By Patti Murphy
The automated clearing house (ACH) system achieved a major milestone in late 2016 when, under the guidance and rulemaking authority of NACHA – The Electronic Payments Association, it embarked on a transition to same-day settlement. Going forward, person-to-person (P2P) payments could be the initiative's driving force.
The ACH was created in the 1970s as a semi-electronic alternative to check payments. Over time, the network became fully electronic (from initiation through settlement), but settlement schedules continued to mimic the multiday approach of check clearing.
Ironically, some of the technologies and processes evolved to accommodate faster ACH payments, combined with legal/regulatory changes, also have made checks faster. With the combination of mobile remote deposit capture (RDC) and image check clearing, checks, too, can be same-day payments, noted Louise Steller, Vice President, Product Strategy, at Ensenta Corp., a mobile banking software company. "We're seeing a lot of movement in that direction," Steller said.
Proponents of same-day ACH hope shorter ACH settlement windows will encourage more businesses to abandon checks in favor of electronic payments. While check usage continues to fall, the latest data from the Federal Reserve suggests the decline has tapered off to an annual rate of less than 5 percent. Meanwhile, the 2016 Electronic Payments Survey by the Association for Financial Professionals found use of paper checks for business-to-business (B2B) payments actually rose 1 percent between 2013 and 2016.
It's not that businesses lack interest in same-day ACH. It just may not be an everyday requirement. In discussing the findings, Jim Kaitz, President and Chief Executive Officer of the AFP, said that the treasury and finance professionals AFP surveyed "see the value that it [same-day ACH] brings to last-minute payments."
According to NACHA, of the more than 13 million payments submitted for same-day ACH settlement between Sept. 23, 2016, when same-day ACH rules took effect, and Dec. 31, 2016, 52 percent were direct deposit transactions. Businesses have long complained that direct deposit is not an effective option for hourly employees, for example, because of the two-day lag between when employers deposit payment files and funds are available to payees.
B2B payments represented 31 percent of all same-day ACH payments during that period, P2P transactions accounted for 13.5 percent, and consumer bill payments were 2 percent of the total, NACHA reported.
"In its first three months of operation, same-day ACH has proven that it is a valuable faster payment solution for a variety of users, including businesses, consumers and financial institutions," said Janet O. Estep, President and CEO of NACHA.
Under a plan set out by NACHA in 2015, same-day ACH applies now only to credit transactions, like direct deposit. Same-day ACH settlement of debit transactions (for example, consumer bill payments) will begin in September 2017. While ACH debits have appeal for consumers (think automated bill payments) they are less attractive to corporations, as control of ACH origination is in the hands of payees.
"There are important differences between [ACH] debits and credit," said David Walker, President and CEO of ECCHO, the industry rules group for image check exchanges. Businesses are averse to providing checking account details to trading partners, which is necessary, as ACH debits are initiated by recipients (payees). Also, most B2B payments are accompanied by detailed invoice information that cannot be accommodated by ACH addenda record formats.
Bottom line: corporate accounts payable and receivables processes and systems have evolved around check payments; switching payments from checks to the ACH, or another network, would demand major systems overhauls. "That's not an insignificant cost," Walker said.
Walker believes banks would be better served by making the check payment system more electronic. Nearly all checks today clear through the banking system as electronic files – over 99 percent, according to the Fed. Also increasing numbers of checks are being deposited via RDC (using PCs, tablets and smartphones).
In addition, a movement is underway toward fully electronic checks, more commonly known as electronic payment orders, or electronically created items (ECIs). Walker said his calculations suggest businesses could amass $29 billion a year in savings by converting existing B2B paper checks to ECIs. "This would have a huge impact on the business community," Walker said. Several companies, and a few large banks, offer businesses services that emulate ECIs, although currently no laws or regulations address these items, he added.
In August 2016, Bank of America established a partnership with upstart Viewpost IP Holdings LLC to support electronic initiation of checks and related remittance documents by the bank's more than 3 million small business customers. Viewpost prints instructions in conformance with industry and regulatory requirements and submits the electronic files for clearing. Most items are presented and cleared within a day. Remittance documents are delivered through electronic interfaces Viewpost has established with major accounting systems. "We see memo-posting [of check payments] within an hour," said Pat McMonagle, Viewpost Executive Vice President, Director of Payment Operations.
The appeal of real-time payments cannot be denied. "Real-time payments can benefit financial institutions, merchants, consumers and society by offering enhanced visibility into payments, by enabling better cash management and by helping businesses better manage day-to-day operations by improving liquidity," the consultancy Deloitte wrote in a recent report, Real-time payments are changing the reality of payments. "The liquidity improvement can be especially impactful to small merchants who may be used to waiting days for their settlement, possibly creating a positive impact on their cash flow and daily sales outstanding (DSOs)."
The consumer appeal is especially acute. "[M]any consumers now expect almost everything to be available in real time," the consultancy added. "The age of instant gratification is here to stay. Paying bills or friends should not be more than a few clicks or touches away, and the same expectations tend to apply to accessing funds as soon as they are available."
A 2016 survey by banking technology firm Fiserv Inc. drove home the point. "Life moves fast, and people and businesses want their money to move fast, too," said Pat Korb, President, Financial and Risk Management Solutions at Fiserv. Fiserv markets a service that combines check guarantee and mobile deposit support; it allows banks to cash checks and accept check deposits with immediate availability, for a fee.
