4 ms·

I still haven't understood why credit cards companies need to go through this complex multi-hop "settlement" pipeline that takes almost a day for transactions t

I still haven't understood why credit cards companies need to go through this complex multi-hop "settlement" pipeline that takes almost a day for transactions to get "processed". Is it because some banks still depend on mainframes doing batch processing?

hn_throwaway_99 4y ago
> Is it because some banks still depend on mainframes doing batch processing? Pretty much all banks use mainframes to do batch processing. "SFTP runs the world". I got heavy into fintech a couple years ago, and at first I thought "This is all insane." I was coming from a SaaS world where it's easy to think about transactional guarantees with API calls. I finally "got it" when I realized that pretty much all of our financial system in the US is based on the digitization of manual processes from the 50s and 60s. If you think of how banks worked before computers (e.g. large binders of ledgers that were manually reconciled), that's basically how it still works today, those big binders have just been turned into digital files that are processed by machines. I'm no fan of crypto, but the one place where I can see real utility for blockchain is as a backend settlement service for banks.
- Enginerrrd 4y ago
  >I'm no fan of crypto, but the one place where I can see real utility for blockchain is as a backend settlement service for banks. So... what does the crypto provide there that a simple authenticated communication protocol with a few redundant centralized servers doesn't?
  - csomar 4y ago
    A blockchain will allow all these operators to transact safely. It's really just more secure because it's open (otherwise very quickly compromised). And blockchain tech has shown to be reliable when it comes to up-time and security (if you keep it simple).
    - thematrixturtle 4y ago
      > blockchain tech has shown to be reliable when it comes to security Seriously? You would trust billions of dollars to this? https://web3isgoinggreat.com/?theme=hack https://web3isgoinggreat.com/?theme=hack To be clear, the cryptographic underpinnings of blockchain seem solid, it's just that both implementations and actual usage are by fallible humans. And because everything is irreversible, even if you manage to guard against hackers, you still can straight up incinerate money by (say) mistyping a receiving account number (wallet).
      - doodlesdev 4y ago
        See no mention of Bitcoin or Ether in that page, only centralized shitcoins such as Solana and a few buggy smart contracts. Also, if the system is to be operated by only the banks then transactions _can_ be reversed when needed due to security issues. I don't have a strong opinion whether this is a good option or not, just saying that it's not as absurd as it may seen.
    - cuteboy19 4y ago
      But they are talking about permissioned blockchain which are essentially clearinghouses.
  - hn_throwaway_99 4y ago
    There are large benefits to not relying on a few redundant centralized servers in that case. We have "clearing houses" now, and in most cases they shouldn't be necessary. If you had something like a "permissioned blockchain", any financial institution could easily validate that everything was settled, in real time.
    - yao420 4y ago
      Well someone has to write the code and run the nodes. I’m not on the side of clearing houses but I don’t see the improvement bid switching to a system run by a crypto foundation and a few blockchain validator companies.
- JumpCrisscross 4y ago
  > Pretty much all banks use mainframes to do batch processing. "SFTP runs the world" This isn't an anachronism. Batched net settlement is inherently cheaper than real-time gross settlement. Canonical example: if I send you $10, then you send me $5 and I send you $2, in net settlement, there is a single $7 transaction; with RTGS there are three transactions of $17. The first system not only has lower transaction costs, it also scales better on account of needing less capital. TL; DR If there is a real-time settlement system, it is always possible to build a net settlement system on top of it that's cheaper (albeit slower).
  - sytelus 4y ago
    Why should transaction "cost" anything? It is just running arithmetic instruction on a number in a computer. I would argue batch processing makes no sense. If you send me me $10 and I send you $5 and bank wait for a month to run that batch, you might have already been bankrupt and have nothing to send so somehow you sent me money, I never received it and now everything is in big limbo. Transactions should be instant.
    - JumpCrisscross 4y ago
      > Why should transaction "cost" anything? It is just running arithmetic instruction on a number in a computer. Every dollar that crosses a payments platform has a non-zero chance of creating some combination of legal, regulatory and customer-service costs. Frictionless transactions are as real world as their physics counterpart. > would argue batch processing makes no sense It does, from a deeply fundamental level. The only case where RTGS is equal to net settlement is if we make some Econ 101 assumptions (frictionless transactions, infinite borrowing and lending capacity) together with zero or negative rates. (Even then, one could be a stickler about the cost of computation.) > you might have already been bankrupt Clearinghouses. My point isn't that net settlement or RTGS are inherently better. They're not. But they're fundamentally tied, and net settlement on top of an RTGS rail will always be cheaper in the real world than that same underlying rail. On the cost side, net settlement will win. On immediacy and counterparty risk, RTGS. A strong system offers both options.
- xenadu02 4y ago
  Indeed; check settlement used to be small planes flying the checks to the nearest Federal Reserve every night where all the checks from all member banks would be reconciled and money transferred from the bank where the check was drawn to the bank where it was deposited. Then the checks themselves, having been stamped, would be flown to the originating bank and kept on file. A "bad" check would get stamped and returned to the depositing bank. The bank where you deposited a check would in fact be lending you the amount of the check until the settlement was complete - hence the daily deposit limits and such to limit the bank's exposure.
- crote 4y ago
  Is this still universally the case? The Eurozone has been working on SEPA Instant Credit Transfer for a few years now. It allows transferring of money within 10 seconds, even to a different bank in a different country. The maximum time is 20 seconds in exceptional circumstances. How would this work with batch processing?
toast0 4y ago
Authentication and capture have different processing requirements and availability needs. You want to have 100% uptime for authorize, but correctness isn't strictly required; if you allow too much in charges, you'll probably end up collecting user fees, which is not a negative for the bank. On the other hand, you want exactly once processing for capture, and you don't really need that to have 100% uptime, since the financial industry is built around batch processing.

