Last September, NACHA issued a proposal for same-day processing of Automated Clearing House (ACH) payments. Bankers are now debating among themselves whether this would be a good thing for the industry. After balancing the pros and cons we think the answer is yes.
Many banks would be forgiven for viewing NACHA’s proposals as the latest in a long line of governmental or industry initiatives that, if not designed to erode revenues and raise costs, have certainly had that effect. After all, margin pressure is the number-one concern in banking today – greatly enhanced by recent regulatory restrictions on debit card interchange and overdraft fees – and has long been the challenge in the retail business. Boston Consulting Group has forecast a 7% decrease in annual revenues accompanied by a simultaneous increase in transaction volumes of 9% CAGR over the next ten years. Mandating a shorter time frame in which ACH transactions must be processed and funds made available to receiving banks potentially reduces float and interest revenue and contributes towards this trend.
There are also legitimate questions about how far same-day ACH payments will cannibalize existing income from more lucrative same-day wire transfers, although experience from other schemes globally suggests that the threat of cannibalization may be more theoretical than actual. Even so, it remains a factor for banks concerned about offsetting the costs associated with implementing any new payment scheme.
Despite such concerns, same-day ACH constitutes a lower-cost alternative to checks, credit and debit, which will allow banks and retailers to compete more effectively by developing new, higher-margin revenue streams. In fact, there is a real opportunity for banks to divert debit and check traffic to same-day ACH and thus greatly improve deteriorating margins (see chart, “The Margin Opportunity of Same-Day ACH”). Check conversion, which currently accounts for approximately 30% of total volumes in the U.S., is the most immediate opportunity. If priced right, it can make sense for corporate customers and retailers who would benefit from same-day funds availability.
The benefits of improved, low-value ACH transfers will be of particular benefit to smaller businesses that tend not to have the volumes needed to negotiate preferential wire transfer rates. From here it is a short step to a series of carefully targeted, premium-priced same-day services that offer differentiation.
Perhaps more importantly, same-day ACH offers banks the opportunity to compete against the new entrants who are targeting consumers and businesses with lower-cost solutions that apply downward pressure on bank’s existing revenues. This is the real challenge for banks, and with the shortened timescales proposed by NACHA, new payment types such as person-to-person (P2P) transactions and mobile payments become more viable. Both areas are set to experience significant growth in volume over the next few years, and same-day ACH gives banks the chance to provide a new, more profitable payment mechanism that maintains the immediacy of mobile but costs a fraction of wire and checks. This is an important step forward for banks as it makes traditional banking services more competitive, while simultaneously allowing them to place a stake in the ground currently dominated by nimble, niche players.
More generally, same-day ACH provides an infrastructure in which the innovations needed to deliver on customer demands for greater convenience, security and relevance are made possible. Although ACH payments may need to become closer to real time before they are able to underpin mobile payment schemes in full, the move to same-day transactions is a positive step.
Same-day ACH can also support web transactions so that funds are more quickly available to merchants who reduce their risk by assuring payment before goods are shipped while still meeting customer expectations for convenience and speed. The opportunity is there to offer discounts that incentivize behavior, funded on both sides by the avoidance of interchange fees.
Another benefit is the potential to significantly reduce counter-party risk, still one of the biggest threats in the markets. Being able to move money and make transactions faster, especially if fraud and fund checks are conducted in real time before the transaction is accepted, can provide a greater degree of confidence and make it easier to do business.
Finally, same-day ACH is another step closer to creating a complete circle of payments in which traditional distinctions between wire, ACH and others are broken down. In this scenario, customers are no longer required to understand the various payment types and choose the most appropriate in any given circumstance. They simply select a fund transfer and it falls to the bank to route that transaction in the fastest, most effective and cost-efficient manner – one of the basic premises of a truly agile payment provision.
On a practical level, same-day ACH will affect both the basic transaction processes in place and the technology that supports them. NACHA is avoiding the technological upheavals caused by the UK Faster Payments initiative, which required the installation of a brand new network and a new software application at the bank to support it. However, the move to a more frequent and less rigidly scheduled timetable is a significant process change that is likely to challenge systems with limited scalability and performance capability. Even where systems can adapt to the new load, handling exceptions in a very short window will be challenging for many banks.
For institutions that have already moved to a more agile payments environment, the changes to volumes and payment patterns are more easily incorporated into the technological infrastructure. For institutions operating on disparate, slow and overburdened legacy infrastructures that do not have the scale and performance needed, the same-day ACH proposal is the latest – but almost certainly not the last – pressing incentive to update increasingly critical payments technology.
Since same-day clearing provides little opportunity to stop or reverse payments once authorized and completed, the new ACH arrangements increase the focus on financial risk management, fraud prevention and detection. However, it is worth re-emphasizing that NACHA is not proposing a real-time payment scheme. Instead it is inviting comment on a same-day settlement mechanism that will require the receiving bank to make funds available only by the end of business. Nonetheless, it will involve effective near real-time fraud detection methods and credit checking to ensure that appropriate funds are available and that illegitimate transactions are weeded out.
It is hard to deny that this is a proposal whose time has come, and that the benefits offered to banks’ customers are significant. However, these advantages will only be realized if the move to same-day ACH is managed effectively. As with any proposal of this type it can be difficult to know what the first steps should be. There is no denying that preparing for even a much-anticipated move such as NACHA is proposing, with a lengthy consultation period and plenty of lead time, is a major change program.
What we have seen with other same-day ACH projects around the world is that the best response is a measured one that involves and engages all relevant parties from the outset. This would require business, operations, risk, technical, fraud and innovation teams to work together to assess all the issues, understand the opportunities and implications and come up with a strategic response that ensures that any technology investments will deliver on the business opportunities offered.
The NACHA proposals may still be in their infancy but the time is right to mandate same-day ACH.
Mr. Blatt is senior vice president, Strategic Planning & Marketing, for Waltham, Mass.-based ACI Worldwide Inc. He can be reached at firstname.lastname@example.org.
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