One question that often arises in discussions of faster payments is just how fast is faster? Is there an expectation for immediacy, or is within hours an acceptable time frame for payment settlement? "For a transaction to be real time it needs to take less than three seconds to complete," said Mike Charles, President and CEO of CONIX Systems Inc., a Vermont-based company specializing in check processing software. That's less than three seconds for bank-to-bank communications as well as intra-bank decision processes.
Time constraints aren't the only thing holding back real-time payments, added Robb Gaynor, founder and Chief Product Officer at Malauzai Software Inc. There also are critical differences in legal treatment of checks and electronic payments.
Under federal and state electronic funds transfer laws, for example, consumers have 60 days from receipt of a statement containing a questionable ACH payment to dispute that transaction, which is substantially more time than consumers have to challenge checks or card payments. Neither businesses nor banks want to risk the financial implications of reversible real-time payments, Gaynor noted. "Real-time payments are great, but the repudiation laws aren't going to change," he said.
Nonetheless, interest in faster digital payments is exploding, especially among consumers. When the consultancy Accenture PLC polled North American consumers in 2016 on awareness of mobile payments, 58 percent indicated they were "extremely aware" while just 8 percent were "not at all aware." In 2012, 27 percent said they were unaware they could use their mobile phones to initiate payments.
In a report on its 2016 North America Consumer Digital Payments Survey, Accenture said mobile technology is the driving force behind digital payments and that 73 percent of consumers trust traditional providers of card services to offer them mobile payments. Alternative payment providers (like PayPal Inc.) are popular, too, with 63 percent of consumers indicating trust; established retail banks were close behind, garnering the trust of 62 percent. Just 24 percent of consumers polled said they trusted technology startups to provide them with secure mobile payment services.
Preference for mobile payments is highest among millennials. Among the 4,000 consumers Accenture surveyed, 32 percent of those identified as millennials and 27 percent of mass affluents (households with income producing assets between $250,000 and $1 million, excluding real estate) use their mobiles for P2P payments, compared with 18 percent of the total.
The largest obstacle to greater adoption, the consultancy said, is the merchant checkout. "The reality is that merchants have been slow to invest in modern card readers. Even if people want to pay by smartphone, they often cannot," the report stated. It encouraged payment companies and merchants to build "the case for change with incentives that unlock inertia."
Deloitte reported that more than 20 applications in the U.S. marketplace allow consumers to initiate payments from their debit cards or bank accounts using smartphones. Forrester Research Inc. projected P2P payments will top $17 billion in 2019, up from $5 billion in 2014.
Today, PayPal is one of the best-known P2P payment providers. In addition to online payments, PayPal offers P2P mobile payments via its Venmo unit. Other nonbank options like Apple Pay and Android Pay are making inroads with consumers and small merchants. In January, Square Inc. heralded an arrangement with Apple Inc. to offer merchants discounted contactless card readers and $350 in processing credits for Apple Pay transactions.
"Square plans to most heavily market the promotion at counter-top merchants, like small retailers, rather than individual sellers," stated a Feb. 1, 2017, report by BI Intelligence. BI Intelligence analysis suggests the move is part of a strategy to generate profits from hardware sales, which generated about $29 million in red ink on Square's balance sheet in 2015 and the first half of 2016.
Not to be overtaken by nonbank competitors, several large banks and bank technology firms are joining forces to create alternative P2P networks. Last year, a consortium that includes the largest banks in the country announced Zelle, a P2P network that is set to go live in the first half of 2017. Zelle is the creation of Early Warning Services LLC, which is owned by several major U.S. banks.
Once Zelle is operational, consumers will be able to send payments to each other using email addresses or mobile phone numbers, with same-day funds posted to recipients' checking accounts, although funds availability won't necessarily be immediate.
"Security concerns, interoperability problems and delays in funds availability have been persistent challenges to awareness, adoption and usage for non-FI P2P services," noted Talie Baker, an Analyst at Aite Group LLC. "The launch of Zelle gives banks a chance to establish a foothold as the provider of choice for person-to-person payments, and even take back their share of the market from non-FI providers."
According to Early Warning, any financial institution can join Zelle. Seventeen financial institutions had signed on to be part of Zelle as of October 2016; since then, several additional banks and leading bank technology companies have added their names to the member roster.
Larry McClanahan, Director of Digital Delivery at Fifth Third Bank said the decision to join Zelle was a response to consumer demand. "We looked at what our customers want," he said. "They want to make payments now; they don't want to wait for them to process. They want it to be easy. And they want the same trust they have in their own bank."
Michael Abbott, Managing Director for Digital Financial Services at Accenture, believes consumers want more than just faster payments. "[T]he incentives are not there yet," he said. He likened current offerings to early computer games. "Payments providers need to bring the traditional card to life and create a real-time interactive experience for consumers," he added.
The Federal Reserve Board conducts surveys every three years to assess the size and value of the noncash payments pie. Data covering 2015 was published in late 2016. Here's a snapshot of that most recent data.
To put this data into perspective, consider that a 2016 survey by Accenture revealed that 60 percent of North American consumers use cash at least once a week for POS transactions.
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