By Patti Murphy
ProScribes Inc.
The automated clearing house (ACH) system was created in 1974 to eventually replace the centuries-old check system. More than 40 years later, checks still outnumber ACH payments, but the recent move to same-day ACH is expected to narrow the gap.
"The launch of Same Day ACH marks a significant milestone in the journey towards faster payments in the U.S.," Janet O. Estep, President and Chief Executive Officer of NACHA ‒ The Electronic Payments Association, said when introducing the group's same-day ACH rule.
The ACH network was built as a store and forward payment system that required exchanges of bulky computer tapes; over the years the network has gone through numerous upgrades, including PC-connectivity for originating and receiving ACH transactions. Despite operational improvements, however, it continued to operate on delayed cycles. NACHA, the ACH rules group, voted to change course in 2015 with new same-day settlement rules.
Implementation of ACH same-day settlement will take a few years to complete, NACHA said. First up are ACH credits, which are the most common ACH transactions (direct deposit, for example). ACH debits will have same-day settlement options beginning in September 2017. Consumer bill payments for utility, insurance, telecom, mortgage, loan and credit card accounts are next year's candidates for same-day ACH debits, NACHA said.
Under NACHA's rules, all financial institutions must be able to receive same-day ACH payments; there is no requirement that all banks and credit unions be able to originate same-day ACH payments. NACHA's research, however, found 95 percent of the nation's top financial institutions intend to originate same-day ACH credits in 2016.
"Same Day ACH is an innovative and immediate solution to support the demands of those consumers and businesses that want to move their money faster," Estep said. "Not only does it support the industry's near-term needs, but it also serves as a building block for the future of faster payments."
Electronic payment companies that rely on the ACH are ramping up to support same-day ACH. One such company, Dwolla Inc., is an ACH-based alternative to online and mobile card payments. "In the United States, the ability to transfer funds from one bank account to another within the same business day has been a pipedream since the 1970s," wrote Jordan Lampe, Dwolla's Director of Communications, in a blog post heralding the company's same-day ACH project. "The ability not only to do that, but to do it affordably and through an API endpoint starts today with Dwolla's Same Day ACH pilot program."
Merchants are forever seeking cheaper alternatives to credit and debit card acceptance. In the 1980s, Mobil Oil Corp. (now ExxonMobil) ran a proprietary debit card program that cleared payments through the ACH. The project didn't gain customer traction and was quietly shuttered several years after its inception. More recently, the Merchant Customer Exchange mobile wallet was built to run on the ACH rails, but that product never made it out of beta testing and was shut down in June.
Same-day ACH should fare better. NACHA has been talking up the concept to create demand. Plus the move is supported by the Federal Reserve, which provides ACH clearing and settlement services for thousands of banks and credit unions.
These days, faster payments is a hot-button topic with policymakers and bankers throughout the developed world. The Fed has been prodding the industry to create improved payment schemes that can support real-time or near-real-time payments in an electronic environment. A report prepared for the Fed in 2014 suggested that about a third of checks written in the United States would be replaced by such a system, and that ACH and wire transfer payments also would fall.
The Fed's Faster Payments Task Force has received 22 proposals for new payment systems that meet the task force's criteria, according to Dan Gonzalez, Vice President Industry Relations at the Federal Reserve Bank of Chicago. Dwolla said it submitted a proposal that builds on that network's existing infrastructure.
The Clearing House, working with the banking technology firm FIS, also submitted a proposal that builds on existing technologies. The real-time system, slated for an early 2017 pilot, will be owned by The Clearing House. The Clearing House, which traces its roots back to 1853, is the oldest banking association in the nation. Once known as the New York Clearing House, the company is owned by a group of the largest U.S. banks. Through The Clearing House Payments Company LLC, the organization operates the largest private sector ACH, wire transfer and electronic check exchanges in the nation.
Some industry experts are concerned the Fed's almost singular focus on creating faster electronic payment systems could detract from continued improvements to legacy payment systems. The technologies and processes underlying mobile remote deposit capture (RDC), for example, coupled with verification services, can support nearly instantaneous availability of check deposits.
The process could be expedited further with products that let folks "write" checks simply by snapping electronic images with their cell phones and sharing those with merchants who could then submit the payments using the RDC rails. (Redding Bank of Commerce, in Redding, Calif., recently began offering a mobile wallet like this.)
It would require only a small incremental investment on the front end, said David Walker, President and CEO of ECCHO, the industry rules group for check image exchange. Incorporating checks into the Fed's faster payments plan would also preserve the decades-long investments the industry and businesses have made in the checking infrastructure, according to several experts who participated in a panel at the September 2016 RDC Summit.
"We frequently hear that checks can never be real-time online payments," Walker, who participated in the panel, noted. The only real obstacle to widespread adoption of electronic checks is the lack of governing rules, he said, adding that even without formal governing rules, electronic checks are clearing through check image exchanges. Walker also pointed to poor uptake of real-time payment systems in other nations, particularly the Untied Kingdom (which is often held up as an example to be followed in the United States) to suggest demand for real-time payments is lacking.
Panel member Gonzalez said the Fed wants a system in the United States that can make good funds available to payees within one minute. And checks can't do that. "Checks aren't effective at all," he said. 
Patti Murphy is Senior Editor ofThe 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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