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Why Does It Take So Long To Transfer Money Between Banks?
This is a question that has bothered many people, but it did not seem to bother the banks until crypto projects such as Ripple came on board and have threatened the status quo. But for those of you out there who may be wondering why bank transfers take so long, it is good we clear up certain things.
The Process of Moving Money
What is involved in moving money from one account to another account, especially if it is done on an international scale? This is what is involved.
Several customers will fill transfer forms within the course of a banking day. The bank will send out these transaction requests in batches to their clearing system. Here, sorting of transaction requests is done (e.g. on the basis of requests to a particular country or correspondent bank). The requests are then approved if they meet all the criteria for such money movement. The sender bank then moves the cash electronically to the receiving bank. Transactions typically take 2 working days i.e. if sent out early on Tuesday, the receiving bank will get the funds by the end of work on Wednesday. If sent out later than the cutoff time, then the funds will arrive on the next working day, which is Thursday.
Why Do Transfers Take So Long?
In today’s fast-paced digital world where everything is being done in a hurry and where humans increasingly want things done at a faster pace, why have the banks now been able to increase the speed of bank-bank transfers?
Risk Mitigation & Fraud Prevention
The major reason is because banks want to obey the unwritten rule of “three day good funds”: tying down transactions for three days and subjecting them to extra scrutiny to determine if they are fraudulent or not, before dispatch. So banks can be said to “deliberately” delay fund transfers so as to ensure that there is no form of fraud in the course of the transaction process.
As some bankers would readily tell you, faster payments and larger payment sizes increase the risk of fraud or losing money significantly. Banks are all about allowing people to use money with as little risk as possible. A frequently used analogy is that of two friends. One wants to pay the other $100. Mr. A could easily decide to use $100 bill to pay in cash without thinking twice about it. But the moment the amount is increased to $1,000,000, it becomes a whole new ball game. Not only would Mr. A be very cautious about getting corresponding value for such a large amount, he would also be worried about other external factors such as getting robbed on the way or losing the bag containing the money along the way.
It is the same with banks. A bank can move $100 with little risk, but because they typically do volumes that run into millions and billions of currency units, they tend to slow things down to do all necessary checks before transferring funds. So deliberately delaying bank transfers is a method deployed by banks to lower the risk they take on such transactions.
Then there are the challenges that have become part of today’s world when it comes to illicit financial flows. No bank wants to be accused of helping move money for terrorists or drug dealers. The need to perform due diligence checks on especially heavy transactions is another reason why banks delay wire transfers.
Following the Process
That we live in an era where instant gratification is almost seen as a right does not automatically mean that processes must be bypassed so as to sacrifice quality controls on the platform of speed. No matter how fast a brain surgeon wants to get his work done, there are processes to be followed in performing neurosurgical procedures which ABSOLUTELY cannot be bypassed. So in this instance, speed is not an advantage.
Bankers have also argued that anything that has to do with moving money comes with a lot of risk. Therefore, internal control processes which have been instituted to make sure things work smoothly in an environment of low risk cannot be sidestepped and must be followed to the letter. This may come with a few delays, but it is well worth it at the end.
Extra Trading Capital
However, it is also a widely held view that these delays may have nothing to do with fraud prevention, and are actually all about making some extra money from the funds to be transferred. It is well known that banks engage in many forms of financial trading, including forex trading. Indeed, they are the biggest players in the forex market. Some banks use forex for settlement of the requests of their clients, while some actively trade with it. Price movements of 0.9% and more on some volatile trading days are not uncommon, and these are mostly generated by the trading volume of banks. So holding on to transfer funds for a few days in order to trade with it and make some profit would not be such a bad idea, considering the competition for deposit funds.
There will always be arguments on why bank transfers are slow and these arguments will run along these lines. But they at least explain the situation and provide a better understanding of the subject matter. So next time you wonder why your wire transfer is slow, at least you now know why.