More Broken US Retail Banking

Here is another great example of how US Retail banking is completely unsuited for the 21st Century and how the rules of the banks not only costs money but is also subject to considerable delay. It doesn’t affect International companies, it’s just an example of how it’s one rule for them, and one for us. Actually it’s lots of rules for us.

To make this interesting, let’s start at the end. I’ve got some money in my UK FirstDirect bank account, I need to transfer it to my daughter’s UK Barclay’s Bank account. Here is the process with notes.

1. Login to FirstDirect mobile app (requires finger print on Android phone)
2. Select Move Money > To Personal or Small Business Account
3. Select Account to Move Money From
4. Enter First/Surname, Sort-Code/Routing Code and Account Number of Payee,
5. Enter amount(greater than $9,999) to be transferred, and a reference
6. FirstDirect verifies account payee details provided at 4.
7. Required to confirm transaction
8. Money transfer is initiated by FirstDirect, received and available immediately

Asides from the whole process is paperless, no checks/cheques or PDF’s, has two important steps. 6). where the sending bank verifies the destination and confirms. 8). The money is transferred via Straight Through Processing based clearing house system making the funds immediately available.

How Does It Work In The US?

My use case is my daughter in the UK needs some short term help to buy her first house. In the first step, which is the broken ACH part, would be broken even if she was in the US. The amount I’m going to provide is more than $9,999. That’s where the system breaks. Pretty much apart from internal transfers, between accounts two accounts at the same bank, you can’t transfer more than $9,999 without using a wire transfer.

It doesn’t matter if you bank with a credit union, an FDIC insured bank, use Zelle, Paypal, Venmo etc. try paying/transferring more than $9,999 and it will come to a standstill. The simple answer you’ll be told is to make multiple transfers of upto $9,999. Some banks though make that a daily limit, not just a per transaction limit. If you write a personal check for a large amount, it can take 7-days to clear before the funds are generally available.

If you are transferring less than $9,999 it can usually be paid online through a bill pay service. However, many of them have lower daily and transaction limits. Also, again, you have to have exactly the right details, or your transfer becomes a form of “hail Mary pass“. The system will only confirm the money has gone, not that it’s gone to the correct account.

You can also go to the bank and get a cashiers check which you can hand to the payee, or take to a branch of the payee’s bank and pay into their account. If they don’t have one locally, you are stuck with multiple transfers, over multiple days.

Wire Transfers

So unless you are lucky, wire transfer it is. Wire transfers are so called because back in the 1870’s Western Union used to send money between it’s branches using a password that would be decoded at each branch using a code book. The details were received at the branch by telegram and paper tape. That’s where US Retail Banking still is, as far as I’m aware, the paper telegram and paper tape have been replaced by a computer network, but they still use the same process from the 1870’s.

The good news is at least with wire transfers, there is no overnight reconciliation, so the funds are available straight away. However, not all banks can send wires to all other banks. This means your bank may have to use an immediacy bank, who forwards the money on to a destination. In principle, any bank that has your wire before you get the money, could go out of business, meaning your money would be lost. In practice this doesn’t happen, and is what banks have FDIC and other insurance to cover. The point is, if you “executed” a wire transfer from your local bank, who used a big international bank as an intermediary, and that bank was exposed to the 2008 housing crash/crisis and your wire was caught in the middle. You might get your money back at some point, but it wasn’t going to be quick.

In order to initiate the process you need to tell your bank all the details. It’s not standard banking terms. Here is the process on the HSBC bank website, all banks have some variation of this. Mine, Elevations FCU asks you you complete a .pdf which you print, sign, must have a “wet signature” and scan in and send them. If you get stuck on the terms, they generally don’t help because they know nothing about the receiving bank. You have to get the details from the receiving bank, including stuff like the intermediary bank details, IBAHN number and so on.

So here is the process to transfer more than $9,999 in the US for same day receipt.

1. Contact your bank to find out how to initiate a wire transfer
2. Complete the complex wire transfer form details
3. Agree to the banks wire transfer fee, usually $25-$35.
4. Bank deducts amount to be transferred from your account
5. Takes details from complete form or online and "executes" wire transfer
6. If you got any details wrong in above, wire may reject or complete.
7. If the wire completes but you got the account number wrong by 1-digit you now have a 6-week process to get your money back.
8. If the wire completes and you got the details right, the money is either available, or forwarded and available.

The process is the same number of steps, but requires you to know and be able to provide a number of arcane banking details. It also exposes you to significant risk of getting things wrong and of course the wire transfer fee.

For common wires, for example buying a home in the same or nearby town, where both banks are in the same state, for banking purposes, this is minimized, your bank probably knows or has the ability to check directly with the receiving bank.

