⁠⁠The $900 million wire that wasn't final

Patrick McKenzie (0:02)

Welcome to Complex Systems, where we discuss the technical, organizational, and human factors underpinning why the world works the way it does.

Most people have an intuitive ranking of payment finality. Put a $20 burger on your credit card, and you know if something goes wrong that you can dispute it. But you send a wire, and you think the money is just gone because wires are final. That's what wires are for. In August 2020, Citibank accidentally wired nearly $900 million to a group of lenders. Some sent it back. Some said, wires are final, we're keeping it. A federal judge agreed with them. Two years and one appeal later, they gave it all back. I have a classic essay on this topic, and then I'd like to riff a little bit to apply to the Citibank case, which I think a lot of people misunderstand a bit. Finality does not exist in payments, originally published in Bits about Money on February 15th, 2022

Children have a culture all of their own, and one sacred ritual of it, and sometimes in places, is no takesies backseats. Like much of child law, it both rhymes and is enforced by social sanction dictated by custom and memorial. It means transactions are absolutely final. Many adults believe final transactions to exist. They mostly don't, and that is a good thing too. That might sound surprising. Finality is a techno-socio-legal construct. What does a transaction being final mean? In the layman's use of the term, it means that the transaction cannot be reversed. As a payments professional, finality can be thought of more of a probability distribution given the technical and organizational infrastructure which was used to make payments. In the industry, we call this the rails. Finality also brings in the facts of the underlying transaction, the relationship of the parties and the governing law or laws and regulatory regimes. We can confidently say things like, wire transfers are more final than credit card payments, but we generally don't say wire transfers are final. If they were really final, the world would break. An extreme example which proves the point. The cryptocurrency enthusiast community largely believes that code is law, not your keys, not your coins, etc. Many crypto enthusiasts would say that the Bitcoin protocol does not prohibit reversing transactions, but provides a security guarantee which suggests the likelihood of a reversal after an hour or so is infinitesimal. And yet, someone sent $70 million worth of Bitcoin in 2016, and that transaction was partially voided, with the reversal being worth slightly more than $70 million due to Bitcoin volatility. That didn't happen an hour later, it happened in 2022 How?

The answer is nowhere in the Bitcoin white paper or any code base. A fool recounting a business outside the scope of this anecdote, but it rhymes with, if you and the United States federal government disagree whether a transaction is final, you are wrong. That is true for notorious Bitcoin thefts, but it's also true for wire transfers, conveyances of real estate, credit card payments and grave robin. Possession is nine-tenths of the law, so the saying goes, but the state can conjure as many tenths are required if it is motivated to.

The overwhelming majority of transactions do not go to the state for adjudication. In fact, English lacks the non-mathematical phrase common use to describe how much of an understatement that is. Billions of transactions happen every year on the order of hundreds of thousands get explicitly adjudicated.

Non-state agreements for dispute resolution. If payment rails don't provide finality, what do they provide in its stead? Predictability. They publish rules, can't call them laws, and operate dispute resolution processes, definitely not courts, which provide for relatively efficient, relatively inexpensive, relatively fast decisions on transactions without needing to escalate past the payment rail to the state.

These rules have a property in common with formal law. They are not fully descriptive of the system that is envisioned by them. For example, in credit card disputes, almost all decisions which matter are made by an entry-level employee of the card issuer, and those decisions vary wildly across issuers, even in circumstances which look very similar. As a simplified example, issuers who focus on premium card for users frequently make a business decision side with their customer more frequently than say, mass market banks do. They would probably entirely automate charge back sustained if the network rules allow them to, but they don't.

A side effect of formal rules is that they give soft security guarantees to an ecosystem, and those security guarantees allow people within the ecosystem to transact in something approaching mutual understanding of the degree of finality on offer. Additionally, they let ecosystems compete for users and for individual transactions, specifically on the basis of different rules for finality. Take wire transfers, please. We largely don't think of Fedwire as being an agent in the same sense that American Express is an agent, but Fedwire factually does have a marketing department and, believe it or not, is in vicious competition with Amex for at least some transactions.