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A thing not widely understood by either consumers or even most people working in finance: the standard US checking account is a credit product.
(Even if overdrafts are turned off.)
(Even if overdrafts are turned off.)
“Why?”
The holder of a checking account gets constructive access to money from their bank while there is some risk that the bank will not itself durably receive that payment.
That creates credit risk.
The holder of a checking account gets constructive access to money from their bank while there is some risk that the bank will not itself durably receive that payment.
That creates credit risk.
“Diagram that out for me in practice.”
Day 0: Bank balance of $5k. Receive $10k ACH push.
Day 2: Bank updates available balance to $15k.
Day 12: wire $7k out to buy a car. Available balance $8k.
Day 37: Bank receives ACH return saying the ACH push was not authorized. Balance -2k
Day 0: Bank balance of $5k. Receive $10k ACH push.
Day 2: Bank updates available balance to $15k.
Day 12: wire $7k out to buy a car. Available balance $8k.
Day 37: Bank receives ACH return saying the ACH push was not authorized. Balance -2k
“This seems like a silly edge case.”
This is one of the most important facts for financial access in the US, because the difficulty of making an “overdraft proof” checking account made banks use Chexsystems to manage checking account credit risk.
This is one of the most important facts for financial access in the US, because the difficulty of making an “overdraft proof” checking account made banks use Chexsystems to manage checking account credit risk.
Chexsystem functions as a de facto blacklist for opening up new checking accounts, and the dominant way to get listed is to have transitory cash flow crunch and then be unable to resolve it to bank’s satisfaction.
After you hit that state, which is not uncommon for e.g. poor people, it is disproportionately hard to get out of it, because your lack of access to banking system will start to cost you money and opportunities, and lack of access tends to compound (similar to access itself).
Many people have asked me “Is this because settlement isn’t instant?” and the answer is “Nope, probably not.”
Consider the case where X and Y both bank with BigBank. X pays Y $5k. Internally this is effectively instant for BigBank; Y may get instant access or 2 days later.
Consider the case where X and Y both bank with BigBank. X pays Y $5k. Internally this is effectively instant for BigBank; Y may get instant access or 2 days later.
Can that payment be reversed? *YES.*
There are many reasons that could happen, even if X appeared to have the money when the payment was made.
One is “Hello I am X’s divorce attorney. The money was dissipated in violation of this court order. Gonna need that back; thanks.”
There are many reasons that could happen, even if X appeared to have the money when the payment was made.
One is “Hello I am X’s divorce attorney. The money was dissipated in violation of this court order. Gonna need that back; thanks.”
“Hello I am X. I have no knowledge of this Y person; how did my money end up going to them? Via a transfer at online banking? What? No; give me the money back.”
“Hello this is your regulator. X called. Give them their money back.”
“Hello this is the FBI. Bad news re: X...”
“Hello this is your regulator. X called. Give them their money back.”
“Hello this is the FBI. Bad news re: X...”
“Hello this is IT. So, um, a funny thing about the Z account, which you may be under the misapprehension existed as the X account for a few hours on Tuesday.”
“Hello this is Ops. So, um, X and Q are both letters on a keyboard. Do you see where this is going?”
“Hello this is Ops. So, um, X and Q are both letters on a keyboard. Do you see where this is going?”
