Mobile payments settled over the automated clearinghouse system officially have entered the mobile-payments space, but not without sparking debate.

Skeptics contend mobile ACH payments are less beneficial to consumers because they are not settled immediately, leaving them–and payment recipients–vulnerable if their account becomes overdrawn.

Merchants, however, may reduce their payment-acceptance costs by avoiding more-costly card-network interchange fees. Moreover, mobile ACH payments eliminate the need for consumers to use cash or pay on credit, proponents say.

Regardless of which position one takes, mobile payments are a growing phenomenon, and more merchant processors are considering adding mobile-ACH payments to their product offerings. However, the time it takes to settle ACH transactions could play a role in how quickly merchants, and consumers, embrace the technology.

All ACH debits, draw funds from consumers’ accounts electronically using the magnetic image character recognition data from personal checks, settle one banking day after being initiated, Mike Herd, managing director of ACH network rules at Herndon, Va.-based NACHA, tells PaymentsSource.

By comparison, PIN-debit transactions settle almost immediately. And providers of mobile-ACH payment services are well aware of the difference and the potential impact.

To address the issue, Redwood City, Calif.-based Obopay Inc. in September began offering consumers the option to route mobile funds transfers over First Data Corp.’s Star PIN-debit network, which accelerates the payments and may make the service more appealing to bank customers (see story).

Additionally, Obopay updated its text-message interface to enable users of its service to use Star debit cards to pay recipients who have accounts at participating Obopay banks (see story).

The Federal Reserve System also is working to speed up ACH settlements. On Aug. 1, it rolled out same-day ACH as an opt-in service for financial institutions, Beth Robertson, director of payments research at Javelin Strategy and Research in Pleasanton, Calif., said in a recent research report about same-day ACH payments.

The Fed offers the opt-in, same-day settlement capability for various categories of ACH transactions, such as check-conversion transactions and online and phone debit-transfers, Robertson explained in the report. And since Aug. 1, “12 banks are participating in same-day ACH with test volume only,” Robertson said via e-mail.

Technology Changes

Financial institutions, however, face a variety of technology changes and cost issues before accommodating same-day ACH, including necessary modifications to intra-day posting and cross-channel integration, Robertson said in her report.

Despite such issues, mobile ACH payments are becoming a reality, and providers and networks should become more engaged with the ACH network because “mobile options offer an enormous payment-servicing opportunity that will benefit from same-day settlement,” Robertson said.

Indeed, some smaller companies, such as Cimbal Inc., do not view the slower settlement period as an issue with mobile-ACH payments, especially because of the new Federal Reserve pilot allowing same-day ACH settlement, Cimbal CEO Christopher Boone tells PaymentsSource. Moreover, “Cimbal has the ability to settle immediately, not just same-day,” he adds.

Additionally, debit and credit card transactions are expensive for merchants because of interchange and processing fees, Boone says. Therefore, “banks and consumers are both seeking ways to make money from necessary low-margin products such as checking accounts,” he says.

Cimbal, a San Francisco-based electronic-payment service provider, recently launched a downloadable mobile-phone application that supports contactless ACH payments (see story). The application uses a smart phone’s camera to scan two-dimensional barcodes displayed on another phone or a computer screen.

To use the application at participating merchants, consumers tell the cashier they want to pay using Cimbal when ready to make a purchase. The cashier presses a Cimbal button on the store’s point-of-sale terminal, which sends a message to Cimbal’s system that a purchase is being initiated.

Cimbal sends back a single-use code, which displays as a two-dimensional barcode on the terminal screen. The consumer then launches the mobile application on and places his phone on the screen to scan the barcode, initiating the ACH payment.

“We will eventually incorporate debit and credit card technology,” Boone tells PaymentsSource.

Cimbal chose to go with ACH-based payments because “ACH mobile payments can empower consumers,” Boone says. Through ACH, consumers without PIN-debit cards also may use their mobile phone to make payments, he notes.

Participating merchants do not need a specific payment terminal to incorporate Cimbal into their checkout process, but they do need to download software to the terminal, he says. “As long as the merchant has the “ability to have a network connection like wireless, then Cimbal will work,” Boone says.

Merchant’s using Cimbal pay a fee based on transaction volume, which is “easier and cheaper than interchange,” Boone contends, noting the transaction fees are a fraction of the interchange rates merchants pay to accept card payments. Boone declined to provide more specific pricing details.

