By Patti Murphy
ProScribes Inc.
NACHA – The Electronic Payments Association wants to move the automated clearing house (ACH) closer to a real-time payment network. In March 2014, it detailed a plan for transitioning the ACH to a same-day settlement environment by perhaps as early as 2016.
If two years seems to you a long wait to achieve parity with competing payment choices, you're not alone.
The inescapable irony, though, is that when it was created more than 40 years ago, the ACH was envisioned as a replacement for the paper- and labor-intensive check system. Yet thanks to image capture technologies and the Check 21 Act, checks can be settled on a same-day basis today while ACH transactions remain, at best, next-day payments.
Moreover, it's taken over 40 years for the ACH to surpass check payments in terms of sheer transactions. The ACH was used for 22 billion payments in 2013, an increase of about 600 million payments over 2012, according to NACHA. (Extracting federal government transactions from the tally puts the 2013 total at just under 17.6 billion ACH payments.)
The Federal Reserve reported that checks deposited by American consumers and businesses in 2012 totaled 19.4 billion, down from 23.6 billion in 2009.
NACHA President and Chief Executive Officer Janet O. Estep and a panel of experts discussed the plan during a packed session at Payments 2014 (the annual NACHA conference held in Orlando, Fla., April 6 through 9) and again during a briefing with reporters. She described the move as a "phased approach to ubiquitous same-day settlement."
The ACH operates today as a store-and-forward network. Credit transactions (such as payroll direct deposit) are settled with final and irrevocable funds in two days, while ACH debits (for example, automatic deductions for insurance premiums) are next-day payments.
The first phase in NACHA's latest plan would be to introduce same-day settlement for credits, with settlement occurring at 5 p.m. Eastern Time. It also includes an additional, later daily deadline for submitting ACH credit files. The next step would be to extend those changes to ACH debit files. The final phase would be to introduce an additional ACH settlement deadline at mid-day.
The concept of same-day ACH payments is not new. About a dozen countries around the world (including the United Kingdom) have networks that support same-day settlement for ACH-like payments, said Dr. Leo Lipis, Managing Director of the international consulting firm Lipis & Lipis GmbH. In the United States, however, same-day ACH has proved an elusive goal.
The Federal Reserve Banks introduced an optional same-day service for ACH debits several years ago, but it is not broadly used. (The Fed banks are required by law to offer payment services including ACH. The Clearing House, formerly the New York Clearing House, offers a private sector alternative and claims to process about 50 percent of all commercial ACH payments in the United States.) NACHA put the idea to a vote of its membership in 2012, but failed to garner the necessary votes for passage.
This time around, NACHA is more optimistic. "The concept of phased implementation is the result of thoughtful exploration of feedback we received over the past year," Estep said. Bill Schoch, President and CEO of Western Payments Alliance, a large ACH association serving banks and credit unions in the western United States, said a recent survey of its members found 83 percent like the idea of same-day ACH. "We expect new uses for the ACH [resulting from same-day settlement] that we can't even imagine today," Schoch said.
According to Christopher Ward, Executive Vice President for Product Management at PNC Bank, one big advantage is that additional presentment deadlines and same-day settlement will enable employers to move weekly payrolls to the ACH. (Today, millions of workers who get paid weekly don't qualify for direct deposit because of the lead time needed to effect ACH transactions.)
Anita Patterson, Director of Treasury Services at media giant Cox Enterprises Inc. and Vice Chair of the Association for Financial Professionals, expects corporations to support NACHA's plan. "I think it's a good first step," she said during the press briefing.
But the move to same-day ACH will not be simple, or fast. That's because any change to NACHA's ACH operating rules must first garner approval from a super-majority (75 percent) of member banks and ACH associations, and it takes at least a year to plan and complete a vote by NACHA's members. I queried several of the bankers I met at Payments 2014, and about half said they weren't keen on the idea of same-day ACH. The investments in technology and operational changes will be significant, these bankers told me. Ward said he is hopeful NACHA's game plan will garner enough votes to pass, but conceded it's not a slam dunk. "This is going to require an educational campaign that can help dispel the concerns and issues people have," he said. Estep said NACHA hopes to put the matter to a vote in 2015, and that if it passes, implementation could begin the following year.
There are lessons from past experiences to be considered, however. For its first 25 years, the ACH was only semi-electronic. Customers submitted instructions for ACH transfers, typically in writing. Financial institutions (FIs) would collect and store these requests throughout the day, loading them onto computer tapes and sending those by courier to collection points operated by Federal Reserve Banks and local clearing houses.
When the Fed mandated electronic ACH initiation in the 1990s, executives at thousands of FIs balked at the move, which required dedicated PCs. In the end, the transition to all-electronic ACH took nearly a decade to complete. In today's fast-paced world of payments and technology, a decade can seem an eternity.
I inquired about this during NACHA's press briefing. Estep said she didn't see a similar fate for same-day ACH, in part, because it's not going to be mandated. "It's never mandatory for financial institutions to originate [ACH] payments," only that they be able to receive, she said.
So what if NACHA's latest plan gets shot down, or takes too many years to implement? Nasreen Quibria, an executive consultant with CGI Group Inc., an international information technology and business process services firm, addressed this in a recent article published by Bank Systems & Technology. "In the absence of a ubiquitous real-time payment system, the U.S. financial market risks falling behind the rest of the world," she wrote.
Worse, in my opinion, absent a same-day settlement mechanism, the ACH risks losing relevancy as a U.S. payment alternative.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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