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Small Bank In Kansas Creates the Bank Account of the Future
HughPickens.com writes Nathaniel Popper writes at the NYT that the Citizens Bank of Weir, Kansas, or CBW, has been taken apart and rebuilt, from its fiber optic cables up, so it can offer services not available at even the nation's largest bank. In the United States the primary option that consumers have to transfer money is still the ACH payment. Requests for ACH transfers are collected by banks and submitted in batches, once a day, and the banks receiving the transfers also process the payments once a day, leading to long waits. ACH technology was created in the 1970s and has not changed significantly since. The clunky system, which takes at least a day to deliver money, has become so deeply embedded in the banking industry that it has been hard to replace. CBW went to work on the problem by using the debit card networks that power ATM cash dispensers. Ramamurthi's team engineered a system so that a business could collect a customer's debit card number and use it to make an instant payment directly into the customer's account — or into the account of a customer of almost any other bank in the country. The key to CBW's system is real-time, payment transaction risk-scoring — software that can judge the risk involved in any transaction in real time by looking at 20 to 40 factors, including a customers' transaction history and I.P., address where the transaction originated. It was this system that Elizabeth McQuerry, the former Fed official, praised as the "biggest idea" at a recent bank conference. "Today's banks offer the equivalent of 300-year-old paper ledgers converted to an electronic form — a digital skin on an antiquated transaction process," says Suresh Ramamurthi. "We'll now be one of the first banks in the world to offer customers a reliable, compliant, safe and secure way to instantly send and receive money internationally."
The UK has Faster Payments processing across all its national banks, which allow instant payments between bank accounts. Maybe the US is married to a daily batch processing paradigm but CBW is most certainly not the first bank in the world to move away from it.
But that's the national part. There is also a claim about instant international payments at the end, but this is done via Ripple.com which uses an internal pseudo-currency for operations, and is comparble enough to similar Bitcoin-based systems that maybe there's some "News for Nerds" here, but Pickens completely fails to mention this part at all, instead putting the glory onto a bank that uses Ripple.com.
Overall, some very confused reporting; in future Mr Pickens might want to read all the links he's posted and then summarize them for the audience. C minus.
Not every bank. Unlike the US, banks in other parts of the world aren't in the dark ages. Sending and receiving money via your bank account can be done instantly, even from your smart phone (no Apple Pay or NFC software required, just email or whatever other system you choose to use from the various options the banks offer).
"Transparent" is a shit show that trades on every stereotype going. A man in drag is NOT a transsexual.
SEPA is not the same. SEPA only guarantees international transfers in the SEPA area must be made in the same time frame as a national transfer. This is not instantly as the bank in the article is doing. For example here in Germany a transfer to another bank in Germany takes one day and usually the same to another SEPA country. Also, this is done on a batch basis. We check our accounts twice daily as transfers to us show up usually around the same time twice a day.
While I agree that in general the European banking systems are more advanced in general regarding the aspect of transferring money this is a different case.
My background, I'm an American who has lived the last 20+ years in Germany, Italy and the UK and I use SEPA for our international dealers on a daily basis. While better as a whole SEPA is not the same as what this bank is doing.
Disclaimer: I used to write banking software for a living, including implementing ACH management on both the customer-facing and backend processing systems.
The article is blatently misleading regarding realtime transfer of funds, but it takes some knowledge to understand why. Let's talk about ACH transactions.
ACH, or Atomated Clearing House, is the network that the majority of electronic funds in the US use. As the article points out, it's ancient and horrible, basically a 1:1 translation of the paper funds reconciliation to electronic format. In essence, a customer creates an ACH transaction, which is sent to two endpoints; the federal reserve a.k.a. The Fed, and an ACH operator. Just like a credit processor, the ACH operator is then responsible for delivering the funds to the destination financial institution (FI) and they make their money by charging the originating FI. The transfer only goes through once both The Fed and the operator finalize the transaction, which can take a day or more, and most of them are held for additional days to provide for reversals (effectively, cancellations).
Here's some important takeaways:
- To perform bank-to-bank transfers, you must either engage a third-party processor, or you must have an agreement (and process) with each individual bank you wish to transfer to.
- These transfers are subject to some very specific banking regulations, some of it relating to reporting to the Fed, who can block the transactions.
- Laws provide for effective reversal (issuing a reciprocal transaction, not necessarily a reversal) for 2 days for corp-to-corp transaction (CCD) and up to 60 days for transactions involving people (PPD).
- Just like most retailers, these are batch processed, not in real time, though the banks will reserve funds and adjust your balance accordingly. No one minds because legal protections result in at least a 2-day processing window anyway.
Okay, so what do we need to perform this transfer in realtime? Well, first, you'd have to get every bank in the US and the federal reserve to switch to a new system that actually supports real time transfers, instead of the ACH. Then we'd have to completely overhaul the 40+ years of recent laws that were written with a batch-based system in mind, including removing many of the funds reservations activities (and the legal protections that require them) in favor of a realtime system.
So how does this bank do it?
Based on the info from the article, it sounds like the bank is managing two accounts per individual account; the customer-facing one which serves the 'realtime' aspect, and the actual one that is used for the ACH transaction. The risk comes in when the bank accepts a credit or debit prior to it being authorized and completed, and thus the need for 'risk management' software, identical to the sort that ATMs use, especially when configured as a local authorizer (for branches too far from the main branch and others).
They just don't show the end user the reservation of funds like most FIs, and they assume the risk directly so there's no odd 'processing' credits or debits in their statement.
So, it's just smoke and mirrors. They have to use ACH if they want to talk to other banks, and they're not doing manual wire transfers. They just aren't telling their customers. Though if they hit the anti-terrorist check (I wrote the software that matches against the government list too, at one time), their customer is going to find out really quickly that it's really just an ACH after all, and they ~don't~ have those funds - it's illegal for the bank to provide them!
For this exact type of thing, check out Dwolla. Paypal-style transactions (unique id is your email, but that's where the similarities end). It's run by a REAL bank (Veridian Credit Union, that's been around since 1934), and they do bank to bank transactions for 25 cents.
Disclaimer: I'm not in any way affiliated with Dwolla and don't gain anything by this post! Actually, as a business owner who accepts Dwolla payments, it would be nice to see this thing grow and become a standard thing people have to make it easier for everyone to pay each other, including me! :)
The goal of computer science is to build something that will last at least until we've finished building it.