By John F. Wasik, RealClearInvestigations
May 15, 2019
The float – that Bermuda Triangle of finance, where banks take your money but don’t pay interest because they are “processing” the funds – has long seemed a form of legal robbery. But even if it really did once take “three to five business days” to move money from here to there, dramatically improved money-transfer technology should have sunk the float.
Only it hasn’t.
Despite the pell-mell advance of frictionless online banking, allowing almost anyone to send payments instantly, institutions and new “fintech” apps such as PayPal’s can still take days and sometimes months to release money. These entities can even double their return on the “float,” earning interest on money instead of paying it.
It’s a holdup in more than one sense of the word, many say. “Since 2005, when I started blogging on banks, there has been frustration and questions about slow electronic transfers,” notes Ken Tumin, founder and editor of Depositaccounts.com, a service that tracks banking rates. “Bank officials often claim this is due to security,” he adds, but depositors commonly complain “that the banks are using it to make money on the float.”
Sluggish electronic payments hurt consumers in direct ways, and not just from lost interest. They can get nipped with overdraft fees if money isn’t deposited in checking accounts to cover bills. Or they simply lose access to their money.
While float-related abuses in modern American banking peaked during the high-inflation late 1970s – roughly $7 billion per year – now it’s believed that float-related interest earned by banks is under $1 billion annually, according to the New York Federal Reserve. The precise figure is not known because of another void: a dearth of publicly available official information.
One of the agencies charged with policing consumer banking is the Consumer Financial Protection Bureau, created by Congress in 2010 through the Dodd-Frank financial reform act. The bureau recorded some 8,700 entries in its consumer complaint database regarding money transfer issues from Jan. 1, 2012 through the end of 2018. The complaints, accompanied by short anecdotal narratives, cited a range of institutions from big banks to PayPal.
The CFPB does not reveal the names of those lodging complaints, so it’s not possible to directly verify them. Neither does another key regulator of money transfers, the Office of the Comptroller of the Currency, which is one of the federal watchdogs of banks holding assets of more than $10 billion.
The OCC did not respond to a request for a tally on enforcement actions and referred information requests to the CFPB.
Even regulators have complained about slow electronic transfers. Five years ago, Richard Cordray, then director of the bureau, delivered a speech in which he decried the fact that “when consumers make a deposit into their bank or credit union account, it is often difficult for them to know when the money will be available for their use, which may be well after the funds actually clear.”
“Not knowing when a payment will be credited or a debit posted can cause them significant harm,” Cordray said. “For many of them, as they reach the end of a pay period, they find themselves playing a high-stakes game of chance without even realizing they are at the gambling table.”
About a year after the Cordray speech, the CFPB issued a statement of principles that outlined pro-consumer guidelines for the industry. It called for transparency, data privacy, better fraud protection/security and better fund availability. It’s too early to tell whether new rules issued on April 1 will speed up the flow of consumer funds.
Inertia helps explain the staying power of the float. In a financial blast from the past, the general electronic transfer banking guideline still only requires that money reach its destination within three to five business days. Another factor is banks’ reliance on an archaic system, the Automated Clearing House, to process some $2 trillion in payments per day.
Unlike fintech transactions, which are usually instantaneous, conventional ACH transactions are processed in batches three times a day and are governed by the National Automated Clearing House Association, a banking trade association that oversees the electronic network. Debit transactions must be processed by the next business day.
When contacted, a NACHA spokesman declined to comment on slow transactions, saying only, “We do not share publicly” violations of the Electronic Funds Transfer Act of 1978, under whose rules the association operates. It moved nearly 23 billion electronic transactions last year.
The association has a new rule that allows for same-day transactions, but it’s up to individual members whether they choose to employ it. NACHA did say that it is slowly building a real-time payments system.
Electronic transactions are a more than $180 trillion annual business, according to Federal Reserve figures covering just the depository institutions it regulates. Most of the fraud reported was through credit cards, not electronic transfers such as direct payments. Fraud in such transfers totaled only $1.2 billion in 2015, or “an estimated 46 cents of payments fraud for every $10,000 of payments in 2015,” according to the Fed.
Of course, since the Fed mostly tracks large banks, it’s not seeing the whole picture, which is rapidly changing. Fintech payment applications are mostly off the regulatory radar screen. A case in point is offered by a PayPal customer who agreed to speak only on condition that a pseudonym be substituted for his real name.
“Justin White” was running an online business when, he said, PayPal held up payments due him for 180 days. PayPal reserves the right to do this, especially with new accounts, to prevent fraud and for other reasons, which White says did not apply to his account.
“PayPal may place a payment hold -- for usually 21 days or less -- in case there’s an issue with your order,” the company states. “When a payment hold is placed on your account, the money still belongs to you and once we get confirmation your buyer received the item they ordered in the condition promised, the funds will be available for withdrawal.”
After several calls and emails, White said he felt “totally helpless, like there was nothing I could do. I know they can hold back money to pay customers, but there was no reason for them do it in the first place.”
After posting about his problem on his blog, several hundred others who were having similar problems chimed in; to date more than 540 similar posts have been logged regarding PayPal. While it took several weeks for White’s issue to be resolved, it’s not known how many others are having money transfer issues. (It was not possible to verify the other complaints since their emails weren’t available and those posting did not consent to be interviewed.)
“Everything banks do is highly regulated,” White noted. “PayPal is not regulated because it’s not a bank. It’s infuriating and enraging when it [money holds] happen you.”
PayPal would not comment on the complaints directly, saying, “We cannot specify any details on customer information,” but issued the following statement: “Customer service is an important focus for PayPal, and we encourage customers that have questions or need clarity on PayPal’s policy to reach out to our dedicated customer service teams."
“Per our User Agreement, PayPal may hold the balance of an account for 180 days if it’s reasonably needed to protect against the risk of liability such as claims, chargebacks or reversals.”
Even as such conflicts become evident in the booming fintech sector, mainstream banking is trying to up its game to compete. There, payment processing in general is dominated by three mammoth companies: Visa, Mastercard and American Express, which handle 75 percent of transactions by volume. And last year, the Federal Reserve, through its FedPayments Improvement Initiative, spearheaded a team of industry leaders for a Faster Payments Council.
So the days of the float could be numbered due to fierce competition. The emergence of blockchains (encrypted digital ledgers), direct payments, peer-to-peer networks, cardless transactions and a host of new applications have created inroads for companies like Apple, Google, PayPal, Square, Venmo and Zelle.
Younger consumers are abandoning debit or credit cards to make payments or transfer cash through mobile fintech apps. And there’s more competition coming: Since 2014, more than $130 billion has been poured into new fintech companies with $40 billion in 2017 alone, notes sharespost.com.
Under the Obama administration, the CFPB was moving toward enhanced regulation of consumer money transfers. Is the bureau now implementing or drafting new policies on money transfers? It did not respond to several requests for comment. Kathy Kraninger, a former White House official with no consumer protection experience, is now heading the agency.
During a Senate hearing in March, responding to criticism that the agency has done little new enforcement or rulemaking in the last two years, Kraninger replied, “It is certainly an objective of the bureau to understand and reduce regulatory burden, but it’s also important how this impacts consumers.”