Editor’s Note: This is one of a pair of ACH commentaries that we are publishing today on Payments Views. Be sure to also read Erin McCune’s post “The Future of ACH.”
There is a tremendous focus on the ACH network right now within the payments industry – and with good reason. The ACH is the sleeping giant behind many of the new payments products that have emerged in the online domain over the past several years. The potential role for ACH transactions at the physical point of sale, and for mobile transactions may be even greater.
Jan Estep, NACHA’s new President and CEO, has been in place for over a year now. Sadly, I missed the NACHA conference this spring, so I didn’t get a chance to hear what she said to the gathered masses of the payments industry. But I spoke to her last week and got her observations on some of the issues of the day – or the decade – for the ACH system.
Same Day ACH
In Glenbrook’s Payments Boot Camp, I always enjoy the section where we talk about the checking payment system – and how image clearing has led to checks – which start life as paper – clearing more rapidly than electronic transactions (at least, cards or ACH). How is that possible? Because the checking payment system has myriad paths to clear items: and they settle as soon as they are delivered to the check writer’s bank. Increasingly, that is being done on a same day basis – so the settlement is same day. ACH and card payment systems, on the other hand, all clear on standardized schedules – the day AFTER presentment.
This standardized settlement schedule has arguably been one of the benefits of the ACH in the past. Banks and end users could rely on schedules that were more predictable, and more understandable, than the “who knows when it will clear?” environment that characterized pre-image checks. But now, NACHA and its two operators (the Fed and The Clearing House) are left with a network that is delivering second-best clearing times.
In response to this, the Fed announced earlier this year that they would implement same day ACH settlement in 2010. They limited it to check conversion transactions, apparently intending to ensure, at a minimum, that a bank that decides to convert a deposited check to an ACH transaction would not be disadvantaged in clearing times by doing so.
There are a number of interesting questions around the Fed’s decision. Why, for example, did the Fed lead the charge on this, rather than NACHA? It is not clear yet, for example, whether or not the Fed’s announced program will require NACH A to amend their rules. Today, NACHA rules specify the timing of debits and credits to the receiver’s account, based on a date that the FI puts into the transaction format – the settlement date. The rules don’t cover the timing on when the file needs to be delivered to the processor relative to that date. Up until this change, everyone’s accounts (the two banks, the originator, and the receiver) all had their accounts debited or credited on the same day. Does the Fed program mean that there will be intrabank float with ACH transactions?
Secondly, is this the first step on a slippery slope to non-standard clearing times for ACH? What will this do to consumer (or merchant or biller)’s comfort with these transactions? Jan thinks this is an issue that the banks will be able to deal with effectively. Overall, her view is that this is a relatively minor enhancement to the ACH processing environment. She noted that clearing times haven’t changed in over 30 years, and thinks that the network does have an ability to improve settlement times going forward. She stressed that it does not change the batch nature of the system, nor is it a new payment service, such as the U.K. has introduced with their Faster Payments initiative. “In the U.S.”, she said, “We are simply striving to improve settlement times – at a minimum, to put ACH on par with checks”.
One of the industry hot button issues with the ACH, of course, is interchange – or the lack of it in the ACH system. Very simply put, this means that the economics of the payments system, when compared to interchange-bearing card payments, are less attractive to the consumer’s bank, and more attractive to the merchant or biller. This is the economic framework which has enabled the business models of a number of non-bank payments products. NACHA made a dramatic change to the economics of ACH when they introduced what is called an “authorization fee” on the fledging Secure Vault Payments transaction type – an interchange rate in all but name. For the first time, bankers participating in an ACH program could receive compensation from another bank, defined by the network. Merchants or billers, of course, will end up paying these costs – just as they do with card payments. This model, if it succeeds, would allow bankers to be as enthusiastic about ACH as a mechanism to draw funds out of consumer accounts as they are today about debit card transactions. Jan, with a strong debit card background, is in an excellent position to navigate these waters with the bankers who own the network and the other parties who use it.
