Where’s Our Money?

From the moment it leaves one account to when it reaches the other, cash can spend a few seconds to a week in a banking system. With SEPA, the EU wants to speed things up

Top Stories | Margaret Childs | November 2013

Time is money. Even so, in banking, we’ve become used to the idea that moving it around can take a while. But it doesn’t need to.

A transfer that takes one workday in Austria, takes three to seven days in the United States, and only a few seconds in the U.K.. Most European transfers are effectively free or included in account fees, while the American ones cost between $12 and $40.

To streamline money movement across the "old" continent, the European Commission has now initiated a Single Euro Payments Area (SEPA), to simplify bank transfers dominated in euro. By February 2014, the EU will have faster, cheaper bank transfers across borders, which are expected to foster competition and save bank customers and companies time and money.


Clearer clearing

When asked what their money is actually doing, customers have various theories. "The banks invest it," one waiter said. "I’m sure that’s why it takes so long." Others assume the money is in some sort of "ether" until the receiving bank grabs it out.

In reality, it’s much more prosaic, although procedures vary from country to country. In essence, as U.S. senator Elisabeth Warren said, "banking should be boring". But that doesn’t mean it has to be inefficient.

At the Austrian National Bank clearing service on Garnisongasse, the entrance hall is vast and every noise echoes off the marble floors. They call it the Geldzentrum (Money Centre) and is one of the places where the future of European banking is being put into motion.

Christiane Burger and Alexander Mayrhofer work at the Cash and Payment Systems Management Division that is helping Austrian banks coordinate with the new requirements. Within the SEPA zone – which by 2016 will include all 28 EU countries plus Iceland, Liechtenstein, Monaco, Norway and Switzerland – all international transfers must be processed within one business day at the same cost as national ones.

"In Austria, transfers are now very cheap or free, as they are included in the cost of the account," Burger said, "so you will basically never have to pay for a SEPA transaction within the EU."

This was not always the case. In the 1990s, a transfer of €100 within the EU would have taken five business days and cost €24 on average. Now it takes one business day and an EU average cost of €2.46.

With comprehensive online banking, using IBAN and BIC codes, "no employee has to be involved," Burger explained. "It’s fully automatic."

So why the whole business day to complete the transfer?

There are cut-off and processing times and the systems are only operational during business hours. So the next-day guarantee is the maximum, and "some transactions will go though more quickly."


Fuelling competition

While an Austrian can draw money from any cash machine in Germany without a fee, a German has to be careful which bank owns the machine.  "We have colleagues at the ECB who use their Austrian debit cards to get cash in Germany, simply because it’s more practical," said Burger.

Under SEPA, customers will have the freedom to choose the bank that best fits their needs, Europe wide. Banking services do vary across the continent and that doesn’t need to change.

There are also cultural differences. "While Austrians like to use cash, the French are far more likely to use credit cards," Burger said. Checks, too, are still very popular in France and the U.K., but none of this affects making backoffice banking work more efficiently.

The streamlining of transactions has been gradual across Europe, with many Central and Eastern European countries leapfrogging into state-of-the-art systems in the 1990s, ahead of much of the west. Several countries already have real-time banking systems in place like VocaLink in the UK, Bankgirot in Sweden, Poland’s Express Elixir and VIBER, operated by the Hungarian National Bank.

For multi-national companies, it has already meant "millions in savings," says the ÖNB’s Mayrhofer. "They can plan on when they will get the money. They used to say 3-6 days, and now they know the exact day." These companies were a main force in pushing for SEPA. Now "instead of having bank accounts in every country in which you do business," Burger said, "they can do everything from one account."


Why doesn’t everyone do it?

Inside the United States, the clearing system still functions roughly the same way it did in the 1970s, a time when banks exchanged sacks of checks and used a virtually extinct programming language called COBOL.

The American Clearing House (ACH) wants same-day service, but a bank vote in 2012 fell short of the needed majority. The reasoning: Processing offices would have to staff longer hours for payments later than 15:00. It was certainly not for lack of consumer or corporate interest, which nearly all banks in a recent Glenbrook survey acknowledged was not an issue.

The majority of respondents (67%) saw opposition over operational demands as the most important obstacle. Banks argue that with around 8,000 banking institutions in the U.S., it would take too long and be too expensive to change the operating systems.

After the 6,825 banks in the EU comply with SEPA in February, and the other five SEPA countries by 2016, it will be easier to assess the costs and benefits.

Other Glenbrook respondents (28%) saw losses through the "cannibalization of existing revenues" as a major obstacle.  For SEPA banks, the efficiency gained is expected to cover any lost fees.

And the benefits? A lot of happy customers who get their money on time.

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