International

You can do wires internationally, I could have. However, you still have to pay the wire fee, and are then subject to the banks process for international, and their exchange rate process. I’m not aware of any bank, even for example HSBC or other international bank, that allows you to transfer internationally within the same bank, without using a wire. If you do, let me know!

For the last 8-years, I’ve used Wise!, formally Transfer Wise. You follow the process above to wire them money, using an agreed 24-hour exchange rate, which is pretty much always better than a retail banks. Once they’ve received the wire, they forward the funds to the final destination. The wire part remains complex, you still haver know all the details, but they use the standard Sort-Code/Routing Code and Account Number of Payee for the final destination.

It ads a step, but generally gets to the destination the same day and funds are available the same day because Wise! use standard UK bank processes at the receiving end.

But What about ##ITCOIN?

Yes, I know I could have used a coin. Your exposure to variability in the value of the coin is massive. It’s often way more variable than an exchange rate fee. Yes, the US$ to the UK£ costs you 30c more, but it doesn’t vary nearly as much.

Also, using coins isn’t free. In this case I was transferring money my daughter rather than buying something direct, which made it pretty much just as complex, it just uses and different intermediary. It doesn’t solve the problem or remove the risk or fees. For the most part, few vendors actually accept ##ITCOINS as payments, despite all the fuss.

And so there you have it. How American retail banking, that in many places still asks you for a cancelled check, in order to set up a reoccurring debit, and advertises being able to scan checks in on your phone as a “competitive advantage”, uses technology from the 1870’s to transfer money domestically between banks.

2 thoughts on “More Broken US Retail Banking

  1. You have been caught in the great mess of regulations to stop money laundering, supposedly. Banks get fined millions for violations so this is the one regulation they pay very strict attention to. The different rules evolve from each banks legal team deciding what the regulations mean and how much risk they are willing to take on. Welcome to the US! Land of dumb regulations and guns. I’m not sure we offer much else at this point.

    1. Hey Rachel, great to hear from you.

      I had to send bank statements around for money laundering anyway. The issue here is the inefficiency, cost and number of steps taken, not why they were taken. I left money laundering checks out of the post because they were not germane to the topic. Either way, do you really think that had I been money laundering I’d have gone through this process? No, then I would have taken the ##ITCOIN route, or kept the money in an offshore account and just wired the final amount to my daughter.

      The problem here is that 20-years ago, when Internet banking was new, the best way to ensure the banks were not robbed blind was to implement what were reasonable limits then. $10k in 2000 was still a big deal. For anything over $10k then would buy a lot more then, than it does now. Also, American Banking really hasn’t changed, and that isn’t good enough. All those payment apps we use are just workarounds. I shouldn’t have to sign-up for some 3rd party service to transfer money domestically, easily.

      I’m reminded of 1983. Late that summer, my first in New York, working at Chemical Bank. We were in the final stages of rolling out the worlds first home banking system, PRONTO. I was involved in the server-side design. We’d had a successful beta test and it came to making the final changes before rolling it out and selling it to other banks. At a meeting, we were discussing transaction security. One of the bankers said that the limit for a transaction should be $99. My boss, VP Phil Gross, looked at him and said something to the effect of, it’s way easier to just reverse a truck into an window or building and drive off with an ATM, than it is to break-in to the system and make fraudulent transactions.

      He was right about the first part, and at the time for the second part. These days not so much.

      If someone tells you it’s the reasons the bank’s won’t allow straight through processing and destination verification, ask them why that applies to accounts which are both yours but at different banks. Some American banks support UPIC, but this typically only works for credit transactions and not debits. ie, you can pay someone but you can’t debit someone. Ask your bank if they support UPIC for payment of bills and what the limit is for a single UPIC transaction. Only a few banks support RTP, Realtime payments. Again, if you think WalMart, Amazon et al use these systems to make transfers, you be wrong. Sure they do to you an me.

      Ever got a refund for a bad purchase and been told it will take 3-5 days to appear on your account? Because when they deal with us, we are subject to these restrictions. When they deal with each other, they are not.

      The real problem here is America’s size and the scale of what needs to be changed. Of course, there is a cost to that change, and with change, comes risk. American banks won’t make that change until we can convince them that it’s needed. Until then it’s frustration, time wasting, and additional cost for us, ##ITCOINS for the money launders.

      Here are a couple of useful links:
      1. PRONTO > https://www.newspapers.com/clip/90194718/chemical-bank-ny-pronto-home-banking/
      2. RTP > https://www.theclearinghouse.org/payment-systems/rtp
      3. UPIC > https://www.theclearinghouse.org/-/media/new/tch/documents/payment-systems/ach-183-upic-flyer-m031715.pdf

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