Heidi Miller Challenges the Status Quo at NACHA Payments 2009

by Erin McCune on April 6, 2009

in ACH, Conferences & Meetings, Erin McCune, Facebook, NACHA Payments 2009, Web 2.0 in Financial Services

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Heidi Miller, CEO JPMorgan Treasury & Securities Services, didn’t pull any punches this morning when she addressed the NACHA Payments 2009 conference.

The financial crisis – and resulting economic uncertainty – is just one of the real dangers to the ACH network but those same dangers can be an opportunity for improvement. (I suspect she purposefully choose the word “danger” over the more benign “challenges.”) JPMorgan has been the largest ACH transaction originator for 34 straight years, so these words of advice come from deep expertise and common interest with the NACHA community. ACH processing is core to JPMorgan’s business.


Dangers:

All payments systems carry risk, even if they aren’t in the headlines. Just because ACH isn’t regularly featured on CNN and Fox news doesn’t mean it is without risk. Managing risks help the industry and the network improve. become more efficient, and more appropriately priced.

Large value transactions (over $1 million) are a mere 0.02 % of ACH volume but they are 38-46% of the payment value processed via ACH (based on data from EPN). This low frequency, high severity risk poses a true threat to the system. The unprecedented, unlikely, improbable does occur (recent events demonstrate) and we cannot afford to not mitigate risk. Miller suggests that these types of high value, low volume transactions should be migrated to the wire system once it is modified to carry remittance data. This will keep NACHA off the front pages of the financial press.

Same day ACH has its proponents, and benefits, but today the network does not have sufficient safeguards in place to support intraday credit risk. The necessary reporting capabilities do not exist to provide the ACH network with the appropriate level of risk management to support same day transactions. Miller wonders, why build redundant capabilities when the appropriate risk mitigation exists for wires today?

In today’s climate does the industry have the resources to support redundant infrastructure? Pariter, the joint-venture between BofA and Wells Fargo for “on-we” ACH processing is characterized as an operational efficiency for both institutions. Miller suggests that the existing networks are moving too slowly, and warns that as more and more volume migrates to private alternatives, incumbent ACH network participants will experience increased cost.

Opportunties:

The current ACH network pricing does not appropriately distinguish between risk and non-risky transactions and originators. All participants pay the same price. There was a movement to charge originating banks for unauthorized returns, but the modification was voted down. Recently some tiered pricing schemes have been introduced, but Miller characterized these efforts as “timid.” She suggested that volume pricing tables are inadequate. Consider, as an alternative, the SWIFT network; it has established pricing tiers that incent the highest volume network users to submit even more volume (up to 50% more for no additional charge). All members benefit as the volume increases.

NACHA can do a much better job of monitoring third party processors. Although mitigation steps are in place, they are not robust enough (Miller actually said not Draconian enough!) to discourage risky behavior. The ACH fee structure needs to be amended to address risk. This will ensure that participants not only know their customers but their customers’ customers. This is necessary to safeguard the entire ACH network. Miller also suggests that the ACH network cooperate and share data with other payment networks in order to more effectively manage risk.

Miller noted that although over all ACH transaction growth continues, in 2008 the growth rate dropped to single digits and declined as the economy soured in the later part of the year. ACH products are becoming mature. The network needs to look to new market segments in order to continue to grow. She cited B2B as a huge new opportunity to generate native ACH transactions (Glenbrook heartily agrees; and NACHA has a number of B2B initiatives under way, particularly targeting the SMB market) and suggested that P2P transactions remain stubbornly paper based, too. But fast acton is necessary if NACHA and the ACH network are going to be able to capitalize on these opportunities.

Emerging, alternative solutions such as Bill Monk (operated by Obopay) provide consumers with new ways to transact. They sign up for accounts online, send transaction data via SMS, and the service aggregates and settles transactions. Miller does not use Facebook but she says she is fascinated by it. She observed that banks and social networks could be considered competitors. And, in fact, when it comes to P2P payments she believes JPMorgan and Facebook are competitors. Facebook, MySpace, and Twitter will move into payments – its a question of where and when and how. New, younger consumers expect far better integration of financial services and their online/mobile environment. There are countries in the world where the mobile phone is the payment network. [As an aside, I was amused that Miller characterized social networking as a West Coast phenomenon; do we out in California somehow intuitively understand the value that resides in capturing this market?]

Finally, Miller cited healthcare as ripe for payment innovation. Administrative costs of the US healthcare system are five times that of the level of OECD countries. Five times! That’s embarrassing. We spend 100 billion in healthcare administrative costs each year.  A lack of standards, complexity of payments (insurance, hospital, consumers, doctors, gov’t entities, etc.), and no common infrastructure for the healthcare industry inhibit efficiency. [This of course, as we all know, is a far larger issue than just payments. Considerable money, effort, and attention will be focused on the healthcare space in the coming years. Will the ACH network be ready to help solve the problem?]

I don’t know Heidi Miller but I was impressed. I introduced myself afterwards and offered her a West Coast primer on the intersection of Web 2.0 and banking. I’ll let you know if she takes me up on it.

One Response to “Heidi Miller Challenges the Status Quo at NACHA Payments 2009”

  1. While Heidi Miller’s speech had interesting commentary, nothing really new was revealed. Removing large value payments from the ACH has been a topic for many years. It is interesting to note that Ms. Miller was touting structured remittance for wire transfer as a solution for large value payments on the ACH when JP Morgan was the bank most vocally opposed to adding structured remittance to wire transfers.

    While the large value dollar amount is significant and the transactions few, many of those large value payments are CTX payments where a single amount covers multiple payments. Many payrolls total well over a million dollars, is she suggesting that those direct deposit payments move to the wire as well. Clearly the credit risk is no different for a payroll file hat exceeds a million dollars than a B2B payment of the same amount. The company must fund both and the ODFI needs to manage the risk either with a balance on hand or a credit line.

    With regard to comparing SWIFT pricing to ACH pricing that is like comparing apples to oranges. SWIFT pricing can vary from $.10 to $.15 a transaction maybe less for the large users (since pricing is not public). Compare the SWIFT price to the price that the ACH operators charge, a mere $.0025 a transaction. Based on the transaction volume on SWIFT and the volume on ACH, SWIFT pricing would need to be as low as $.01 for all transactions to be equivalent to the U.S. ACH. I would suggest that Ms. Miller review the P&L of SWIFT as compared to the P&L of the ACH operators, she would see that SWIFT needs to do significantly more price cutting and streamlining their spending habits. JP Morgan needs to understand that the value of the ACH network is achieved by the receivers and that not all of the benefit needs to be passed back to the originators.

    The danger of Pariter is real and I have to give Ms. Miller credit for taking that topic on. She was also on target on reigning in healthcare costs.

    Overall, this was a good speech. Ms. Miller should get the various silos at JPMorgan in sync because this is a bank that is extremely reluctant to change and innovate when it comes to payments.

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