hn_throwaway_99 4y ago

> Is it because some banks still depend on mainframes doing batch processing? Pretty much all banks use mainframes to do batch processing. "SFTP runs the world". I got heavy into fintech a couple years ago, and at first I thought "This is all insane." I was coming from a SaaS world where it's easy to think about transactional guarantees with API calls. I finally "got it" when I realized that pretty much all of our financial system in the US is based on the digitization of manual processes from the 50s and 60s. If you think of how banks worked before computers (e.g. large binders of ledgers that were manually reconciled), that's basically how it still works today, those big binders have just been turned into digital files that are processed by machines. I'm no fan of crypto, but the one place where I can see real utility for blockchain is as a backend settlement service for banks.

Enginerrrd 4y ago
>I'm no fan of crypto, but the one place where I can see real utility for blockchain is as a backend settlement service for banks. So... what does the crypto provide there that a simple authenticated communication protocol with a few redundant centralized servers doesn't?
- csomar 4y ago
  A blockchain will allow all these operators to transact safely. It's really just more secure because it's open (otherwise very quickly compromised). And blockchain tech has shown to be reliable when it comes to up-time and security (if you keep it simple).
  - thematrixturtle 4y ago
    > blockchain tech has shown to be reliable when it comes to security Seriously? You would trust billions of dollars to this? https://web3isgoinggreat.com/?theme=hack https://web3isgoinggreat.com/?theme=hack To be clear, the cryptographic underpinnings of blockchain seem solid, it's just that both implementations and actual usage are by fallible humans. And because everything is irreversible, even if you manage to guard against hackers, you still can straight up incinerate money by (say) mistyping a receiving account number (wallet).
    - doodlesdev 4y ago
      See no mention of Bitcoin or Ether in that page, only centralized shitcoins such as Solana and a few buggy smart contracts. Also, if the system is to be operated by only the banks then transactions _can_ be reversed when needed due to security issues. I don't have a strong opinion whether this is a good option or not, just saying that it's not as absurd as it may seen.
  - cuteboy19 4y ago
    But they are talking about permissioned blockchain which are essentially clearinghouses.
- hn_throwaway_99 4y ago
  There are large benefits to not relying on a few redundant centralized servers in that case. We have "clearing houses" now, and in most cases they shouldn't be necessary. If you had something like a "permissioned blockchain", any financial institution could easily validate that everything was settled, in real time.
  - yao420 4y ago
    Well someone has to write the code and run the nodes. I’m not on the side of clearing houses but I don’t see the improvement bid switching to a system run by a crypto foundation and a few blockchain validator companies.
JumpCrisscross 4y ago
> Pretty much all banks use mainframes to do batch processing. "SFTP runs the world" This isn't an anachronism. Batched net settlement is inherently cheaper than real-time gross settlement. Canonical example: if I send you $10, then you send me $5 and I send you $2, in net settlement, there is a single $7 transaction; with RTGS there are three transactions of $17. The first system not only has lower transaction costs, it also scales better on account of needing less capital. TL; DR If there is a real-time settlement system, it is always possible to build a net settlement system on top of it that's cheaper (albeit slower).
- sytelus 4y ago
  Why should transaction "cost" anything? It is just running arithmetic instruction on a number in a computer. I would argue batch processing makes no sense. If you send me me $10 and I send you $5 and bank wait for a month to run that batch, you might have already been bankrupt and have nothing to send so somehow you sent me money, I never received it and now everything is in big limbo. Transactions should be instant.
  - JumpCrisscross 4y ago
    > Why should transaction "cost" anything? It is just running arithmetic instruction on a number in a computer. Every dollar that crosses a payments platform has a non-zero chance of creating some combination of legal, regulatory and customer-service costs. Frictionless transactions are as real world as their physics counterpart. > would argue batch processing makes no sense It does, from a deeply fundamental level. The only case where RTGS is equal to net settlement is if we make some Econ 101 assumptions (frictionless transactions, infinite borrowing and lending capacity) together with zero or negative rates. (Even then, one could be a stickler about the cost of computation.) > you might have already been bankrupt Clearinghouses. My point isn't that net settlement or RTGS are inherently better. They're not. But they're fundamentally tied, and net settlement on top of an RTGS rail will always be cheaper in the real world than that same underlying rail. On the cost side, net settlement will win. On immediacy and counterparty risk, RTGS. A strong system offers both options.
xenadu02 4y ago
Indeed; check settlement used to be small planes flying the checks to the nearest Federal Reserve every night where all the checks from all member banks would be reconciled and money transferred from the bank where the check was drawn to the bank where it was deposited. Then the checks themselves, having been stamped, would be flown to the originating bank and kept on file. A "bad" check would get stamped and returned to the depositing bank. The bank where you deposited a check would in fact be lending you the amount of the check until the settlement was complete - hence the daily deposit limits and such to limit the bank's exposure.
crote 4y ago
Is this still universally the case? The Eurozone has been working on SEPA Instant Credit Transfer for a few years now. It allows transferring of money within 10 seconds, even to a different bank in a different country. The maximum time is 20 seconds in exceptional circumstances. How would this work with batch processing?

toast0 4y ago

Authentication and capture have different processing requirements and availability needs. You want to have 100% uptime for authorize, but correctness isn't strictly required; if you allow too much in charges, you'll probably end up collecting user fees, which is not a negative for the bank. On the other hand, you want exactly once processing for capture, and you don't really need that to have 100% uptime, since the financial industry is built around batch processing.