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ACH Losing the War on Checks

B y Patricia A. Murphy

Is the Automated Clearing House (ACH) system losing the campaign to eliminate paper checks from the payments system?

NACHA - the Electronic Payments Association, the private-sector group that has taken command of the war on checks - reports that 6.88 billion payments were sent via the ACH last year, up 12.4% (or 760 million payments) over 1999 totals.

Getting a handle on check numbers isn't easy. But Federal Reserve Chairman Alan Greenspan said in a speech to NACHA members last year, "Americans still write about 68 billion checks a year." And experts inside and outside the Fed figure the total will grow 1 to 3 percent a year for several more years before it begins any decline.

So that means Americans wrote somewhere between 680 million and 2 billion more checks last year than they did in 1999. In other words, the increase in the number of checks written by Americans last year was about the same as the increase in the number of ACH transactions initiated.

So it would seem fair to say that the ACH, which was created nearly 30 years ago by the Fed and the banking system to supplant checks, muddles along as an "alternative" payment system but has failed to usher in the "checkless society" its early proponents had envisioned.

NACHA, not surprisingly, prefers to look on the bright side. "In 2000 the ACH Network continued the robust growth that occurred every year during the 1990s. Annual commercial ACH volume is 580 percent higher than 10 years ago," said Janet Boyst, chair of NACHA's board of directors and senior vice president and group executive at Wachovia Bank, during NACHA's annual conference in April. "As new methods of conducting commerce evolve, the ACH Network is well-positioned to continue to serve the needs of businesses, individuals and the government to move money."

The problem is that as an industry association, NACHA historically has been slow to react to changes in the business environment.

Consider the Internet. It radically has changed the financial services landscape, but when it comes to buying and selling on the Internet, credit cards are the preferred method of payment. For the largest companies buying and selling on the Internet (those engaged in B2B commerce), it's not uncommon for payments to be effected using checks - at least 80 percent of B2B Internet purchases are completed by check, according to various experts. Two ACH groups - NACHA and the New York Clearing House (NYCH) - announced in April that they are working out plans that would move more of these payments to the ACH.

NYCH is most interested in moving the check payments that accompany B2B Internet transactions to the ACH, or alternatively to the CHIPS wire transfer network NYCH operates. NYCH, which outside of the Fed is the largest provider of inter-bank payment services, clears and settles checks, ACH and wire payments totaling an average $1.4 trillion per day.

"The key to successfully implementing an Internet-enabled payment system is to maintain or upgrade the current payment systems and take advantage of the security, reliability and universal access of the current infrastructure," insists Jeffrey Neubert, president and chief executive officer of NYCH. "The support of large financial institutions is a requirement, and banks will need to work cooperatively to make electronic payments succeed."

NYCH, founded in 1853 as the nation's first check clearing house, has received funding from 11 large member banks to build a database of numbers that will function like check routing and transit numbers, masking confidential information (such as bank and account numbers) as payment instructions travel across the Internet. Called Universal Payment Identification Codes (UPICs), these numbers will be assigned by banks to business customers and registered with NYCH. (George Thomas, a senior vice president at NYCH and one of the key architects of the plan, says eventually the scheme will be applied to consumer-account payments as well.)

NYCH says the new system should be fully operational and moving payment instructions via the Internet by the summer of 2002 with the Electronic Payments Network (EPN), the NYCH's ACH service.

NACHA, meanwhile, has announced its own strategy for moving more business and consumer payments to the Internet. It's called Project Action (for ACH credit transactions initiated online) and will operate akin to the Electronic Check Council, a special membership panel that has been marshalling forces behind electronic check conversion (nee truncation). The Project Action plan: develop a payment method for Internet-based business and consumer transactions that clear and settle through the ACH.

Bill Nelson, executive vice president of NACHA, says the group hopes to have a new payment mark ready for the Internet by next March. "That's quick turnaround for us," says Nelson.

