By Brandes Elitch
CrossCheck Inc.
Recently, I attended a presentation by Mark A. Matthews, who published a book called Terroir and Other Myths of Winegrowing. As an agronomist and scientist, Matthews endeavors to separate fact from fiction. It turns out there is a lot of fantasy in winemaking, including the following:
None of those statements can be proven using the scientific method. What's true is that good weather, high yields and quality wine have historically gone together by many accounts. And crop yield in vineyard production depends on many factors over two seasons: varieties; cultural practices; and weather and environmental conditions such as temperature, light on the developing bud, vine water status, untimely rain and low temperatures, vine row spacing and pruning, water, nutrient supply, etc. For red wines, it has been well accepted that most flavors and aromas originate with the fruit.
The idea of terroir ‒ that plants arise from eating the right kind of soil ‒ is primarily a marketing term that mixes extrinsic and intrinsic wine properties; when formalized into laws restricting production, it becomes a system to extract high rents. Terroir is a shibboleth that establishes an in-group in a world unto itself. It isn't wine appreciation, and it doesn't reflect interest in the vine; it's more like wine snobbery.
I see parallels between the myths of the wine industry and the myths surrounding the idea that the automated clearing house (ACH) system is a better payment method than the check because, supposedly, everybody knows that the ACH is cheaper, faster and easier to use than a check; checks are going away; and same-day ACH will change everything. This is what I hear from so-called experts in the payments industry. Experts, however, aren't always correct.
Some time ago I took the Accredited ACH Professional exam, because my boss here at CrossCheck wanted me to make sure that we understood how the ACH works. Now, NACHA ‒ The Electronic Payments Association has been around for 42 years, but when I worked in the cash management department for a major bank, about 20 years ago, ACH was a non-starter.
Our Executive Vice President regularly said, "No bank ever made money with ACH and no bank ever will." We did not yet have a PC-based ACH product, which made the testing for a new client who wanted to send us an ACH file a rigorous event. When the PC ACH product was unveiled, it was so complicated that only one of the salespeople could figure out how to set up clients, and he was very popular.
We avoided taking a big loss from ACH fraud that hit the other San Francisco banks (do a search on Hamilton Taft) but we did not avoid taking a big hit from a fraudulent originator who got consumers' permission to pay their mortgage every two weeks, and then absconded with the money. After that, the senior risk officer for the bank had to approve any new ACH account, which had a chilling effect on selling ACH.
NACHA has been a relentless publicity machine for popularizing the idea that ACH is a better, faster, cheaper way to move money than a check, and it has been pretty successful at it, although frankly, it didn't get much traction in the first 20 years. Some people think NACHA is some kind of quasi-governmental agency, like an offshoot of the Federal Reserve, but the truth is that it is a financial institution (FI) industry group.
There are, perhaps, fewer than 10 major money center and super-regional banks that originate the majority of the transactions. This is because these banks hold roughly 75 percent of all the demand deposit accounts in the country. They also bank the largest insurance companies in the United States, which were the real early adopters of ACH for collecting monthly premiums.
The other 6,000 commercial banks originate minimal volume; their role is principally as receivers. The originators write the rules. NACHA's role is to codify the rules for the many standard entry class codes that specify the file format and record layout for each type of transaction and the return item rules.
Did you know that NACHA has 84 return item reason codes? I am not making this up. Up to now, small banks have never had any revenue for just receiving transactions, but the new same-day rules will give them 5.2 cents per entry or transaction, certainly not meaningful for a community bank which might receive a few hundred entries a day.
Same-day settlement does not obligate anyone to originate ACH entries, but it does obligate all financial institutions to settle eligible ACH credit payments of $25,000 or less the same day. In September 2017, this will expand to include debit payments; in March, 2018, the rule will require FIs to make funds available to recipients by 5 p.m. local time. Most large enterprise business-to-business payments are above $25,000. Making funds available at 5 p.m. is not all that important, as the banking day is over by then, and the value of balances today is negligible.
NACHA touts the advantages of expedited bill pay, a better peer-to-peer payment experience, and same-day settlement that is cheaper than a wire transfer.
These same large originators are also the major credit card issuing banks, and they have a hefty fee for paying your credit card payment on the day it is due. I doubt they want to cannibalize that business model. Wire transfer is also a very lucrative business for a major bank, and the single riskiest business they are in. They are not going to cannibalize this for an ACH equivalent. In any event, there is a cap of $25,000 on same-day ACH, which is smaller than most wires anyway.
Same-day ACH gets a lot of publicity, but we should not overlook the efforts by both the Federal Reserve and The Clearing House LLC to build a faster payments infrastructure, as well as Early Warning Services LLC and Dwolla Inc. When you hear that same-day ACH will change everything, ask yourself if this is myth or reality. Sometimes, it's hard to tell. A glass of wine might help. 
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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