With complex processes and multiple parties, determining the costs of payments can be difficult. In recent years, the Reserve Bank of Australia (RBA) has taken up the challenge and released a research report on the cost of payments in Australia. This represents a long-awaited follow up to research last done in 2006. The most recent RBA report dated December 2014 draws upon data collected in 2013 from financial institutions, businesses and consumers and seeks to quantify the overall cost of payments and the cost of various payment methods. This includes both “resource costs” (the costs to the whole economy) and “private costs” (the costs borne by consumers, merchants and financial institutions respectively).
You might be able to tell us in shearers’ language, in a simple way: where did the $5 go and why did it take Sunday, Monday, Tuesday, Wednesday – four days – and Saturday, so five days, to get into my account?
Senator WILLIAMS – Senate Economics Committee, Inquiry into Competition within the Australian banking sector, Transcript of Evidence for 21 January 2011, pE46
Senator Williams has been a shearer, not to mention truck driver, farmer and small business owner. He is well qualified to ask this dangerously simple question. Why did the money apparently disappear from his savings account on Saturday morning, but not reappear in his business account (at a different bank) until Wednesday morning?
Unfortunately, I was the one he asked. Reading over the transcript, I did my best. I don’t think I talked like a shearer, even if I did feel like swearing. There are lots of technicalities. I want to take another crack at it. Let’s start with the first basic proposition:
Australian card payments are ‘value now, funds later’
So when you do a card payment, the shop owner can be certain she’s getting paid because the card terminal does a real-time authorisation out of your card account (‘value now’); but the payment system actually moves the money early the next business day morning or, for some payments, the morning after (‘funds later’). Payments made on the weekend are the same in that value (authorisation) is still now, but the system only actually moves money between financial institutions on weekday mornings – which could be 2 to 4 days later.
By the way, ‘value now, funds later’ is a lot better from the shop’s perspective than ‘promise now, funds later’ – which is how a personal cheque works.
In the good old days of branch banking, most people couldn’t check their account balance outside business hours. Nowadays we all have much better information about our accounts through widespread ATM networks, internet banking and phone banking. When the Senator uses his card in a shop, he can then go online and ‘see’ that the cash seems to be gone from his account straight away.
That’s right, it only ‘seems to be’ gone. Surprising as it may be, the money is still in the account over the weekend. Let’s say you spend $60 on groceries at the supermarket on Saturday using your EFTPOS card. The purchase is authorised through the terminal, and off you go with your groceries. If you then go online to check your account balance you will probably see a ‘purchase authorisation’ for $60. So you know you can’t go and spend that $60 again. Eventually, this ‘purchase authorisation’ is replaced with details of the supermarket purchase dated not Saturday (when you bought the groceries) but Monday.
This is sometimes called a ‘shadow posting’. It means that from Saturday to Monday the $60 hadn’t gone from your account, it was just set aside to pay the supermarket later. So you get the benefit of interest on the $60 through to Monday. This is like putting the grocery money in the tea caddy so you don’t spend it on something else – but better, because you’re still earning interest (or if it was a credit card, you’re not being charged interest) until Monday!
On Tuesday morning (for some kinds of card payments, it’s Wednesday) your bank (or building society, or credit union) settles up with the supermarket’s bank. Under system rules interest benefit passes on Monday, so there is a small interest adjustment between them to cover the day or two between Monday and the day they settle up.
This leads to the second basic proposition:
There is no system ‘float’ in Australian card payments
Despite perceptions created by internet banking, money doesn’t disappear for a while moving from a card account to a shop account. The answer to the Senator’s question “where did the $5 go?” is that it didn’t go anywhere until it was time to pay the shop – it was just put in the tea caddy (shadow posted) because it had already been allocated.
On the other side of the transaction – that is, between the supermarket and its bank – things can vary quite a bit. At the latest, the bank puts $60 in the supermarket’s account at the same time as it gets the money from the cardholder – ie Tuesday or (for some cards) Wednesday morning. It should also pay interest from Monday, being the system value date.
But many financial institutions do better than this. They might offer ‘working capital’ packages that supply a retailer with cash flow as needed, regardless of when payments are credited. Others will put their own money into the supermarket’s account on Saturday, relying on the money turning up from the cardholder later on. This gives the retailer access to funds nice and early – but in effect it’s an advance to the retailer. This acquiring market is highly competitive, as the RBA has noted, and institutions compete to serve retailers better. If a shop owner doesn’t like the service she’s getting, other institutions will happily take the business.
Now you might say this is all very well, but why make it so complex? Why not transfer value 7 days a week, and not have to adjust interest all the time? The short answer is that for now, anyway, the most reliable and efficient way to move value from one financial institution to another is through the Reserve Bank Information and Transfer System (RITS), which operates 5 days a week. This could change, of course, but until it does, something needs to be done about covering weekends and public holidays. The current system balances the interests of consumers and retailers, focusing on ‘value now’ and ‘no float’. If retailers want funds fast, there are acquirer services that offer this: competition in action.
Evidence given to the Senate inquiry makes it clear that a lot is happening on the technology front. If financial institutions are not already capable of 7 by 24 transaction processing, they have multi-million-dollar IT programmes to give them that capability. This means they will be able to transfer value and calculate interest at any time and be ready to take advantage of changes in the settlement cycle as they occur. The RBA is redeveloping its settlement services to allow more flexible settlement.
In the future, Senator Williams won’t need to ask where the $5 went – he’ll see it happen on his internet banking in real time.