Why Do Bank Transfers in Europe Occur in Seconds While They Take Days in the US: Will the US Ever Modernize?

The difference in speed between bank transfers in Europe and the United States is often not due to a lack of modern technology, but rather how different banking systems are structured. While the EU has a semi-integrated banking system, the US relies on the ACH (Automatic Clearing House) system, which is significantly slower. This article will examine the reasons behind these differences and discuss the possibility of modernizing the US banking system.

EU Banking System: A Modern Approach

In the European Union, all banks are semi-integrated through a universal banking system. This means that a bank transfer from one bank to another is similar to transferring funds within the same bank. This streamlined process ensures that the transaction is completed in a matter of seconds. However, this system comes at a high cost to both the banks and the users regarding privacy and operational costs.

US Banking System: The ACH System

In the United States, bank to bank transfers go through the ACH (Automatic Clearing House) system. Every bank collects and bundles all of its transfer requests for the day, and sends them to ACH. ACH then sorts these requests according to the routing number (the bank's ID number) and sends them back to each bank to complete in the morning. This system is significantly slower, as it takes several business days (usually 3) to complete the transaction process.

Could it be done faster? Absolutely. There are several systems in place that allow for instant transfers, such as Zelle and CashApp. However, implementing a system similar to the one in the EU is unlikely in the US.

The EU mandated this speed through a system of enforcement, requiring all banks to align their processes. On the other hand, in the US, the banks are more independent, and they do not like the idea of giving up their control over the flow of funds. Moreover, significant lobbying and political influence have kept the ACH system in place, enabling banks to maintain their cash reserves and their preferred operational methods.

Why Do We Rely on Alternatives in the US?

While bank transfers are widely used in the EU, in the US, we typically rely on other means such as debit cards, credit cards, and bank checks for in-house and high-value transactions. For instance, when purchasing a property, it's common to use checks from a local bank, especially if the seller is a trusted individual. This is partly due to the trust and convenience provided by these alternatives.

The Role of Institutions and Regulations

The regulatory environment and the presence of strong institutions in the EU have played a significant role in the modernization of the banking system. When faced with the challenge of transferring money across different banks and countries, the EU took a proactive approach to ensure that the process was as efficient as possible. They mandated that transactions should be completed within seconds, even if the technology was readily available. In contrast, the US regulatory environment and political landscape have allowed banks to maintain their traditional methods, despite the advancements in technology.

SWIFT Network: Proof of Possibility

The SWIFT network transfers billions of dollars every second, which is proof that the technology for near-instantaneous banking transactions already exists. However, the US banking system, heavily influenced by political and financial interests, has chosen not to fully adopt this technology. The reluctance to change is driven by the banks' desire to maintain control over the money flow and the political clout that enables them to resist modernization.

Conclusion

The difference in speed between bank transfers in Europe and the US is not solely due to a lack of modern technology. It is a result of different regulatory environments, political influences, and the banks' reluctance to change their operational methods. While the EU has successfully implemented a more efficient system, the US banking system is unlikely to modernize anytime soon due to the current political and financial landscape. However, with technological advancements and increasing public demand for faster transactions, there may be a shift toward a more modern approach in the future.