Episode 489: The Invisible Plumbing Of Our Economy
DAVID KESTENBAUM, HOST:
When we started the Planet Money T-shirt project, we wrote down on this big whiteboard all of the stories we thought we would do so that when you get your shirt, you will know the story of its creation. And the list included the things you would expect like who grows the cotton, who makes the thread, who is the captain of the containership? The story today, it was not on that list.
ALEX BLUMBERG, HOST:
We stumbled on this story after our Kickstarter campaign ended. So most listeners remember, we're making this T-shirt that tells the story of its own creation. And we essentially pre-sold the T-shirt on Kickstarter. And lots of you bought a T-shirt. We raised a lot of money, over $500,000.
KESTENBAUM: And the first step in this project was to take all that money that you sent us and just transfer it from one place to another.
BLUMBERG: And it's just a bunch of numbers going from one bank account to another. It took five days. Now, maybe that's not surprising. I mean, you see this periodically, it'll take 3 to 5 days for this transaction to complete or 5 to 7 business days. But think about that, five days. Why does it take five days? What is happening after you click send?
KESTENBAUM: It's not like we're sending money from some community bank in the United States to a factory in Indonesia. We were moving it between two of the largest, most wired institutions in the world.
BLUMBERG: The money that we collected on Kickstarter, it turns out it's handled by Amazon.com, Amazon of we can send you anything in a day - that Amazon. The money was in an Amazon payments account.
KESTENBAUM: And we were sending the money to a checking account at Chase Bank, right? And Chase is one of the largest banks in the world.
BLUMBERG: Now, I regularly order diapers from Amazon and have them delivered to my door, physical diapers, a huge, big box, the next day - diapers brought to me. Sending money electronically from an Internet company to one of the largest banks in the world took five days. Hello, and welcome to PLANET MONEY. I'm Alex Blumberg.
KESTENBAUM: And I'm David Kestenbaum. Today on the show, the invisible pipes that carry money from one place to another and why, oh, why they are so slow.
(SOUNDBITE OF SONG, "COUNTDOWN")
THE BLACK KEYS: (Singing) Well, it's one, two, three, four, five, six, seven, eight, nine.
KESTENBAUM: This question of why it can take so long to send money from one place to another, it's a serious question.
BLUMBERG: And the slowness, I think we'll just say up front, it irks me more than it irks you. And I think part of the reason that I'm irked by it is that I can relate - that I have been burned by the slowness.
BLUMBERG: Right? I'm not as good a planner as you. And so sometimes I'll transfer money to my account, think it's there, pay a bill, and then it won't be there and I'll get hit with a late fee. I think that happens a lot. And especially if you're paycheck to paycheck, you're being penalized by the slowness of the system. And nothing else about our life online is this slow.
KESTENBAUM: My first thought, you know, about why it was so slow is that, look, we were transferring a lot of money, a lot of money for us, you know, over $500,000. And it was going into this little regular checking account. It wasn't a business account or anything. So I thought, you know, maybe sensibly it got a little extra scrutiny and that is why it took so long. So to test if that was the case, we tried a second transfer. We tried to send just $10 the reverse direction.
BLUMBERG: From Chase to Amazon. And this transfer took even longer - eight days.
KESTENBAUM: So we did the logical thing, we called up Chase and Amazon. Amazon first.
(SOUNDBITE OF MUSIC)
BLUMBERG: All right, we're on hold, and I'm recording. And we're listening to...
KRISTYN: Amazon Payments, this is Kristyn (ph). May I have your name please?
BLUMBERG: My name's Alex Blumberg.
KRISTYN: What can I do to help you today, Alex?
BLUMBERG: Well, I have a question about my Amazon Payments account. Also, I'm a reporter for NPR, National Public Radio, and I'm recording this for possible broadcast. So my question is I have an Amazon Payments account that was associated...
KRISTYN: I can't answer questions if it's being recorded.
BLUMBERG: You can't answer questions if it's being recorded?
BLUMBERG: Is there any way to get permission to answer the questions if they're being recorded?
KESTENBAUM: We also tried Chase.
COMPUTER GENERATED VOICE: Your call may be monitored or recorded for quality purposes.
LADITA BAKER: Thank you for calling Chase. My name is Ladita Baker (ph). Can I get your first and last name please?
BLUMBERG: Yeah, my name is Alex Blumberg. I have a question about my Chase account.
