The ACH system

February 6, 2007 11:22 AM

Why is the United States ACH (automated clearing house) system so slow and inefficient? Funds can never be assured until several days pass, and that creates a ripe atmosphere for check bouncing. When I do a Paypal transfer to my bank or move money from bank to bank it always takes 2-3 days. Why is the banking system stuck in the 1950s? Is there any talk of overhauling the ACH system?
posted by calhound to work & money (12 comments total)

ACH itself can be quite fast. I've heard some banks manage it in 1-2 days (GMAC Bank is often mentioned). it's just that the service has to pay for itself somehow, especially as for consumer accounts it is often handled by a third party (e.g. Checkfree, CashEdge) rather than the bank itself, and the way it typically gets paid for is by collecting interest on the "float."

It's not really a ripe atmosphere for check-bouncing, though. You can't write checks on money you don't have, so you just wouldn't write the checks until the ACH completed.
posted by kindall at 11:37 AM on February 6, 2007

Unlike the Fedwire system, the ACH system does not function in real time. It uses batch processing. So you may be affected by assorted cutoff deadlines. PayPal submits one or more files to its ODFI (Originating Depository Financial Institution) at various times throughout the day. And the ODFI in turn processes those files and combines them with work from other Originators and submits the transit items to the FRB or a private ACH Operator. The FRB then sends the items to the RDFIs (Receiving Depository Financial Institutions). Each RDFI then processes the received items and posts them to its DDA system. You can therefore have a turnaround as quick as one day, depending upon when you undertake your transaction, or two or three days, although three is a bit excessive.
posted by Midnight Creeper at 11:43 AM on February 6, 2007 [1 favorite]

I suspect the ripe atmostphere calhound refers to is in regard to the fake certified/travellers checks scams, wherein the fleecer sends a fake check to the sucker, sucker cashes at his bank, sends 90% to the fleecer, keeps 10% as his fee, then finds out a week later the check was fake, and he's out the money...
posted by nomisxid at 12:40 PM on February 6, 2007

As noted above - ACH itself is pretty fast. It's the bank(s) on either end of the transaction that's causing the delay you're experiencing.

Some banks process ACH transactions very fast, others do not.
posted by twiggy at 12:52 PM on February 6, 2007

Well, actually I wasn't being clear when talking about check bouncing... I think I was focusing on a symptom: that you can have a deposit yanked from your account if a check that was deposited a week ago bounces. I know that the bank is sort of giving the deposit to you on credit, but on the other hand I've never figured out how to determine if a deposited check has actually cleared... I've gotten shrugs from the bank when asking them about this.
posted by calhound at 1:25 PM on February 6, 2007

Well, actually I wasn't being clear when talking about check bouncing... I think I was focusing on a symptom: that you can have a deposit yanked from your account if a check that was deposited a week ago bounces. I know that the bank is sort of giving the deposit to you on credit, but on the other hand I've never figured out how to determine if a deposited check has actually cleared... I've gotten shrugs from the bank when asking them about this.

There's often not a way around this, because it's the check writer's bank that's going to decide whether the check bounces or not. I'm pretty sure checks clear though a different system from ACH, anyway.
posted by oaf at 2:39 PM on February 6, 2007

I'm pretty sure checks clear though a different system from ACH, anyway.

This is true.

The funds you receive via ACH are guaranteed (short of a reversal by the ODFI, which is rare and is not done arbitrarily) and there is no hold placed upon them once they actually credit to the account, which the RDFI is mandated to do by NACHA regulations within a specified time period following its receipt of the item from the Fed (basically by the opening of the business day of the effective date).
posted by Midnight Creeper at 3:16 PM on February 6, 2007

ACH funds are pretty much handled as has been outlined here. However, just as an example, people used to call all the time and want us to release their deposit because they "knew" we had it (ie, they knew that their employer's system sent the deposit info 2-3 days ahead of time). Unfortunately, your paycheck ACH (and some others) comes labeled with a posting date, and it doesn't matter whether we "know" you're getting paid or not -- the bank is committing a violation to release those funds early. As far as debit ACHs go, those are processed when they are received according to the information that is in the file. The speed of the transaction is going to depend on a few things, but the one that seems to have a lot of impact is size. Discover Card, for example, will get that debit done on the day it's supposed to go, no ifs ands or buts. Smaller institutions, however, send fewer files (volume probably dictates this) and so therefore their batches are larger and less frequent.

Checks clear differently. Before 9/11, literally you had ninety gabillion paper checks being flown across the country in order to facilitate check clearing. You may or may not have noticed that stuff cleared weirdly through your account at that time, but it really got the financial system in a kink, so that's why we have Check 21. Basically this makes electronic processing of checks extremely attractive. I don't know, maybe ten years ago now? Banks started giving you statements with check IMAGES rather than actual checks. Those big banks were able to clear checks more quickly because they were sending check images rather than actual checks, and they were using these image clearing networks. Check 21 provides incentives for all banks to participate in this faster clearing process. It was implemented not that long ago and you probably got a disclosure. Checks clear now a lot faster, basically eliminating float on checks (well, in a lot of cases, but generally speaking, there isn't a lot of float left).
posted by Medieval Maven at 7:52 PM on February 6, 2007

From what I've read, banks make money off of the float. Even though checks really do clear faster, banks can still put that nice 7 day hold on them. So if the check clears in 2 days, they can still hold it for the 7.

At least that's how a lawyer friend explained it to me. Banks like to make money.
posted by drstein at 8:22 PM on February 6, 2007

From what I've read, banks make money off of the float. Even though checks really do clear faster, banks can still put that nice 7 day hold on them. So if the check clears in 2 days, they can still hold it for the 7.

At least that's how a lawyer friend explained it to me. Banks like to make money.
posted by drstein

Banks surely do like to make money, and they make a TON of it off 'float processing' or at least they surely did when I programmed check processing in the early 90s. There are entire systems - not programs, we're talking monster systems - devoted to float processing, with three day float and four day float and five day float etc and etc on and on, figuring out damn near to the minute how they can hold onto your dollar and make money off of it.

Interesting factoid - checks rolling through the MICR processing system move at 35 mph. Also - the programs that the MICR machines ran on were octal ie 8 bit instead of 16, an entirely different language and all of it machine language to boot, all on the level of zeros and ones, very primitive stuff. Maybe by now they've implemented new stuff, almost surely they have, but at the time it was just like all the systems which are written in CoBOL and assembly on the mainframe, too expensive to change all the code, too expensive to implement new systems, esp when the systems in place did/do work.
posted by dancestoblue at 12:16 AM on February 7, 2007

Also the hold periods are largely dictated by law and your account's status with the bank. So if you have an account history that indicates you can't/won't balance your checkbook, you are more likely to end up with holds on your account (at least at some banks) because of your history of being overdrawn.

Aaaaaand some banks will try to screw you at every opportunity. If you bank with WaMu and ever schedule a bunch of payments on the day that you get paid, this should be immediately obvious. Somehow, it seems your account will always go "negative" before they apply your paycheck. Hmmm.

I work in the industry but I still think WaMu are a bunch of crooks.
posted by Medieval Maven at 3:00 AM on February 7, 2007

I know that at the bank I work for, it is standard policy to process debits before credits. I just assumed that was an industry wide thing.

In the department I work in, the ACH's get credited in like 2 hours give or take. It is also possible to get things posted manually before the batch is run if you make a few phone calls and annoy enough folks. =)

Big bank though. {shrug}
posted by Chickenjack at 2:56 PM on February 8, 2007