Same-day ACH in the US: The Next Chapter
The trends signal diminishing ACH traffic in the US. NACHA acknowledges competitive pressure from alternative payment providers as one of the imperatives to settle ACH transactions faster. President and chief executive officer (CEO) of NACHA, Janet Estep, comments: “As more parties have sought solutions outside of traditional network flows to move their transactions more quickly, we decided it was time to more fully, intently, and purposefully investigate expedited processing and settlement.”
Increasing disintermediation from bilateral exchanges developed among the largest ACH players (e.g. Wells Fargo and Bank of America, Citigroup and Capital One with certain institutions) are leading to dropping volume and significant losses in payments in the tens of millions of dollars.
To stem the tide, in the second quarter of 2010, the Federal Reserve rolled out a same-day service limited to certain consumer ACH debits – consumer cheques converted to ACH (ARC, BOC, POP), and consumer debits initiated from the internet (WEB) and telephone (TEL). Originally anticipated to accelerate ACH traffic, the meagre adoption rates of the FedACH service is a sobering reality. Steven Corday, project manager for the retail product office at the Federal Reserve Bank of Atlanta, explains: “Adoption of the Fed service has been hindered because of the low interest rate environment that banks are operating from. Low interest rates offer less motivation for an originating bank to benefit from receiving payments one day sooner.”
Another shortcoming that has contributed to the anaemic participation is the voluntary participation of the FedACH service. Cordray concedes: “Transaction volume is modest given that we have only one prominent bank participating.” To date only 30 or so banks have signed up for its service. The most prominent user is Bank of Oklahoma, a large regional bank, and the rest of the participants are smaller banks and credit unions.
Lack of broad accessibility by financial institutions is another reason for minimal adoption. The current same-day service only handles Fed-processed transactions. Although the Fed processes 57% of ACH traffic, it is one of two ACH networks. The Clearing House Payments Company, which operates the only other ACH network, has also been conspicuously silent, and thus far not moved towards introducing a similar service.
A NACHA rule change would mandate participation by all networks (the Federal Reserve and The Clearing House), by all receiving depository financial institutions (RDFIs), and, more significantly, move beyond certain consumer debits to support all consumer, corporate, government, and cross-border payments (with some US dollar limitations). The proposal suggests a same-day processing and settlement with the addition of a 2pm EST window to the processing and settlement schedule (with a settlement time of 5 pm) that would mirror the current FedACH same-day service.
This recent move is in direct response to another threat – the rising volume of deposits made via cheque image exchange or Check 21 remote capture. Unlike other payment types, US cheque laws previously restricted the use of technological innovations in cheque processing. With the passage of the Check 21 Act in 2003 the processing of cheques went through a radical change, allowing banks to clear and settle checks including corporate cheques (that still cannot be converted to ACH), based on a digital image in lieu of paper. For corporate customers, remote deposit capture (RDC) offers convenience and earlier availability of funds, while reducing processing costs.
Although current regulations do not allow corporate cheques to be converted to ACH, similar dynamics and changes in regulations could prompt ACH to be a critical enabler of the transition from paper cheques to native electronic payments (e-payments) for corporate trade payments. The key element will be significant bank participation, without which users will have few trading partners with whom they can send and receive payments.
Lessons can be learned from across the globe. Estep notes: “Other geographies are moving ahead of the US in this regard, and benefiting from risk reduction and value-based uses of the ACH Network.” Indeed, Sweden, Netherlands and many other European countries have used same day settlement for many years.
UK’s Faster Payments Service (FPS), which launched in 2008, is somewhat parallel to the same-day ACH efforts in the US (see Figure 1). Despite the opt-in participation, according to the Payments Council, this year Faster Payments reached a milestone, processing over a billion payments to accelerate phone and internet payments.
John Farrell, vice president of financial services at Logica, a company which engaged in the FPS infrastructure, comments: “Faster Payments in the UK is opening up opportunities for innovation. Institutions that take advantage of this new channel stand to make gains in overall customer wallet share and increase both their retail and commercial customer base. With the same-day ACH offering in the US, mobile payments such as person-to-person or person-to-business can become a more viable channel. In turn, leading banks will be able to reinvent their business models to benefit from these capabilities.”
Same-day settlement offers clear benefits including new revenue streams for financial institutions. Although most banks allow bill payments via ACH, today, to make a last minute bill payment, payers need to provide cash or cheque face-to-face, send an expensive bank wire transfer, or pay over the telephone with a credit or debit card. With the faster service, a financial institution can offer same-day alternative at a reasonable price point for consumers as well as corporations.
In general, businesses favour same-day settlement. Anita Patterson, director of treasury services and Patriot Act compliance officer at Cox Enterprises, who also serves as vice chairman of the board of directors at the Association for Financial Professionals (AFP), a trade member group that represents corporate financial officers, comments: “I see this as a benefit to businesses – offering additional flexibility in today’s fast-paced world. As a corporate practitioner I am looking forward to having the option to send same day ACH for certain transactions. I do not envision sending all transactions same day – that is not necessary in today’s environment. However, there will be times when having the option of same day will definitely be convenient. It may be because the amount of the transaction, while important to send same day, does not warrant the expense of a wire, but may warrant the added expense for a same day ACH.”
For billers same-day ACH transactions can help identify more quickly returned transactions. Although it is unlikely that the bulk of ACH payroll and preauthorised debit programmes will be altered, other benefits include concentration activities as well as responding to late or failed payroll originations.
However, there are concerns of unintended consequences. Patterson cautions that organisations “ensure that controls and procedures are in place concerning the correct circumstances when to use same day and when to use next day settlement in order to be sure funding is available for any late day transactions. We do not want to find ourselves in overdraft positions because we did not plan adequately.” While faster transactions are intended to reduce risk, it may also accelerate or introduce exposure to emerging payments fraud. Increased complaints of unauthorised transactions are another potential outcome.
Financial institutions are also wary of additional costs. For many banks tied into old technology, introducing same-day ACH will require some bank transformation. Estep recognises that it is not “an insignificant change,” and considerations include the need to integrate new timeframes for file pick-up, processing, posting, settlement and reporting, returns decisioning, vendor/processor management, and other elements of payments processing in a batch environment. “For any financial institution there may be many moving parts that will need to be recalibrated to the new window,” she says. However, Estep suggests: “By leveraging existing ACH windows and infrastructure, EPS intends to minimise implementation costs for financial institutions. The proposed new afternoon EPS window leverages an existing operator window for returns, with the goal to balance value creation with the ability to minimise initial impact on financial institutions.”
In contrast, corporations do not appear as concerned about costs. “As far as pricing goes, it will be interesting to see what the fees will be. I would expect to pay some incremental fee but not significantly more than ACH today,” said Patterson.
Change is inevitable. Estep encourages the industry to review the proposal that is out and available on the NACHA website and to submit comments by 18 November. “The feedback we receive will help formulate next steps in rulemaking for EPS [expedited processing and settlement] and plays a pivotal role in the open and inclusive rulemaking process,” she says.
The ultimate success of same day ACH will depend on adoption by banks and the move into the mainstream. Each financial institution should consider the benefits of faster settlement and include supporting technology investments into their competitive strategy. When the FedACH same-day settlement service launched, many sat on the sidelines taking a wait-and see approach. Instead, they should really be asking: “Are my competitors ready?”
Read the previous article entitled ‘Same-Day ACH – What Does it Mean?‘.