BLUMBERG: And I'm also a reporter for NPR. I'm recording this call for possible broadcast.
BAKER: OK, for possible broadcast.
BLUMBERG: Yeah, I have a question about my account and it involves Amazon Payments.
BAKER: It involves Enron payments?
BLUMBERG: No, no, Amazon - amazon.com
BAKER: Oh, I was going to say Enron was a long time ago.
BLUMBERG: (Laughter) I like where your brain went, though.
KESTENBAUM: Alex, we were able to learn that our money got sent through something called the ACH system, which stands for Automated Clearinghouse. But what exactly that was, how it operated, why it was so slow, it was surprisingly hard to get people to talk to us on the record about it. Chase and Amazon both declined to make anyone available and would only answer questions over email. When I did get someone on the phone to ask about this, they'd say, why are you doing this story?
I couldn't tell if they were hiding something or just embarrassed or if just they were so used to the system, it didn't seem weird to them.
BLUMBERG: And often, the answers only lead to more questions. For example, we found someone who used to work at the Federal Reserve, which runs part of the system that handles these electronic payments, part of this ACH system.
BLUMBERG: Her name's Elizabeth McQuerry. And we asked what we thought was a simple question. What does this system even look like?
ELIZABETH MCQUERRY: It's a row of machines (laughter). Big, tall computers with information being spit out on monitors.
MCQUERRY: Those are classified.
KESTENBAUM: You can't tell me where they are?
BLUMBERG: Can you say which state they're in?
MCQUERRY: You have to realize that those machines, those servers are moving billions of dollars every day. So it's well protected where those systems are.
KESTENBAUM: Can you tell us what state though?
MCQUERRY: I don't think I can.
BLUMBERG: Another question I thought would be simple but wasn't - what is the deal with weekends? Amazon and Chase both told us that part of the reason it took so long to transfer our money was that there was a weekend in there. And you see this all the time in online banking and bill payment. It'll take 3 to 5 business days or 5 to 7 business days. It's always business days. But if you think about it, why should that matter? I mean, I can look at my account online on weekends. I can even go to the bank on weekends.
So why does this system, the ACH system, close down on weekends?
MCQUERRY: At some point, ACH does cut off its operating hours. It more or less has bankers' hours.
BLUMBERG: And let me just pause there. So this is - when you talk about the ACH, you said the ACH takes bankers' hours. Are we talking about people or are we talking about machines?
MCQUERRY: We're pretty much talking about machines.
BLUMBERG: So if we're talking about machines, why do they need to take bankers' hours?
MCQUERRY: That's a good question.
BLUMBERG: Do you have any answer?
MCQUERRY: I think you have to really - you have to think of it as a system that was conceived and implemented in the 1970s.
KESTENBAUM: The 1970s - 40 years ago. This piece of financial plumbing, it is 40 years old. That's the reason it's so slow. It's old.
BLUMBERG: The system was designed long before anything like Amazon.com existed, long before the internet existed. It was born in the days when the way to send money was with a paper check.
KESTENBAUM: So let's imagine the way people made payments back before anything was electronic, before the system got built, right? So, for example, an electricity bill, right? Say it's 1970, I want to pay my electricity bill. I get out my check book, I write out a check to the power company for, say, $20.16. I put the check in the mail. The post office delivers the check to the power company.
BLUMBERG: But that's not the end. The power company's bank then makes a note in its ledgers, check for 20.16 received. But it still doesn't have the actual money. To get the money, it needs to send that same paper check back to your bank, Dave, so your bank can say, yes, this is from our customer, 1970 Dave Kestenbaum. Yes, he has $20.16 in his account. And this exchange of paper checks between these two banks had to happen with every check that was written. And it wasn't something that could happen through the mail, even.
BERT HARKINS: The exchange of the paper check had to happen physically between two financial institutions.
KESTENBAUM: Bert Harkins is senior vice president with a company called Fiserv, which provides technology to financial institutions. He says sending money back then took a lot of manual labor.
HARKINS: 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.
KESTENBAUM: It's funny to think that now.
HARKINS: 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.
BLUMBERG: And at the very end of this whole process, Dave, your 1970 bank takes your 1970 check, which it's gotten back from the electric company, and it mails it back to you.