It is. In the past it wasn't unusual for NACHA to take a year or more simply to hash out a proposed new payment method for public comment; market readiness usually took at least another year. But in so-called "Internet time," a lot can change in a year. A year ago, remember, Web start-ups still were flourishing.

In 1998, the year Internet interest began to climb, consumer online purchases worldwide totaled about $8 billion. By 2004, Forrester Research is predicting the total will reach $3.2 trillion in the U.S. alone. Is it logical to expect that hordes of Internet shoppers, having already grown accustomed to using credit cards on the Internet, will abandon their cards and instead use a new ACH payment method?

If the past is prologue, probably not very many shoppers will. For about four years, the Electronic Check Council has been trying to convince the consumers who write an estimated 20 billion checks each year at the point of sale and the merchants who accept those checks to truncate those pieces of paper and clear the payments instead through the ACH. According to NACHA, 32 million checks were converted to ACH debits at retail locations last year. In addition, NACHA says 3.5 million returned checks were re- presented by retailers through the ACH during the last three months of the year.

Nelson of NACHA is confident those numbers will grow. During an interview at NACHA's conference in April, he said the group had the commitment of "a major retailer and biller" to back electronic check conversion once NACHA and the check council work out a few nettlesome details, such as the need for rules that support acceptance of corporate checks.

Nelson also conceded during the interview that earlier portrayals of the ACH as a replacement for the check system might have been overly optimistic, and that the war on checks is no more. "We're not getting rid of the check, we're getting rid of check clearing," Nelson said of NACHA's check conversion project. "It's a recognition of the reality that people are going to continue to write checks."

Expanding on Excellence

Among the most respected, knowledgeable and prolific journalists in the financial services industry, one woman stands out. That woman is Patti Murphy, and The Green Sheet is proud to announce that she will be contributing to our award-winning publication beginning with the June 11 (01:06:01) issue. Focusing on payments, Patti will bring her keen insight to GS readers on a regular basis. For those of you (and this number can't be significant) who are not familiar with Ms. Murphy, here's her story:

Patti was born and raised in New York's mid-Hudson Valley. She was educated at the University of Maryland, where she received not one but two degrees - a Bachelor of Science in journalism and a Bachelor of Arts in pre-law.

Patti worked in the prestigious Office of Comptroller of the Currency in Washington, D.C., and then was public information officer for the Bureau of Alcohol, Tobacco and Firearms before becoming managing editor of Capital Reports, which published newsletters reporting on the banking industry. She later joined forces with Phillips Publishing as managing editor for six financial service newsletters, was editor of one, Corporate EFT Report, and managed a staff of 10.

Four years and a vast knowledge of financial services later, Patti struck out on her own as a freelance writer. In 1987, this respected columnist began authoring articles for U.S. Banker and American Banker and helped launch a series of newsletters providing highly reputable analysis and coverage of the payments industry - "Payments Monthly" and "Check & Checking."

As with the others, these newsletters received attention and accolades and ultimately were acquired. The lucky acquirer - Faulkner & Gray. Patti continued to write for Faulkner & Gray as well as other pubs, including Bank Director Magazine, Stores Magazine, Credit Card Management, ABA Banking Journal, Cash Flow Magazine and Bank Technology News. In fact, Patti worked her way into Payments Editor for Bank Technology News and has held this prestigious title since last year. At present, Patti is also Contributing Editor for Stores Magazine and Technology Editor for Bank Director. What an accomplishment!

Having specialized in payments all these years, Patti is also about to transition to an online news and analysis site for the payment industry. She is developing an online payments newsletter, and the portal will be up and running by summer's end 2001 - accessible through www.takomagroup.com.

"I see my role as being a clearing house of information for the payments industry," Patti Murphy says.

All of us here at The Green Sheet heartily support her role and ask that you join us in welcoming Ms. Murphy. We know you will find her column informative, insightful and right on the money!