If you do your banking online, manage your own investments or send money to kids in college across the country, you know how electronic bank transfers work, right? You call your bank or use your online "bill pay" service, tell your bank to send money to another bank and it's there the next day. Actually, it is easy--but it's a bit more involved than clicking a mouse.
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In the old days, transfers between banks travelled in canvas bags, transferred by armed guards, first by stagecoach, then by armoured car. After the establishment of the Federal Reserve System, "Fed" district banks served as clearinghouses. A lot of money movement still happens this way but more and more transfers are being made electronically. Electronic transfers, like physical transfers, must be backed up by the bank's assets, either at the bank or on deposit with the Fed.
Money does not fly through the air. Your bank contacts another bank electronically using the web. Each bank has a "handshake" certificate, using a combination of encryption keys to protect the communication. The transaction is completed and that's it. The complexities are in the "handshakes"--keys and certificates used by financial institutions. Banks transfer funds for account holders and investors every day without anyone handling a greenback. Electronic transfers can be posted the same day or may take two to three days, depending on the accounting procedures of the participating banks.
Electronic transfers have significantly shortened transfer time. Since the transfer of money is direct instead of using an instrument (such as a personal or cashier's check) to complete it, the time needed to verify the transfer is the time it takes for the participating institutions to complete the electronic handshake. By eliminating the handling and verification of paper instruments, you can get Suzy's book money to her in an afternoon instead of a week.
In truth, banks have always transmitted funds between themselves fairly quickly, first by telegraph, then by telephone. The benefit of modern electronic transfers is that it widens the "customer base" to include the people who use the banks. When we sit down to the computer to do a little shopping or pay a few bills, we're using electronic bank transfers and saving the time and paper it takes to send a check or call with a credit card. The advent of electronic banking has made conveniences like ATMs, point-of-sale and debit cards possible that were unheard of just a few years ago.
Money should not take three to four days to transfer electronically. Merchants (or other banks) who have a "direct electronic relationship" with a bank can post payments immediately but those who do not must often wait to get a check by mail. Check when you pay bills online to see how long it takes to post a payment. Periods longer than same-day by a certain time no doubt do not have a direct electronic relationship with your bank (or a larger bank that is an affiliate). Longer periods may also be the result of the creditor's own internal organisation, too.
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