At the start of its fourth decade, the Automated Clearing House — a payment method most commonly known for facilitating payroll direct deposits — has found itself firmly in the crosshairs of the card networks and alternative payment providers.
ACH, built as a way to convert paper checks into electronic payments when making its debut in 1974, has become the standard for payroll deposits because it is a lower-cost alternative to traditional payment methods. But the tradeoff has always been its speed; it can take several days to clear and settle an ACH payment, making it a clunky and aggravating option for some businesses and consumers — and a non-starter for retailers. And since ACH typically relies on both the sender and the recipient having a bank account, it is rarely an option for the unbanked.
Two forces threaten to change this longstanding status quo.
The first is same-day ACH, part of an overall industry push for faster payments. It will initially benefit business-to-business payments and eventually trickle to the retail side when ACH debit is added. These changes start to take effect Sept. 23.
The other force is the exploding popularity of alternative payment options for ACH in its dominant areas. The prepaid card sector has gained significant ground in handling payroll, and Visa and Mastercard are succeeding in giving their brands preference over ACH as a funding method in the PayPal ecosystem.
But there are ways to push back — hard — at the forces threatening traditional ACH.
The Loyalty Factor
Mastercard's pending acquisition of the U.K.'s VocaLink is one of the ways ACH is expected to reach new audiences.
The goal of this acquisition is, in part, to allow ACH payments to benefit from many of the same advancements that have helped credit and debit cards flourish, said Michael Miebach, Mastercard's chief product officer.
"The convergence of cards and ACH rails, many years out, is something that is absolutely in the cards," Miebach said. "If you take our existing services that we have today in Mastercard. … and you assume for a second that loyalty matters to a consumer regardless of the underlying type of payment, you can make an ACH payment an even more valuable payment by combining it with a loyalty feature."
Particularly in the U.K., ideas like these are sparking interest, he said. However, there are some market differences to consider when exporting the concept to the U.S.
"In the U.K., fast ACH is already established," Miebach said. "Here in the U.S. it's a bit different because fast ACH doesn't exist here yet, so you start off the conversation at a very different level."
However, he expressed confidence that the U.S. will get to the same point as the U.K., in part due to VocaLink's existing contract with The Clearing House, one of the parties developing a fast ACH system.
The Importance of Speed
Mastercard — and the many other parties interested in fortifying the business case for ACH — is hinging its ambitions on the promise of a faster ACH system. But how big is the demand for this system in the U.S.?
For their part, some merchants have shown a desire to have more transactions move through ACH or a similar process to avoid card network interchange fees. The Merchant Customer Exchange mobile wallet venture was built in part on that premise, using ACH payments as the foundation, but their product never went beyond the testing phase and was shelved in late June.
It is currently unclear whether ACH-based mobile wallets would become a more favorable option if same-day speed became a factor.
Even under same-day rules, ACH will not be able to compete against the real-time validation and memo posting of the card networks, said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.
Receiving depository financial institutions will hop on board with same-day ACH right away because they are required to handle the two clearing times, but it will take some time to determine how originators like billers, payroll processors and retailers adapt to it, Crone said.
"For same-day ACH to be competitive [with card options], it has to expand its points of acceptance and has to grow beyond billers to get to more retailers," Crone said.
Visa and Mastercard have an advantage in that they are not restricted to two clearing windows, Crone added.
LIke any other advancing payments technology, ACH has to look for new customers in areas not yet developed, Crone said.
"The breakout opportunity for ACH and faster payments in general is to adopt its infrastructure into a greenfield opportunity," he said. "Rather than chase the credit cards, take the infrastructure and adapt it to land-blocked accounts that aren't available for these services, and you do that through mobile payments or mobile cardless cash."
For its part, Nacha — the organization that maintains the rules and transaction types for ACH in the U.S. — has already established a mobile wallet team to study the potential for industry collaboration, including participation by the card networks, for the potential use cases of same-day ACH.
