The Plumbing of the US Financial System
The What, Why, and How of Electronic Money Movement
Every day, around $300 Billion dollars changes hands in US markets – 100% electronically and completely behind the scenes. This system of financial “plumbing,” includes ACH transfers, wire transfers, and trade settlements and is fundamental to the steady flow of money through our economy. Understanding the evolution and functioning of these systems provides insight into how financial operations have adapted to technological advancements and regulatory changes over time (not to mention helping individuals understand just what the heck is going on when our money appears to teleport from one place to another).
ACH Transfers: The Backbone of Everyday Transactions
Automated Clearing House (ACH) transfers are a system designed for processing payments in batches. Established all the way back in the 1970s by a consortium of regional banking associations, the ACH network was a response to the growing volume of checks and the need for a more efficient electronic system. ACH transfers accommodate a range of payment types, from payroll deposits to recurring bill payments.
If you are moving money to and from an investment account, it is almost certainly an ACH transfer. These transfers are secure and reliable, using many of the same principles developed all the way back in the 1970s. However, as a result of grouping individual transactions into larger “batches,” the system is also relatively slow. Depending on when a transaction occurs some may go through in just one day, while others may take up to 3.
Wire Transfers: High Speed and High Stakes
Compared to ACH, Wire transfers provide a faster, though generally more costly, method of moving money. Originating with the telegraph’s invention in the 19th century, the concept of wire transfers has evolved significantly. Initially, messages about money transfers were sent via Morse code. Today, wire transfers involve the electronic movement of funds across a network of banks or transfer services, with the capability to move large sums of money across the globe within hours. The speed and security of wire transfers make them a preferred method for high-value transactions in modern finance, although that convenience almost always comes with an additional $20 fee.
Trade Settlements: The Evolution of Market Infrastructure
Trade settlements - the process of exchanging payment for securities - have undergone substantial transformation, particularly influenced by technological advancements and regulatory changes in recent years. For many years, when you sold a stock, the expectation was that it would take 3 business days to settle the transaction (“T+3”). T+3 was standard for many years until 2017 when the SEC shortened the cycle to “T+2” to reduce market risk and improve efficiency. In a significant move towards further reducing settlement risk and increasing efficiency, the financial industry is now shifting toward a “T+1” settlement cycle. This change means that trades will be settled just one day after they are made, a development that is expected to enhance liquidity and further reduce risk. Innovations in electronic trading platforms and digital ledger technologies continue to drive the momentum towards faster, more secure settlements, potentially revolutionizing how transactions are processed again in the near future.
The Future of Financial Transactions
As the financial landscape continues to transform, the systems that support the movement of money will need to adapt, ensuring they can handle the demands of an increasingly fast-paced, globalized economy. The history of these systems is not just a story about technological advancement but a reflection of the economic and societal shifts as well. As financial advisors, we are committed to guiding you through these transitions, ensuring that you stay well-informed and prepared to navigate any and all changes in how we manage, move, and secure money both now, and into the future.
Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten
