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.
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.
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.