Q&A: Where do bank payments go overnight?

Unlike physical cash, it's impossible to keep an eye on what's happening to your digital dollars.
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Unlike physical cash, it's impossible to keep an eye on what's happening to your digital dollars.

Sometimes the recipient of a bank payment gets the cash immediately. Sometimes it takes an hour. Sometimes it doesn't appear until the following morning, or even days later.

What's with the variation? Where does the money go in the meantime? And who's earning the interest?

New Zealand's payment system is a bit confusing. It's also in the middle of some big changes.

With the help of Payments NZ, the Bankers' Association and the Reserve Bank, we've unravelled it for you.

Why don't transfers happen instantly?

Within the same bank, they do.

Your bank can shuffle the ones and zeros of digital money between accounts without involving anyone else.

What about transfers between banks?

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This is where the Reserve Bank gets involved. Think of it as the banks' bank.

Each bank has an account with it.

There's an overnight settlement where each bank works out who owes each other what, based on the flow of their customers' transactions.

Those that need a top-up borrow some cash from the Reserve Bank, or from each other.

Those that have a surplus lend it out overnight, either to another bank or to the Reserve Bank.

A system introduced in 2012 means most payments are now settled during the day.

Is it instant?

No. Banks batch together a bunch of transactions and send them off every hour or so, which gives them time to do security checks and reduce fraud.

They also stop sending payments at night, meaning some won't be processed until the following morning.

What's the cutoff time?

It varies from bank to bank. ANZ and Westpac's deadline is 10pm, ASB 11.30pm, BNZ 11.55pm, and Kiwibank 12am.

I paid in time, but it still didn't transfer on the same day?

Your bank has sent the funds, but the receiving bank may not have cleared them.

Sometimes they deliberately wait to make sure the payment won't be dishonoured.

Different payment types have different timeframes, and bank systems and policies vary.

What happens on weekends or public holidays?

Banks won't send the payment off for settlement until the next business day.

For a payment made after the Friday night cut-off, the funds might not clear on the other end until Tuesday morning.

Who earns the interest in the meantime?

Even though the money appears as if it's gone from your account, it's only your available balance that has actually reduced.

You keep earning interest until it lands with the recipient.

So banks aren't secretly ripping us all off?

Nope.

Is the system secure?

Payment systems can be disrupted, as we saw on Anzac Day a few years ago.

The whole idea behind getting banks to settle payments throughout the day is there isn't such a big volume of transactions building up.

Where to from here?

From November, sending banks will only be able to recall a payment for issues such as error or fraud.

Some banks already do this, but it's not consistent across the industry.

Payments NZ expects the new initiative to make funds available to customers more quickly.

The Reserve Bank is also keen to get banks processing more payments throughout the day, rather than overnight.

 - Stuff

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