Same-day ACH cost burden for community banks
The implementation of same-day Automated Clearing House (ACH) transactions has been getting a good amount of attention lately. In a letter to NACHA (the Electronic Payments Association) on February 4, the American Bankers Association expressed their support for a proposal to implement same-day ACH transactions. ABA believes that widespread adoption of same-day ACH transactions represents a fundamental step to promote faster payments across the entire industry, as it would level the competitive playing field for all financial institutions while allowing account holders to benefit from expedited settlement.
In a request for comment published on December 9, 2014, NACHA asked “What are the fraud and security implications of same-day ACH?” Initial reaction has been that same-day settlement will pinpoint fraud more rapidly and as a result, customers will be alerted quicker. While part of this is true, there is major work to be done to pinpoint fraud faster and it will come at a cost – particularly to smaller institutions.
Overall, the impact of same-day ACH on fraud prevention programs will constitute an added barrier for these institutions to adopt same-day ACH. The business case to get additional budget money for staff and system upgrades to support same-day ACH will be difficult, particularly since these banks already have limited staff and budget to handle current ACH volumes. The promise of leveling the competitive playing field will come at great expense for the smaller financial institutions and of course, their customers and members.
Same-day clearing provides a small window of opportunity to stop or reverse payments once authorized and completed. Processing transactions in near real-time, instead of batch processing, will require effective near real-time fraud detection methods and credit checking to ensure that appropriate funds are available. Decisions on whether a transaction is legitimate or fraudulent will have to be made extremely quickly.
Some large banks have already implemented same-day ACH. In September, Bank of America Merrill Lynch launched Digital Disbursements, which uses a proprietary electronic payment system called clearXchange, developed by Bank of America, JPMorgan Chase and Wells Fargo, to allow for digital payments to be deposited right into bank accounts. The large banks also have the resources to utilize real-time fraud detection, and massive implementation of same-day ACH will have little to no changes to their current fraud program and environment.
However, the story couldn’t be more different for smaller banks and credit unions ($10 billion in assets or less) as many will have to reassess their fraud prevention processes and solutions. Currently, a good number of those banks offer ACH Positive Pay or ACH Debit Blocks to help customers block unauthorized debits on their accounts. Those systems are entirely based on the overnight settlement paradigm, where companies make decisions on exceptions the following day.
If financial institutions decide to offer same-day ACH, they will probably have to forgo offering ACH positive pay in its current form to prevent unauthorized debits. System providers would have to build a real-time ACH positive pay, where customers have to be on standby, and would have about a one- to two-hour window to determine the validity of the transaction.
In terms of fraud operations, right now most banks processes have a two-day timeframe to tell the Federal Reserve that they want to return the ACH debit. With same-day ACH, banks will be forced to reengineer their entire fraud program and compress all their current processes into the two-hour window. Lots of banks use ACH processing solutions, such as PEP+, which are architected around overnight settlement for positive pay, return item processing, etc. Those solutions will have to be enhanced to provide another process flow for same-day ACH. System providers will definitely charge for that new service.
All ACH fraud prevention processes will need to be automated for those transactions. For example, it will be almost impossible to do callbacks on same-day ACH transactions in such a short timeframe. It will be very similar to wire fraud prevention programs, but on a different scale in terms of number of transactions and liability. Under ACH rules, the financial institution that promises that the payment is authorized automatically assumes liability for the payment. This is much different than for wire transfers, where the liability typically lies on the customer side, as part of the terms of the wire agreement.
For any banks, especially smaller ones, looking to upgrade their fraud detection programs in the near future, serious consideration should be given to the future adoption of near real-time payment and disbursements. Numerous fraud prevention programs today detect anomalies before the transactions get to the ACH network. Stopping transactions before they hit the clearing houses will reduce the operational effort needed to reverse them after they enter the network. It is also critical that banks prepare for this shift by dedicating additional staff to review ACH transactions closer to real-time or by implementing some form of real-time assessment via software solutions.
In any case, the focus should be on finding a balance between incurring additional costs and accepting additional risk of electronic fraud.