How does an online transaction work?

Maybe you’re a fan of technology and always wondered about the process behind online transactions (or exactly what the associated fees pay for), or maybe you’re skeptical of the “invisible pipes” that carry our money. Either way, you’ve most certainly used them.

Alex Bloomberg and David Kestenbaum of NPR’s Planet Money reported on the basics of online transactions back in 2013 when they became curious why the process took so long. Five years later, we’re curious. Has anything changed? Does it still take three to five days to complete a transaction? Let’s find out.

Online Transaction Basics: A brief history.

Imagine it’s 1970. Your electric bill is due. You write out a check, drop it in the mail, and wait.

According to Burt Harkins, Senior Vice President with Fiserve, sending money back then required a lot of manual labor. “The banks would physically exchange bags of checks. If they weren’t banks in the same physical location, if you had banks in different regions of the country, then you literally were flying bags of checks from one end of the country to the other to do that exchange. In major metropolitan areas there were set locations which were often just sort of parking lots in secured areas where literally, trucks would back up to one another from each individual major financial institution, and they would pass bags of checks back and forth.”

Of course this was a tremendous hassle for consumers and banks. So, in 1974, Automated Clearing House (ACH) Associations from California, Georgia, New England and the Upper Midwest region established NACHA within the American Bankers Association. The developed a cutting-edge solution to the problem of physical handling of paper checks.

They decided to eliminate each bank having to find a way to meet up with other banks in parking lots to exchange checks. They did this by setting up a central clearinghouse where all these transactions happen at once. And to help facilitate all these transactions, they used a magical new technology called computers. No longer would banks send bags of checks to this clearinghouse. Instead, they send magnetic computer tapes. Each bank sends in a tape and on the tape will be instructions like, “Send $100 to this John Smith at this bank. Send $200 to Jane Doe at this bank.”

The clearinghouse functions similarly to a Post Office sorting all the mail. The clearinghouse gathers up all the transactions destined for a particular bank, puts that on a tape, and then the bank picks up the tape.

Now, instead of in-person meetings to exchange bags of paper checks we have magnetic tapes getting shipped back and forth between banks around the country and these central clearinghouses. Instead of using paper to carry necessary transaction information, like with checks, ACH Network transactions are transmitted electronically. This offers faster processing times and cost savings. What an upgrade!

And that’s pretty much the system we have today. Although today there are no more tapes. Everything is connected by wires. Yet, it still works the same way. Everything is done in batches. That’s why if your request comes in too late, it doesn’t happen until the next day. NACHA and the ACH Network are one of the main ways money is moved in the US. They move $43 trillion each year. That’s more than 25 billion electronic financial transactions.

All of this is handled by a row of big, tall computers with information being spit out on monitors in a classified location. The servers that handle the US’s online transactions move billions of dollars every day. Keep in mind what today may look like a fairly slow system was a quantum leap forward compared to its predecessor.

What happens after you click "send?"

If you want to pay a bill or send money to friends these days you’ve got even more options. You can use an app like Venmo, use Zelle, or even send money through your favorite messaging app, like iOS’ Messages or Facebook Messenger. Of course, peer-to-peer payment options and messenger-based payments haven’t replaced the ACH Network.

In fact, according to former Federal Reserve employee Elizabeth McQuery, “ACH has given itself a multi-year period to adapt to the changes. And now, what we’re seeing is the final leg of this transition, and that is to require that the receiving institution makes those funds available to you as the consumer by 5:00 p.m. so that it’s truly the same day payment to you as the receiver of the payment.”

In other words, in just a couple of months, you will finally be able to move money from one bank to another on the same day. Just not on holidays or weekends.