it's complicated so they can get away with it. In this era where cars can drive automatically no one fools me that it takes a day to update a few numbers in a database. – Paul Jul 28 '18 at 13:28
  • I suppose this is the second half of the answer. Banks get away with keeping the money and charging interest. And they do not update their systems because then they would even lose this interest. – Chieron Oct 30 at 13:49
3

Other answers highlight the problems that can be the reasons that not all banks in all countries can handle instantaneous transfers.

The problems are no longer there, though it will take time for all banks in all countries to be able to handle instantaneous transfers.

In Denmark it is possible to transfer money from one account in one bank to an account in a different bank without delay using online banking. The money will often arrive faster than the email you send telling the recipient to expect the payment.

You will have the options of instantaneous payment, same day payment, or payment on a certain date. The latter will withdraw the money on your account on the given date and the money will not arrive until the day after.

The only limitation is that instantaneous payment and same day payment can only be made in the 'opening hours' from 08:00 (I think, not absolutely sure) until 17:30.

  • Actually the Danish Straksclearingen, which is the payment backend for MobilePay, runs 24/7, not just in traditional banking hours. It was a major development project for the banks to make this work in a way that would guarantee liquidity so that the receiving bank can be sure to actually get the money before they credit the receiver's account (within seconds). – Henning Makholm Jul 28 '18 at 9:53
  • But it still requires each bank's online banking solution to allow for transfers of those types to be available outside the 'working hours' and at least my bank does not. – Bent Jul 29 '18 at 7:47
3

In India, we have the IMPS (Immediate Payment Service), which does electronic fund transfer between participating banks in real time.

There's also the UPI (Unified Payments Interface) built on IMPS, which enables real time fund transfer by specifying plaintext IDs (such as maskedman@upi). The plaintext ID can be mapped to bank account of any participating bank.

Hence, the technology to enable real time payments certainly exists and is in successful use. Some countries adopt it sooner than others based on their priorities.

2

It is cheaper for banks to collect all transfer orders in intervals and only send net money to other bank or transfer authority. In principal, only doing one transfer for all orders in an interval is enough for clearing. So this is how CHIPS system works. In our country electronic money transfers between banks is done by central bank and it has 2 hours delay max.

Wikipedia page of Clearing House Interbank Payments System (CHIPS) has a good explanation.

The money transferring between banks each day is huge. Wiki page says it is $1.5 trillion a day in US in 2015 for CHIPS system only. There are EFT, FedWire systems as well for US.

Of course there are faster systems(like FedWire i guess) but they are more expensive.

Also money transfers between banks are heavily regulated. I guess for that reason generally it is done by central banks. Banks have strict responsibilities to pay net transfers and in very exceptional cases they can not and you have a banking crisis.

1

I regulary transfer money between accounts in two different banks in the same country (UK) and sometimes it takes a few seconds, sometimes much longer. The banks say

Payments to another person, business or account with another bank

Usually, Faster Payments will be received by the payee almost immediately after leaving your account, but can sometimes take up to 2 hours

and

Faster Payments Service (FPS) is a UK banking initiative to reduce payment times between different banks' customer accounts from the three working days that transfers take using the long-established BACS system, to typically a few seconds. CHAPS, which was introduced in 1984, provides a limited faster-than-BACS service (by close of business that day) for "high value" transactions, while FPS is focused on the much larger number of smaller payments, subject to limits that depend on the individual banks, with some allowing Faster Payments of up to £250,000.[1] Transfer time, while expected to be short, is not guaranteed, nor is it guaranteed that the receiving institution will immediately credit the payee's account.[

So the answer to why it takes longer in your part of the world is likely specific to your country or to the banks involved.

1

The problem is that (for whatever reason) instant clearing of funds between banks is not available in Romania.

Others have enumerated many reasons and alternatives for this. Here is an explanation of why this process takes a long time:

Two banks need a means to consolidate payments done to each other's accounts. The physical movement of notes and other instruments is just a secondary part of the problem. The main part of the problem is that banks don't have access to other banks ledgers (and rightly so, after all, this is confidential information).

This practically means that Bank A does not have the right or ability to deposit money into a customer's account at Bank B. Only Bank B can do that.

Since Bank A and Bank B don't have access to the other's customer's accounts, they agree to settle transactions in bulk, through settlement accounts. These accounts (if Bank A and Bank B are in foreign countries or dealing in foreign currencies, these accounts are called Nostro and Vostro, Italian for "ours" and "yours") are held normally with a central clearing house which is an entity whose purpose is to settle payments between banks.

It is common practice that the clearing house is the central bank of that country or jurisdiction.

For practical reasons and to make sure accounting and reporting is done properly, settlement through clearing houses is done in bulk.

It is common practice to have a cut off time for transactions. Any transactions posted before this cut off period are processed the same business day, any transaction posted after this period is processed during the next business day. The transaction cut off time depends on the clearing house (and sometimes, even on the currency of the transaction).

The purpose of the cut-off period is to allow banks to fund their correspondence accounts with the clearing house to consolidate transactions. Some clearing houses hold all transactions pending funding.

The practical process of transferring money (when no automatic clearing is in place) between Bank A and Bank B goes as follows:

Simplified for same currency transfers:

Transfer Process:

  1. Customer tells Bank A to transfer an amount to a customer at Bank B.
  2. Bank A verifies the details of the recipient (beneficiary) and the sender.
  3. Bank A deducts the amount of transfer + any fees from sender's account.
  4. The transfer amount is placed in a suspense account held at Bank A.
  5. Bank A notifies the clearing house that it has a transaction for Bank B, including the amount.
  6. The clearing house checks the correspondence account for Bank A which is held at the clearing house, and the time of transaction.
  7. If the transaction is within the cutoff period, the clearing house deducts the amount from the correspondence account of Bank A, and credits the correspondence account of Bank B, and notifies Bank B of the incoming transfer.
  8. Bank B debits its suspense account (for incoming transfers) and credits the customer's account.

If the transfer is after the cut-off period, it is held till the next business date.

Reconciliation Process:

At the end of the business day, or after the cutoff period, or at an agreed interval by the clearing house and all banks, the following happens:

  1. All banks transfer funds from their suspense accounts for outbound payments to their correspondence accounts at the clearing house.

  2. The clearing house then credits all bank's incoming correspondence accounts for the transfers due to them.

  3. Banks receive funds from their incoming correspondence accounts, to then credit their inbound suspense accounts (to zero the balance).

As this process takes time (the funding of accounts, the reconciliation), it can cause delays in local transfers.

The entire process is electronic, but it may not be stright through processing, that is - there might still be manual entry into systems for reconciliation. I know of some banks that simply do not process third party transfers during off hours (such as weekends) for security reasons.

-3

Simple leyman's terms for delay = Transaction must go through the banks' banks.

  • Welcome to Money.SE. This question already has an accepted answer. Please clarify the point you're making that the accepted answer misses. – Rupert Morrish Jul 29 '18 at 20:44

protected by GS - Apologise to Monica Jul 29 '18 at 11:28

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