Citibank’s $900 Million Mistake and the Finality of Payments
Excerpt: For consumers, finality is best thought of as the moment at which a banking transaction is 100% complete. At that point the funds are definitively in the recipient’s possession and can be used without fear of being revoked. Consumers can choose between payment options that offer “soft” finality and “hard” finality. Citibank’s $900 million bank payment is an example of hard finality. So are certified checks and bank drafts. Once the payment appeared in Brigade’s account, Citibank lost the ability to claw it back. And the moment a certified check passes hands, there’s no way for the originator to hit the undo button. A guarantee of finality provides economic actors with a crucial degree of certainty. Their money is safe to be spent, lent, invested, or donated. Without this certainty, we’d be much more hesitant to transact. The wheels of trade would grind to a halt, as no one would know when they had really been paid. That’s why it is important to uphold the principle of finality. Most of us would probably agree that it would be fair if Citibank could click an undo button and get its $175 million back from Brigade. But the ability to do so would compromise something much larger: the system’s ability to guarantee irrevocable payments and the body of trade that depends on this feature. Soft finality, by contrast, is quite forgiving to the purchaser. Under soft finality, there may be a long window of time over which a payment can be cancelled and reversed by the consumer. The best example is a credit card payment. Anyone who uses a credit card to buy something online has up to 75 to 120 days to get the transaction reversed. [Well, here’s a problem I never gave any thought to at all. This will surely end up in the courts. Who knows what they’ll decide or even when? It may take Citibank a decade or more to get their money back–if they do. And, whoever typed those wrong digits is now amongst the unemployed. Ron P.]
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