Money transfer is one of the core competencies of traditional banks, usually between parties via bank-to-bank transfers. Of course transferring and receiving money is not the only service banks perform but it is at the core of the bank’s reason for being since most other services depend or are connected to the fact that banks can move money from point A to point B.
In the old days before computers or telegraphs banks had to transfer money physically between them. They did create notes (essentially IOUs) which could be exchanged on a short-term basis but eventually a physical transfer of funds was necessary. Since gold was the currency du jour this transfer took the form of horseman loaded up with saddle bags of gold or an armored stage-coach escorted by armed people.
Banks kept track of who owned what money in a ledger. Of course these ledgers were tied to the local bank so you had to physically go to that bank to know what money was where and owned by whom. This type of localized “ledgering” made it a challenge to prevent fraud from occurring.
With the invention of the telegraph money could be “wired”. With these wire transfers money stayed in the bank. What was wired was the details of the ledger changes (what amount of money was taken from A and given to B).
Two of the major ways bank-to-bank money transfers occur today are through the Automated Clearing House (ACH) electronic network and by wire transfer.
Automated Clearing House Transfer
“Automated Clearing House (ACH) is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit, payroll and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the point-of-purchase (POP) check conversion pilot program sponsored by the National Automated Clearing House Association (NACHA). Both the government and the commercial sectors use ACH payments. Businesses increasingly use ACH online to have customers pay, rather than via credit or debit cards”.
ACH transfers are a centralized process as all financial transactions have to go through the ACH. For example, suppose several customers deposit checks into Bank A:
- Customers deposits checks into Bank A
- Bank A enters the deposits in its ledger as pending transactions
- Bank A aggregates the customer transactions into batches
- The “batched” transactions are transmitted electronically at regular predetermined intervals over the ACH network
- The ACH Operator receives batches of ACH entries from Bank A. The ACH transactions are sorted and made available by the ACH Operator to Bank B
- Bank B checks to make sure funds are available to payout the checks in the received ACH transactions and updates it’s ledger
- Bank B sends notification to Bank A that the deposited checks have cleared. Bank A changes the associated transactions from the pending state to complete. This notification can take from 1 to 3 days or more from the time Bank A submits the deposited check transactions over the ACH network. This delay is necessary to ensure the integrity of the transaction (i.e., to make sure the money is not spent multiple times).