Leveraging the benefits of same day ACH
Many countries have taken steps toward the implementation of real time and same-day movements of money and the U.S., spurred by the Federal Reserve, is finally moving in that direction. In May, the National Automated Clearing House Association (NACHA) announced a strategy to move toward same-day payments on the ACH network.
Financial institutions now have an opportunity to leverage NACHA’s same-day ACH strategy to increase profits, drive revenue and offer enhanced customer service. In order to properly tap into such advantages, bankers must revisit how they deploy money movement services as part of their digital banking infrastructure. They must understand the history of the ACH network and the significant role it is likely to play as the U.S. moves toward a payment system that corresponds more closely with that of many other nations.
Where We’ve Been
Safety and security have always been priorities in the U.S. financial services industry. The current ACH network was formed more than 40 years ago to address these priorities as money is moved between financial institutions. NACHA reinforces this focus as an organization that makes “the safety and security of electronic payments” its “first priority.”
The assurance of these fundamental requirements and introduction of technology has supported the rapid growth of ACH payments over time. In 2013, NACHA reported that 50% of all payments in the U.S. were processed via ACH. This growth in transaction volumes is fueling demand from consumers and businesses in the U.S. for more timely and cost-effective options when moving money and making payments.
In other countries, such as the UK, the need to balance safety and security with the demand for timeliness and cost-effectiveness has been met through real-time payments. In the U.S., the existence of a legacy money movement infrastructure, established revenue models based on these legacy systems and the desires of the “big players” to maintain the established structure have been impediments to making these same improvements.
In 2012, NACHA proposed the Expedited Processing and Settlement Rule that would add additional file pickup times to provide same-day settlement of ACH transactions as a ubiquitous ACH Network capability. However, in August 2012, NACHA’s membership did not approve the plan. Despite an overwhelming vote from the majority of NACHA members in favor of the rule, the vote was weighted to favor the larger member financial institutions that voted against it.
In September 2013, the Federal Reserve Bank added its voice to those advocating for a same day payment system with the publication of the “Payment System Improvement – Public Consultation Paper.” Finally, in May, NACHA announced that NACHA’s Same Day ACH plan was approved and will be implemented in a phased approach with completion expected in March 2018.
Where We’re Going
Same-day ACH processing has significant implications for the financial services industry. One obvious impact will be the implementation and operating costs. Some financial institutions will simply look at this as costs associated with complying with regulatory change. Those with a strategic perspective will see these expenses as investments to be used to maximize the economic and service benefits that can be realized by taking full advantage of this innovation.
Same-day ACH services will allow banks and credit unions to reduce or even eliminate current costs associated with bill payment services, person-to-person (P2P) services and checks. Same-day ACH will also give financial institutions the opportunity to increase revenue associated with expedited payments.
Individuals and businesses understand the value of time in conducting commerce. As consumers, we have all been trained that if you want your book delivered in two weeks, it is free; if you want it tomorrow, there will be associated costs. This same concept is applicable to the time associated with money movement.
Expedited payments are common in the financial services industry today. Typically, they result in a $15 charge to a consumer to send a paper check through a courier service. With same-day ACH, banks can deliver expedited money movement for $.052, according to NACHA. The “first mover” advantages associated with these pending changes are significant to banks willing to rethink how money movement services are delivered within their digital banking channels. Institutions wishing to claim this advantage should consider the following steps:
- Assess how money movement services are provided within your digital channels. This includes internal transfers, bill payment, external account transfers (A2A), P2P and wire transfers. Are they distinct or integrated services? Are they provided by an external party or controlled by the financial institution?
- Evaluate the costs of processing transactions through the existing money movement processes. Many institutions are unaware of these costs and the potential for dramatic reductions that can be realized from optimization. To understand the potential savings associated with the same-day ACH rule, banks must understand the baseline for what their basic services cost today.
- Consolidate the money movement services provided in digital banking and take control of the user experience. This allows for the least-cost routing of transactions and the ability to assess expedited payment charges while preparing banks to address upcoming innovations in real-time money movement. (Working with numerous disparate third party providers makes it difficult to adjust due to overhead, complexity and cost.)
- Support NACHA’s efforts to expand the ACH Payment Directory service. This system provides the routing and account numbers for participating companies. As the number of participants increases, the economic value of same-day related money movement services will increase.
Taking full advantage of the same-day ACH rule within the digital banking market will require forward thinking and planning. Financial institutions need to be doing this anyway to address the needs of their digital customers. The fact that the payment environment now provides a means for delivering better service at a lower cost should make this an even more compelling path to explore.