KESTENBAUM: Oh, the stories that little check could tell of its voyage. First, a nice postman took me to the electric company, then I went to their bank, then I got put in a bag, then I got handed off in a parking lot to our bank, then I got put in the mail again and now I'm home.
BLUMBERG: And that is the way it worked for everyone, private individuals like you paying their bills but also enormous institutions, huge companies that had to pay their employees. They did it by check - paycheck. The Social Security Administration sending out millions of checks, paper checks.
KESTENBAUM: So that was the problem. The solution to that problem led to the system we have today. And the solution was, look, we're going to get rid of that really annoying thing where every bank has to find a way to meet up with other banks in parking lots to exchange checks. I mean, think about it, if I'm the bank of David, I have to meet up with the bank of Alex to exchange checks. Maybe I also have to go meet up with another bank at another location that's in another state. It's a lot of meetings and it just doesn't make any sense.
BLUMBERG: So, they said, let's just get rid of all these random meetings between individual banks at different locations and let's set up a central clearinghouse where all these transactions happen at once. And to help facilitate all these transactions, we're going to use this magical new technology, computers. And banks will not be sending bags of checks to this clearinghouse. Instead, they're going to be sending magnetic computer tapes.
KESTENBAUM: And the tapes - each bank will send in a tape. And on the tape it'll say, send 100 bucks to this guy at this bank, send 200 bucks to this guy at this bank. And the clearinghouse, you can think of it sort of like, you know, a post office. Like, it's sorting all the mail. It gathers up all the transactions destined for a particular bank, puts that on a tape and then the bank picks that up.
BLUMBERG: So magnetic tapes getting shipped back
BLUMBERG: back and forth between banks around the country and the essential clearinghouses. That was the upgrade.
HARKINS: What today looks like a fairly slow process, when it was - when this sort of came online was a huge leap forward from what they were doing.
KESTENBAUM: So you could get paid without any paper being involved, really.
HARKINS: That's correct.
KESTENBAUM: Well, when you put it that way, it seems like an exciting development.
BLUMBERG: And the technology to do all this processing kept getting better. Over the years, computers got faster, smaller. Here's a computer ad from 1977.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED MAN: You're looking at a small, portable computer called the IBM 5100. It weighs about 50 pounds. You can plug it in anywhere.
KESTENBAUM: A 50-pound laptop (laughter).
BLUMBERG: Our definition of portable has definitely changed. But you can plug it in anywhere.
KESTENBAUM: Eventually, we get to the Internet. And this system for moving cash, what happens to it? Nothing, basically nothing. It doesn't use magnetic tapes today, but it still acts as if it did.
BLUMBERG: All right, so as far as we can tell, here is what happened to our T-shirt money when we tried to transfer it. At 8:03 p.m. on a Thursday, I clicked a button on a computer screen sending a request to amazon.com to transfer the money to our bank account at Chase Bank.
KESTENBAUM: The request goes to Amazon, and it sits there because as Amazon wrote to us in an email, it arrived, quote, "after our last batch for Thursday processing was transmitted."
BLUMBERG: Now, in the old days, I get this. The banks had to gather all these requests to send money and then put them on a magnetic tape and send them out at the end of the day. So if a request comes in too late, it makes sense, you're out of luck. You have to wait 'til the next day when the next tape goes out. But today, there is no tape, right? It's all connected by wires, and yet this is still the way it works. Your request comes in too late, it doesn't happen 'til the next day. Everything is done in batches.
KESTENBAUM: So our request made it to Amazon's bank the following day, which was Friday. From there, it got sent to one of the major sorting centers. You can imagine those big rows of computers in a secret location that Elizabeth McQuery described. There are two of these clearing houses. One is run by the Fed. The other is run by a collection of banks.
BLUMBERG: But now we're at Saturday. It's a weekend. So nothing happens, following day, Sunday, also a weekend. Nothing happens. Monday, according to Amazon, our money arrived at Chase Bank at 7:05 in the morning, but it didn't actually appear in our account until Tuesday, maybe because Monday was a holiday, Memorial Day.
KESTENBAUM: But Tuesday it's finally in your account. I mean, imagine if email worked this way, right? You send an email Thursday evening. It doesn't arrive until Tuesday.
BLUMBERG: And even these big secret sorting computers that run this ACH system are in some ways stuck in the past. Bert Harkins, the payments consultant, says the systems that they use are all based on a nearly extinct programming language called COBOL.