And card networks will absolutely have to respond to this push from rival ACH providers, said Nancy Atkinson, wholesale banking expert and senior analyst with Aite Group.
"I believe same-day ACH puts more pressure on the card networks, even with the networks' movement towards same-day capabilities," Atkinson added.
With both ACH and card transactions, the funds are recognized in the receiver's bank account, but the posting of the payment to the payer's account by the receiver may be delayed to the next day, Atkinson said. "For years, consumer payments have been supported by 24/7 customer service at banks, but business payments have not."
While Mastercard aims to align itself with ACH through its VocaLink deal, Visa is marketing its competing Visa Direct platform to the same audience. The platform was developed for the U.S. in collaboration with the bank-run Early Warning venture's clearXchange network, also known as Zelle.
Visa Direct's technology enabled the card brand to make peace with longtime "frenemy" PayPal, according to Cecilia Frew, senior vice president and head of U.S. push payments, operating Visa Direct in the U.S.
Visa and PayPal announced a deal in July in which PayPal would openly market Visa as an alternative to ACH for funding PayPal accounts.
"Before the agreement, a PayPal user had only one way to get money out of a PayPal wallet or a Venmo wallet, and that was ACH that would take a day or two," Frew said."Now, they can use this new option [Visa Direct] and it is all about offering choice to the customer."
Ultimately, transaction speed was a key factor for both companies and "a great way to collaborate with each other," Frew said.
Venmo, PayPal's person-to-person payment option, is a fast payment method, but it "takes days through ACH, not minutes," Frew added.
The main benefit beyond customer choice that Visa wanted to secure in the PayPal deal was increasing volume for issuing customers while improving the overall card experience, Frew said. "Consumers want to use cards to see their money more clearly and send money."
Slow and Steady Won't Win the Race
ACH's fate in the U.S. is linked to the many faster-payments initiatives currently in play. The Federal Reserve is coordinating this effort, but it is not in the business of picking winners and losers. Thus, even though several pro-ACH companies are working with the Fed, their future is not guaranteed.
Payments technology provider Dwolla, for example, has been working on a faster payments rail for the past two years as well with its FiSync protocol and white-label API as an alternative to ACH. Early Warning and clearXchange/Zelle have been pushing the concept that their P2P payments network can be expanded into a real-time environment.
If ACH doesn't deliver on the type of payment speed that would benefit retailers and consumers beyond what it currently offers, The Clearing House, an ACH operator, says the next best thing is developing a new rail for real-time payments to operate under the hood of financial institution and network products already in place.
But this new rail will operate only for push payments or a request to push a payment. It will not have a debit, or pull payment, option like ACH. Out of the gate, it will concentrate on bill payments, payroll, insurance claims and business-to-business needs.
The Clearing House is hoping to launch its real-time payments option during the first quarter of 2017, in collaboration with VocaLink and FIS.
"This will be a brand new channel, a new rail that is not ACH, but available to all," said Amy Smith, head of payments association for The Clearing House. "It is one of the proposals that the Federal Reserve is looking at [for faster payments]."
The Clearing House, which will deliver payments in less than nine seconds on the new rail, has a goal of making it available to, and connect with, every financial institution in the U.S.
"This is not a closed-loop project that will only benefit a few," Smith said at a recent acquirers conference.
The rail will initially have a $25,000 limit, but that will likely elevate as the industry gets more experience in real-time transactions, Smith said. It will target all push payments financial institutions have in place such as business-to-person, person-to-person, person-to-business and business-to -business.
If The Clearing House option were to eventually expand to pull payments, or those from a checking or debit account, it could ultimately represent another option for merchants.
Until then, same-day ACH may yet rise to the forefront as an element in merchants' ongoing war with card networks over transaction interchange rates.
"If markets demand changes, I expect the card networks will eventually modify at least some of their pricing models," Aite's Atkinson said.