Sunday, 16 November 2014

Nineteenth Century Banking in the Twenty-first Century

Last week I got £50 in a cheque, or in the US, a check. It was cashback from house insurance that I had earlier this year. With all the recent talk about Apple Pay and NFC it was a little quaint to receive an actual printed cheque.

I left it on the table for a couple of days because I would not be near my bank but it eventually was time to get it into my account. So I took the bus into town and banked the cheque. I asked the cashier when the funds would be available. In Britain the banks like to give the impression that they are in the 21stcentury but cheques got back hundreds of years. The original cheque acts state that someone has present a cheque to the actual bank for payment. So my cheque has to physically be transmitted to somewhere and at some point the bank, whose customer my insurance company is, verifies that this did come from that customer to authorise the movement of money. Total turnaround time – 5 working days.

In other words a nineteenth century process, slightly modified for computers, is going to transfer this money. The cost of the transfer is massive. Firstly the insurance company creates the cheque and posts it. Potentially a few pounds there. The cheque is then taken on a bus ride, costing me money, and, ends up in my local bank. The bank then posts it to their clearing location and presents it to the other bank of the account holder for clearing. The face value of the money hasn't changed but the actual transfer may well have cost 10% of its face value.

The bank then tricks me. It adds £50 of uncleared funds to my account. This makes my account look bigger with funds that may not get cleared. This is totally useless money because I can't really spend uncleared funds. If something goes wrong with the process, such as the company stopping payment, then the cheque is returned and my account goes back £50. Uncleared money is not really spendable until the cheque process ends but it indicates that the bank thinks it might be OK.

Banks can move billions in minutes in their casino banking arms but most regular customers see a very nineteenth century system. On top of that they append a 40 year old credit card system.

That is why Apple Pay, Google Wallet and the rest are the next great frontier on the Internet. Getting rid of these nineteenth century processes.

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