HARKINS: You know, we're in Atlanta, and it's hard to find graduates from Georgia Tech who know COBOL.
BLUMBERG: It's like knowing Latin?
HARKINS: (Laughter). Yeah.
KESTENBAUM: This is the system that carried the T-shirt money based on a time when we used to exchange checks in parking lots and built with the programming language that no one knows anymore. And this is one of the major ways that money gets sent around the United States. According to the electronic payments association called NACHA. In 2012, there were 21 billion transactions - total value $36.9 trillion.
BLUMBERG: And, Dave, the more I learned about this, as you know, the more crazy it drove me because it's not like you can't upgrade the system. I mean, I have proof that you can buy. My proof? The country of England. Chris Dunne lives there.
CHRIS DUNNE: People absolutely, definitely were very irked by the fact it took three days to move money around. You had exactly the same reaction as you to say I'm sending money from this bank here to that bank there. They are big institutions. They have lots of wires in technology. Why is it taking three days? It would be faster for me to take the money out of an ATM, walk it around to the other bank and give it to them.
BLUMBERG: (Laughter) Right.
C. DUNNE: And that was definitely a feeling that people had. It's like just give me the money. I'll put in an envelope. I'll walk it down the road. It's faster.
KESTENBAUM: And so with a push from the British government, the banks there agreed to update the system Vocalink, the company that Chris works for, runs it now. It costs pennies per transaction, he says, and it's fast.
C. DUNNE: It takes literally seconds - 15 seconds end to end.
BLUMBERG: So in the U.S., it took five days to send the T-shirt money. In the U.K., you could do it in seconds. As it turns out, there's a limit of about $150,000 per transfer in the British system, so we'd have to do it as four transfers, but still seconds.
KESTENBAUM: Chris says businesses really like this system, and his daughter really likes the system. She's in college, and she sometimes runs out of cash.
C. DUNNE: I actually regularly get the phone call saying can you send me some money? And I can just hit the button, and the money will be with her in literally a matter of seconds.
KESTENBAUM: And you're muttering under your breath I should have never put the system in place in the first place.
C. DUNNE: Well, it does make it very easy. It takes all that friction away. I couldn't possibly get it. Can't you borrow it from somebody else? No, you - unfortunately, you're on the hook 24 by 7 by 365. So there are downsides as well as upsides.
BLUMBERG: And nobody but yourself to blame.
C. DUNNE: Indeed.
KESTENBAUM: For the sake of demonstration, can you send her a few pounds now?
C. DUNNE: Interestingly enough, she's actually sitting in New York at the moment. If I can get my iPhone, I will - there it is. So - right. OK. So at the moment I'm looking at my bank account. It tells me what my balance is. I hit payments. Pay a person or bill. And it's just bringing up lists. And I go - I seem to pay an awful lot of people. And there she is.
KESTENBAUM: So what's your daughter's name?
C. DUNNE: Jessica. So I will send her - how
C. DUNNE: much does a beer cost in New York?
BLUMBERG: Better send 10 bucks just to be safe.
C. DUNNE: OK.
KESTENBAUM: That'll cover the tip.
C. DUNNE: Cool. I'll send her 10 quid then. So I hit the button that says pay - says are you sure you want to pay 10 pounds? Which is actually a useful check because if I just made that accidentally a thousand pounds, I don't want that to go winging out. And there is a point here about faster payments in that it goes immediately, and it's irrevocable. It says are you sure you want to pay 10 pounds? It says OK. I hit the button one moment please. There we go. I have a tick. It says 10 pound payment send and her bank balance will now be 10 pounds slightly higher, and she will wonder what on Earth I'm doing sending her 10 quid.
KESTENBAUM: After we hung up with Chris Dunne, we, of course, call his daughter.
JESSICA DUNNE: Oh, hi.
KESTENBAUM: How are you?
J. DUNNE: I'm good, thank you. How are you?
KESTENBAUM: Did your dad tell you we might be calling?
J. DUNNE: Yeah, he filled me in on everything, so...
KESTENBAUM: Did you get the money he sent?
J. DUNNE: Yeah, he sent some pounds over. I got it pretty much straight away.
KESTENBAUM: It's very convenient.
J. DUNNE: Yeah, no, it's pretty good.
KESTENBAUM: We asked Jessica if she was going to use it to buy a beer. She said no, probably something really boring instead like a subway card.