We didn’t spend much time talking about SVP itself (I’m a skeptic, and think the industry has already devoted enough cycles to this!), but I asked Jan about her thoughts on whether or not this concept might migrate to other ACH transaction types – current or future. She was very clear as she explained her view – that network pricing, be it for transaction switching or authorization, must be based on a solid understanding of “value received for value paid”. In the case of SVP, merchants and billers have a clear value proposition in being given fully authorized, good funds transactions. She sounded very open to the concept of future experiments in that direction – as long as they are grounded in a similar and mutual understanding of value.
We discussed the issue of brand with the ACH network. Generally speaking, there is no market-visible cross-bank brand for ACH transactions: so a payer using one bank and a payee using another bank don’t really have a common vocabulary to explain to each other how the payment will be made. Payroll transactions are actually the exception that proves this rule – “Direct Deposit” has achieved common-vocabulary status. Other ACH transaction types don’t have this common vocabulary –words like “eCheck”, “EFT”, and even “ACH” seem to be used to mean widely different things by different people. The problem is exacerbated by the fact that the ACH is used both to “push” payments (from payer to payee) and to “pull” payments (from payee to payer). Jan thinks this is an important issue for the network to address, although she doesn’t use the “b” word. There needs to be, she said, “a recognizable term that can be used by all parties”. Right now, the ACH doesn’t have that, in the sense that other payments systems do (“card”, “check”). The time, Jan thinks, has come for the industry to “rally some common thought on this”.
Risk management of the ACH system is a source both of pride and frustration for NACHA and its banks. Pride, because the network operates with a very low level of fraud. Frustration, because the active efforts of NACHA, operators, and financial institutions to foster awareness about risk, and implement rules and practices to improve risk management, have inadvertently created perceptions that the network is risky. “Talking about risk shouldn’t be confused with saying that risks are high”, according to Jan. “The discussion is one that is necessary to keep risk levels as low as they are.” NACHA’s role, she thinks, is to keep participants aware of risks, and risk management best practices, without scaring people away from the network.
Collaboration and communication are important aspects for ACH risk management going forward, Jan thinks. Recently, NACHA has made public some figures on fraud rates by transaction type. This kind of collaboration and communication on fraud has characterized the card industry for many years – to this writer, it seems like a good direction for NACHA to pursue as well.
New Product Development
NACHA’s role in new product development is relatively small, especially when compared to the card networks (which regularly roll out new products, complete with brands, rules, interchange, brochure templates and implementation guides!). NACHA has an active set of councils (committees that banks and others participate in, and new ideas do bubble up out of these councils and turn into products – SVP is one example of that, the EBIDs service (which uses the network to deliver biller data to banks, so they can present bills to their consumers) is another. But arguably few of NACHA’s new products have been “home runs”. Where there have been serious volume spikes, it seems to be either unintentional (PayPal’s use of the WEB transaction type) or narrowly concentrated (ARC check conversions). There is cause for optimisim, however, when you look at the “base case” use of the WEB transaction type, for online bill payment – this has has been growing steadily.
We discussed in particular the outlook for growth on the POS transaction type. This is the “behind the scenes” transaction on decoupled debit, on cross-merchant cards such as National Payments System or Tempo, and on private label debit cards such as offered by Shell, Target, Nordstrom, etc. I had voiced my surprise that we had not yet seen a spike in volume from ACH-enabled grocery loyalty cards. Jan thinks there is potential, but feels that the value proposition to the consumer has not been strong enough yet to pull the consumer in. She thinks market research is what is required – but NACHA’s role is not to do this kind of research. Rather, NACHA will continue to rely on its community of owners and users, and on its own rule-making capability, to foster innovation and creativity where it can.
Jan is at a pivotal position as steward of the largest electronic payments system in the United States. It will be fascinating to watch what’s coming next. The real space to watch? How the ACH will be used by banks – and by non-banks – to make mobile payments. Stay tuned!