So there’s been a lot of talk about BitCoin lately, and I particularly liked this piece by Guan - BitCoin’s real value is it's payment system. It doesn't necessarily work very well as a store of value or unit of account, but the very low transaction costs and ease of signup make it attractive as a payments system. The 1% cost of some bit coin transactions is very acceptable for small payments, and its fairly typical for small payments to cost more on a % basis than large ones. That vast majority of bitcoin payments cost far less than 1%, and thats very cheap for an international payments system.
- ACH is actually a next business day system not unlike what Guan describes in Denmark. If your bank sends an ACH payment to the Federal Reserve by midnight, the Federal Reserve will send it to the receiving bank by 6 am of the next business day. In reality, the cut-off is 2.15 am ET, so really it takes less than 4 hours. However, almost 100% of banks in the US are on batch processing systems left over from the 70s, so each of the steps of making an ACH transfer: 1)debit sender’s account; 2) send to recipient bank via Fed; 3) recipient bank credits recipient account; ends up taking 1 day, and thats what leads to the 2-3 business day time for the end to end ACH payment.
- The Federal Reserve charges banks $0.0025 cents per ACH transaction. Thats right, less than 1/3rd of a cent. Think about that the next time your bank tries to charge you $10 for a “Next-day payment”. That’s essentially the bank sending an ACH transaction to the Fed tonight without holding your money for a couple of days first, and charging you for the privilege.
- FedWire costs banks $0.138 per transaction. Think about that the next time your bank charges you $35 for a wire transfer.
- So if back-end transaction costs are so low, why are retail costs so high? Some markup is to be expected, but these margins are insane, especially given the massive scale of US payments systems. ACH moved $37 trillion in 2012. Because NACHA, the standards body that sets ACH standards, is controlled by the big banks, not by Congress. So essentially, the banks write the rules, and the Federal Reserve implements them.
- Not all customers in the US can get a bank account easily. There are 17 million unbanked adults in the US, and 10s of millions more are "underbanked". One of the main causes is that they ran afoul of a bank some day, and got their name added to debit bureau systems like ChexSystems/Qualifile. Most banks in the country will deny an account for anybody who has a ChexSystem entry.