This piece first appeared in The Daily Telegraph on 21 June 2003
The text here may not be identical to the published text

Get your clearing house in order

Banks are running out of excuses for delays

Bank customers in Britain are losing £35 million a year because the banks hang onto our money for several days when we pay our bills. But an investigation by the BBC’s Money Box programme has found that in Sweden people can now move money electronically from one bank to another the same day. The day they pay their bills is the day the money arrives in the other account.

The change was forced on the banks by the Swedish Government and the Swedish financial regulator. But in the UK the authorities have been reluctant to take action even though we moved more than £25 billion by phone and internet in 2002. This money is handled by the Association for Payment Clearing Services, APACS, which is owned by 32 major banks and building societies. It sends phone and internet payments through the 36-year-old BACS system used for standing orders – which account for another £50 billion of transfers. BACS itself is based on the even older clearing cycle used for cheques – even though nothing physical changes hands. So it still takes a minimum of three working days – and frequently longer – for money to be moved by standing order, internet or telephone. The Office of Fair Trading recently estimated the banks make £35 million a year in interest from the delay.

The payment leaves the customers bank on day one and should arrive in the recipient’s account on day three. For two nights the money is held by the bank as part of its float which is invested on the money market earning interest at the Sterling overnight Libor rate – currently 3.98%. In practice the money is there for longer because the banks stretch the three day cycle. First, they only move money on weekdays. On average, that adds around one day to the cycle. Second, the banks hang onto the money after it has arrived before making it available to customers. Research by Consumer’s Association found recently that seven banks and building societies took four days to make telephone and internet transfers. They included the specialist internet banks cahoot and Intelligent Finance. A spokeswoman for IF, which is owned by Bank of Scotland, admitted it took the extra day "our banking run is done at midnight so the money goes in at midnight which is the next day." Worst of all was Alliance & Leicester which routinely took five days. A spokesman said the results were "disappointing. We are carrying out a review to see how we can speed up the process."

Problems like these in Britain were familiar to Swedish Finance Minister Gunnar Lund.

"The banks were dragging their feet and that wasn’t terribly surprising as we know the longer it takes the more money the banks make. So we put pressure on them and told them unless they bring down these time limits we will take legislative action. This had an effect."

The threat was followed up by the Finansinspektionen [correct] – the Swedish equivalent of the Financial Services Authority. Kerstin af Jochnick [correct Kerstin af Jochnick] is the director there responsible for banks.

"We issued recommendations to the banks and we set pressure on them saying you have to transmit money in a fast and efficient way. We couldn’t regulate exactly whether it was one day or two days but we wanted them to make it faster. It is very important to Swedish customers that this period of time is very short."

The result is that since April 2002 the banks now transfer money the same day if the order is given in the morning and the next day if it is given in the afternoon. One bank, SEB, guarantees that money transferred before 1.30pm will arrive the same day – or it pays compensation. Although they were forced to do it, SEB’s head of e-banking Peter Svenfelt says it was a good decision.

"We lost two days. But our customers are pleased with us and we think that is more important because they make more business with us."

And the banks admit the change was simple and cheap to make. Leif Trogen runs the Swedish Banker’s Association which also operates the clearing system there.

"I would say it was very easy. The only thing we had to do was to invest some money in the infrastructure at the automated clearing house. This transfer system for electronic payments on the internet was done on a platform that was actually developed 25 years ago for clearing cheques. The cost was around five million Swedish Kronor (£385,000)."

In the UK APACS says it is not worth the cost of upgrading. A spokeswoman said "Even though many more people are banking on the internet and by phone these one-off payments still only represent about 2% of payment volumes so the business case to date quite simply hasn't existed. Banks are currently investing £100 million in upgrading the BACS infrastucture and one of the upshots of this is that it will provide the platform to introduce a new faster service in the future."

The OFT estimates that the cycle may be reduced from three days to two sometime in 2005.

Paul Lewis presents Money Box on Radio 4 at noon this Saturday.

21 June 2003

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