BLUMBERG: There are individual banks in the United States that have systems like this. For example, at my bank, Chase, has a thing called Popmoney where you basically can send money instantaneously to other Chase customers. But you can't send instant money to people with accounts at other banks.
KESTENBAUM: It turns out the U.S. has been thinking about building something more comprehensive like what they have in the U.K. Chris Dunne told us that people from the Fed have come over to talk to him. And just last year, the banks in the United States here held a big vote on this question, should we move to a faster system with - I know this isn't going to be enough for you, Alex, same-day service, meaning send it in the morning, it could be there by the end of the day.
KESTENBAUM: Here's Elizabeth McQuerry, who used to work at the Fed.
MCQUERRY: Not necessarily a real-time system where you could have the money instantaneously. This was sort of a transition to something faster.
KESTENBAUM: Slightly faster.
MCQUERRY: (Laughter) Yes...
KESTENBAUM: But still not really fast.
MCQUERRY: But still not really fast, exactly. And the banking community voted it down.
KESTENBAUM: Voted it down. The vote was close. But the way the ACH governance system works, you need a supermajority of at least 75 percent to vote yes. We do not know the exact tally. It's not public. But we do know that more than half voted yes, but not enough to cross the 75 percent line. Elizabeth McQuerry says there were concerns about fraud and also that it would just be this major overhaul.
MCQUERRY: Many of these community banks, they actually close their processing back office at 3 pm in the afternoon, even before the bank's front lobby is closed. And so they would have to staff in order to be able to receive these payments later in the day.
KESTENBAUM: Alex, you know I am not as irked by the slowness of the system as you are.
BLUMBERG: I know. In fact, I'm irked that you're not as irked.
KESTENBAUM: But I mean, these reasons they make some sense to me, right? I mean, the U.S. has far more banks than the U.K. The U.K. has under 200 banks. The U.S. has something like 7,000 in all these different states, each with their own computer and their own people who know the ACH system. And you could argue look, if customers are OK with the system we have and it works, then great. You know, we built this pipe in the '70s. We built a good pipe. It still works today. Why spend a bunch of money to replace it with something fancier?
BLUMBERG: You could have said this at any point in history. The cart and buggy works fine. Why do we need a car?
KESTENBAUM: What about the Concorde? Turns out we don't actually need to fly that fast.
BLUMBERG: Yeah, but this isn't some boutique product we're talking about. The entire world is moving at the speed of sound.
KESTENBAUM: All right.
BLUMBERG: And the only thing that isn't is the U.S. banking system.
KESTENBAUM: It's the speed of light, man.
BLUMBERG: (Laughter) It's - right. It'd be one thing if we had the slow system simply because people think it suits their needs. But, you know, there may be something else more going on here. There was a survey done by this consulting firm called Glenbrook, which Elizabeth McQuerry now works for. It was a survey of a bunch of people in this online payments world. And they were asked, what do you think is the most important obstacle to implementing faster payments? Most respondents said what Elizabeth said, that it would be a hassle to switch to this new system, it'd be costly. But 20 percent of the respondents, a big group, cited a different reason. They thought the biggest obstacle was, quote, "financial institution opposition due to cannibalization of existing revenue."
KESTENBAUM: In other words, if we upgrade the ACH, it will compete with things like wire transfers, which are fast but pretty expensive.
BLUMBERG: And I actually can tell you exactly how expensive because there's a last part to the story of our Kickstarter money. After we transferred it to our Chase account, we had to transfer it to an NPR bank account. And it turns out the only way to do that was using a wire transfer. The cost - $30, $30 for sending data over a wire.
(SOUNDBITE OF SONG, "COUNTDOWN")
THE BLACK KEYS: (Singing) Countdown times I tried to, tried to make you mine. Well, my heart goes...
BLUMBERG: As always, we'd love to receive your data over a wire. Send us your thoughts, questions, comments to firstname.lastname@example.org.
KESTENBAUM: You can also find us on Facebook, Twitter and Spotify. I'm David Kestenbaum.
BLUMBERG: And I'm Alex Blumberg. Thanks for listening.
(SOUNDBITE OF SONG, "COUNTDOWN")
THE BLACK KEYS: (Singing) Every time you breathe. Well, you said you loved me till death took you home. But you stayed out late always doing me wrong, crying out. Stayed out late always, and always doing, always doing me wrong.
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