Faster Cheque Clearing?

It appears that the Office of Fair Trading is leaning on the banks to speed up the processing of cheques. You may think and quite right too. Actually, that’s not the biggest news, for cheques are, by definition, physical items, and it takes time to move them around. The big news is that they have already reached agreement on standing orders and direct debits:

The OFT's payments systems task force, set up in Gordon Brown's pre-budget report in November 2003, is expected to announce an agreement between the big banks in the coming days, which will allow direct debits and standing orders to be transferred overnight rather three days as under the current system.

Not everyone has been on both sides of one of these transactions so you may be a little surprised to find out that money electronically removed from your account does not turn up in the other’s account for three days. The justification for this was that this is what happened with cheques, so why not? ( I would note that here in Portugal it is seven days.)

International transfers also have their delays. Even using the SWIFT system, which moves money in under an hour from country to country, banks tend to delay things along the way, four or five days not being unusual.

Why is this? It’s all about something called the "float".

Banks, as you are probably aware, make their money in two ways. One is fees for services, so much per cheque, so much per payment. The other is lending out money at a higher price (interest rate)  than they pay for it. When your standing order to pay your gas bill leaves your account it sits in the bank’s treasury account for a couple of days before being sent to the gas supplier. Your 54.50 doesn’t make any damn difference at all, of course. But everyone’s gas bills, their electricity, mortgages, blah, blah, add up to a fair old sum of money. At any one time, tens of billions. So, they only get to hold on to it for a couple of days, but borrowing money for nothing and lending it at base plus 3%, on tens of billions, makes a fortune for the banks.

If the OFT (which I don’t think it will manage to do) really does manage to make electronic payments immediate then the banks profits are going to take a right old hammering. Might be a good time to sell any such shares you have.