Where does all the interest go to?

dunstonh

The direct debit scheme is managed by BACS Ltd through APACS.

It is basically the same system but with variations available to the originator (the company requesting payment).

ie:

Collection by Direct Debit is facilitated by the chosen Payment Service Provider (PSP). For example, the PSP can complete the entire purchase-to-pay process for a recurring bill. BACSactive-IP Collect uses the Automated Direct Debit Instruction Service (AUDDIS) to allow an organisation to process Direct Debit Instructions (DDI’s) and submit transaction files to BACS to process and collect payment. This can be done entirely online with the Paperless Direct Debit solution.

Direct credits use the reverse of direct debits or can use traditional BACs

[Deleted User]

MarkyMarkD wrote:

It's very trivial honestly unless you are passing huge amounts through your bank account!

It's certainly not trivial! You would be very wise to take into account the interest you lose during transfer before moving to a higher rate account. You can do this as follows:

If the old interest rate is O,
the new rate N,
the time taken to transfer T, and
B is the time the cash has to be in the new account before you break even on the deal, then

B=T/((lnN/lnO)-1)

Note: interest is expressed as a proper ratio here, so 5.26% = 1.0526, for example.

So, using the rates you quote:

B/T= 1/((ln1.0526/ln1.05)-1)
= 19.7

Now, if it takes 3 days to go from the ING to your current a/c, and three days from the current a/c to AA, plus another couple of days for at least one weekend, that's a total of 8 days to make the transfer, so:

B =8*19.7
=158 days!

That's over 5 months just to get back the money you lost during the transfer, by which time eveybody's rates will have changed again.
If your thinking of being a rate tart, beware, check this before you move!

It's worth noting that if you were changing from Chelsea at 4.75% to Capital One at 5.25%, as I'm about to do, the payback period comes down to 78 days, which is not quite so bad.

If you're thinking of opening a postal account for better interest, bear in mind the consequences of a few days delay in the post, and cheque clearing times too.

Another way of doing the same calculation is to calculate what new interest rate you need, if you specify the time in which you want to break even.
In this case:

N= O^(1+B/T)

lipidicman

Thanks Dunstonh Cool!

Generally though its hard to see why things take days here, yet they can be done next day in India!

dunstonh

The main reason is that many of the smaller banks do things the old way. a direct debit can be recalled the next day and in some extreme cases up to 12 on the 3rd day.

If it was same day, then there would be no way to recall the payment.

lipidicman

jack_pott wrote:

If the old interest rate is O,
the new rate N,
the time taken to transfer T, and
B is the time the cash has to be in the new account before you break even on the deal, then

B=T/((lnN/lnO)-1)

Note: interest is expressed as a proper ratio here, so 5.26% = 1.0526, for example.

For my change (4.1 to 5.3, bonus making it 4.9 just ended) it works out at 28 days if it takes 8 days

Cool - very useful equation!

student100

The fact is, transferring money between accounts does cost banks money.

For Direct Debits and BACS salary payments, the business requesting the transfer pays a fee to cover the cost.

For consumers transferring between their own accounts, the banks can provide it as a free service to customers because of the interest they earn during the transfer.

There's no such thing as a free lunch. If they wanted to maybe the banks could implement a same-day consumer transfer service in the UK but they'd have to charge for it (or make the money back some other way).

lipidicman

student100 wrote:

....the banks can provide it as a free service to customers because of the interest they earn during the transfer.

There's no such thing as a free lunch. If they wanted to maybe the banks could implement a same-day consumer transfer service in the UK but they'd have to charge for it (or make the money back some other way).

Pfffffftt.....the banks out of pocket!

whats that I hear....?

its the sound of the world's smallest violin playing just for the banks!!!

You make it sound like moving money is the only way the banks make money....

....think of the SHED LOADS of cash they make on all of our money they have on deposit. If a bank wont move it for free, would you bank with them? No, you would pick the bank that would. Competition would result in free rapid transfers - the problem is lack of competition

MarkyMarkD

dunstonh wrote:

Direct debits are still 3 days.

Processing cycle

The three day cycle (minimum three English bank working days) comprises:

• Day 1 (Input day) - receipt of an organisations payment file at BACS Payment Schemes.
• Day 2 (Processing day) - All data accepted is processed through BACS Payment Schemes and passed onto the paying banks.
• Day 3 (Entry day) - payments simultaneously debited and credited to the relevant accounts.

These must be three consecutive days.

You are thinking of same bank transfer. ie, a LloydsTSB bank account transferring funds to a LloydsTSB mastercard will be same day but that doesnt use the direct debit system.

ADDACS requires a 3 days period as well to allow direct debits to be recalled on day 2)

You can verify the 3 days at http://www.directdebit.co.uk/resources/glossary.php

I know all that.

You misread my original post.

I said that direct debits are same day value i.e.

Day 3 (Entry day) - payments simultaneously debited and credited to the relevant accounts.

So what if it takes 3 or 4 days for the funds to be transferred, because it takes time for the instruction to be processed. This thread is about loss of interest on such transfers and, I repeat there is no lost interest on direct debit payments.

Just plan ahead and issue the instruction 4 days in advance.

MarkyMarkD

jack_pott wrote:

It's certainly not trivial!

Very interesting maths, jack, but I stand by my statement. For most transfers (the bulk of which are bill payments and the like) the lost interest IS trivial.

But I appreciate your point and will bear it in mind when switching funds between accounts to earn a higher rate.

MarkyMarkD

lipidicman wrote:

The 5.35% paying online saver uses a direct debit to take money from your current account. It uses BACS to pay BACK to your current account. I had to set up a direct debit mandate for this account.

I hadn't realised this, as I fund my online saver account from the linked A&L current account and hence do all the transfers online same-day with no need for DDs/BACS transfers.