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The Green Sheet Online Edition

April 25, 2011 • Issue 11:04:02

Insider's report on payments
ACH finds volume in consumer apps

By Patti Murphy
The Takoma Group

The automated clearing house (ACH) system was used to move just over 19.4 billion payment transactions in 2010, representing a 3.44 percent increase over 2009, according to the latest tabulations by NACHA - the Electronic Payments Association. Combined, those transactions represented $31.74 trillion in value, NACHA reported.

Consumer-initiated transactions were key drivers of overall ACH growth, NACHA said, outpacing more traditional payments. Online consumer bill payments grew 15.62 percent, year over year, while other consumer web (e-commerce) transactions grew 7.4 percent over 2009.

Business-to-business (B2B) ACH payments, which have been long in taking off, showed strong growth also. The B2B transaction known as CTX, which supports the most robust use of addenda items (for invoicing details), grew 11.12 percent, year over year.

Check-to-ACH conversion transactions - which drove substantial ACH growth for much of the past decade - were a mixed bag. Transactions known as accounts receivable check conversion (ARC) totaled just over 2.2 billion, down 8.47 percent from 2.41 billion items in 2009. Back office check conversion (BOC) transactions grew 12.88 percent, from 160.5 million in 2009 to 181.2 million last year.

Government-initiated transactions, which had been an early driver of ACH volume, were just 7.9 percent of the 2010 network total, NACHA reported.

NACHA comments

Janet O. Estep, NACHA's President and Chief Executive Officer, suggested the ACH may have found a growth engine as consumers and businesses alike demand faster, better, safer ways to transact business.

"The advent of mobile payments has increased this mindset, and native [older] electronic payments are certain to continue an upward climb, mirroring the evolving preferences of those making payments," she said in a statement.

If that is the case, and ACH transactions continue to grow at 2010 rates, payments by ACH should finally exceed check payments (in terms of sheer numbers) this year. The Federal Reserve reported that 24.4 billion checks worth a total of $31.6 trillion were paid by banks in 2009, down from 30.6 billion in 2006 (for more information, see "Checks give way to debit cards," by Patti Murphy, The Green Sheet, Dec. 27, 2010, issue 10:12:02).

Not included in the Fed's paid check numbers are approximately 3.3 billion checks that were written in 2009 but converted to and paid as ACH items.

Slow upward climb for the ACH

Despite the promising numbers, it's been a long, hard climb for the ACH from its beginnings in the early 1970s, when a group of California bankers convinced the Fed to help them build an electronic alternative to the check clearing system, which was being challenged by ever-increasing check volumes.

What emerged was not a network that anyone under the age of 30 today would think of as "electronic." Throughout the 1970s, and well into the 1980s, banks would collect ACH payment data and download it to large computer output tapes, which then would be collected by couriers and trucked to local Federal Reserve Bank offices for clearing and settlement in much the same way checks were cleared in those days. (A running joke at the time defined electronic funds transfer in the context of the ACH as "ever faster trucks.")

It wasn't until the Fed set a deadline for all financial institutions to implement computer connections to the Reserve Banks' ACH operations, in 1994, that the ACH could truly be considered an electronic payment network.

Today, in addition to the Fed's ACH network operations, financial institutions can process ACH payments through EPN, a bank-owned network that was built from the start as a fully electronic ACH network.

EPN is owned by The Clearing House Payments Company LLC, which also operates SVPCO, a check image exchange network that competes with the Reserve Banks. In 2009, 16.3 billion checks were converted to image files and cleared through either SVPCO or the Reserve Banks.

Checks aren't going away

Despite all that the ACH has achieved, it hasn't exactly excelled at supplanting the check. It's taken 40 years for ACH payments to exceed checks, and most experts now agree that the check (or some reasonable electronic facsimile) is destined to be part of the payments space for the long haul.

That's one good reason for NACHA to look toward 21st century payment requirements (especially consumer applications like mobile) to support future ACH growth.

Corporations have been slow to wean themselves off of checks, especially with trading partners. According to a detailed analysis of the Fed's 2010 Payments Study, consumer-to-business checks fell 10 percent between 2006 and 2009 (from 10.7 billion to 8.6 billion).

Overall, B2B checks fell just 2 percent during that period; B2B remittance checks (a subset of that 2 percent) grew from 5.4 billion in 2006 to 6 billion in 2009.

The Fed's data also suggest large-dollar payments continue to dominate check payments, which represented 44 percent of the value of noncash payments in 2009, but just 22 percent of the number of noncash payments. Debit displacing credit, not checks

Based on the Fed's data, debit cards made up 35 percent of all noncash payments in 2009, but just 2 percent of the dollars spent. Meanwhile, there were 151 million fewer credit card transactions in 2009 than in 2006. In terms of value, credit card payments totaled just $1.9 trillion in 2009 down from $2.1 trillion three years earlier.

The average signature debit card payment was $37 in 2009, down from $40 in 2006, while the average debit card payment authorized by PIN grew from $37 to $39, the Fed reported.

Many want to know how the impending regulation of debit card interchange will be reflected in the continued adoption of debit card payments. I'm also curious to see what recently enacted rules curbing bank overdraft policies will mean for debit card usage. Many people opted out of overdraft protection once they considered the true costs.

Meanwhile, results of a consumer poll recently published by the website Bankrate.com suggest a majority of Americans would consider switching banks if their financial institutions raised checking account fees: those most likely to bolt (75 percent) are consumers earning over $75,000 a year, followed by the $50,000 to $75,000 bracket; 60 percent of those earning $30,000 or less said they'd stop doing business with banks that raised checking account fees. end of article

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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