Challenger banks have a few advantages over traditional banks. Two of them are speed and costs. These fintech startups process transactions faster than traditional banks. And they have lower operating costs. This is partially because they use the cloud to process transactions, rather than older mainframes. And now, bank technology startup ClearBank is developing faster and cheaper processing technology for clearing.
Clearing banks process the transactions between banks. When you deposit a check at the bank, the bank doesn’t withdraw the money from the bank that issued the check immediately. Instead, the other bank sends the payment to a clearing bank first. The clearing bank checks to see if the transaction is valid. If it is, then it sends the payment to your bank. By using a clearing bank, your bank can protect itself from cashing fraudulent checks.
Clearing banks, or clearing houses, have automated payment processing systems. So these transactions are called ACH, or automated clearing house, payments. Banks don’t process each payment immediately, they process them in batches. So at a specific time such as the end of the work day, the automated clearing house processes all of the payments it’s received. Then it does the same thing the next day.
ACH and Wire Transfers
The clearing bank only processes transactions at scheduled times when it’s open. So if the bank closes at 5 PM and you deposit a check at 6 PM, the bank can’t process the check immediately. It might still let you spend part of the money if you’re a good customer, but the check itself hasn’t cleared. And if you deposit the check on a Friday, the clearing house might not process it until the next Monday. While ACH payments are relatively slow, they’re also one of the least expensive ways to transfer money.
Banks can also transfer money to other banks directly using real-time gross settlement systems. The payments sent by these systems are called wire transfers. The US system is called Fedwire because it’s managed by Federal Reserve member banks. The other bank receives the payment immediately when a bank sends a wire transfer. But banks charge their customers additional fees for sending them. I’ve done it before and if I recall correctly the wire transfer fee was around $35. These transfers are meant for important bills that have to be paid immediately. For regular transactions, banks use the slower ACH system.
Clearing and the Cloud
ClearBank is a clearing bank that uses the cloud to process payments. So it can clear transactions in real time, unlike other clearing banks that use mainframes to process batches of transactions. It can accept a payment from a third-party bank, quickly check if it’s valid, and then immediately send the payment to the receiving bank. It’s like sending instant ACH payments to the other bank.
And if the sending bank and the receiving bank are both using cloud systems themselves, they can clear a transaction immediately if they want to. They don’t need to wait for a scheduled batch processing time. But banks often hold payments for a day or so anyway because they’re concerned about cashing a fraudulent check. This process is separate from the validity check performed by the clearing bank.
Preventing Conflicts of Interest
ClearBank doesn’t just help banks send checks to each other more quickly. It’s also less interested in competing with them. Many of the banks that provide clearing services are large banks that also accept customer deposits. So if a small bank has to send its payments to a clearing house to protect itself against fraud, it might be concerned that a larger bank can track those payments. The big bank might analyze the payment details so it can steal the small bank’s customers.
But ClearBank doesn’t offer deposit accounts itself. Unlike other challenger banks and neobanks, it doesn’t offer a brightly colored debit card to consumers. It’s solely a B2B services company that provides clearing services to third-party banks. And it’s competing with four other clearing banks in Britain that also provide clearing services.
This challenger bank doesn’t accept deposits or market to consumers. But it could have a larger impact on consumer banking than many challenger banks that do. By providing real-time clearing services, it can help low-income bank customers rapidly access any funds they receive. So these depositors will have less need to take out high-interest short-term loans. And they’ll also be more pleased with their banks and credit unions, who will appreciate ClearBank’s services in turn.