Consumers using Cimbal do not pay a fee to make in-store or online purchases. Person-to-person funds transfers also are free, though Cimbal charges funds recipients a fee equal to 3% of the transfer amount, Boone says. The company requires both parties in a funds transfer to have a Cimbal account.

Several U.S. merchants are testing Cimbal’s service, but Boone declined to provide any of the stores’ names or say how many merchants are participating. The company also is in contract discussions with several international retailers, telecommunication companies and financial institutions to accept and distribute the mobile-payment service globally, Boone notes.

Because mobile ACH payments are not yet mainstream, “Cimbal may have challenges with convincing people to adopt its payment method,” Adil Moussa, an analyst for Aite Group LLC in Boston, tells PaymentsSource. “Unless a company has something to offer the consumer for using a specific payment option, the consumer will not get there on their own.”

Enrollment Issues

Additionally, it is not always easy for a consumer to “enroll in a payment plan that involves linking to a checking account, like an ACH-based payment,” says Todd Ablowitz, president of Double Diamond Group, a Centennial, Colo.-based consulting firm. “Most consumers do not carry around checks or account information. Plus, once they do set up an account and begin making purchases, they don’t get any instant gratification because the payment takes so long.”

For example, “most consumers making a purchase do not want to wait until the merchant can verify their bank account, when the consumer can just use a credit card,” Ablowitz explains.  Some consumers may get deterred from signing up for a payment scheme that involved linking to their checking account, Ablowitz adds.

In some cases, a consumer cannot make an instant payment because they have to wait for account verification through a small deposit made by the ACH payment company,” he adds.

Despite the challenges Cimbal may experience with consumer sign-up, bigger companies, such as PayPal Inc., also are incorporating mobile ACH payments into its payment scheme.

The San Jose-based unit of eBay Inc. soon plans to allow consumers to pay for purchases from various merchants through a service called Mobile Express Checkout. PayPal is testing the service, which is similar to its Express Checkout for online purchases, a PayPal spokesperson tells PaymentsSource.

Mobile Express Checkout enables consumers to pay from their PayPal account when shopping via their mobile phones at large retailers such as Nike Inc. and Sears Holdings Corp., the spokesperson says

For purchases made using Mobile Express Checkout, consumers enter their PayPal account number and their password or mobile phone number when prompted to do so on the PayPal mobile site. From there, the checkout process continues as though they were making a PayPal purchase online, the spokesperson explains.

Different from other payment processors, however, PayPal charges merchants the same transaction fee for all payment types because “merchants do not actually see how the customer funds a purchase,” the spokesperson says.

Within the U.S., PayPal accepts all major credit and debit cards, bank funds via ACH, and GreenDot MoneyPaks, the spokesperson says.

PayPal-accepting merchants pay between 1.9% and 2.9% of the sale plus 30 cents for payments over $10. For payments less than $10, merchants pay 5% plus 5 cents, the spokesperson says.

Consumers appreciate the option to link their PayPal account to their checking account because they “want to control where, when and how they make a purchase,” the spokesperson contends. If consumers do not want to pay with a credit or debit card, then they still have another payment option, the spokesperson adds.

Many consumers view ACH-based payments as a mode of convenience, the spokesperson says. “If someone sends you money, you can deposit it right into your bank account. If you send money or make a purchase with a credit card, then you have to carry around a credit card balance.”

And for PayPal, it is less expensive to process ACH transactions than debit or credit card transactions, the spokesperson says, declining to provide specific processing fees.

Remote Deposit Capture

PayPal also recently added a mobile remote-deposit capture feature to its iPhone application (see story).

Mobile-deposit capture technology, which USAA Federal Savings Bank was first to launch last fall, enables customers to deposit checks into their bank accounts over the ACH-network using images captured with cameras on their smart phones.

As more electronic-payment processors offer mobile ACH as a payment option, industry standards and rules are becoming increasingly necessary to ensure the process operates smoothly. NACHA members approved a mobile ACH rule in April, and it will become effective on Jan. 1, NACHA’s Herd says.

Because more companies are starting to offer mobile ACH payments, financial institutions will process the payments in the same manner as online purchases. “For a company allowing consumers to initiate ACH-debit payments over a wireless network, we consider it to be the equivalent to an Internet-based transaction and will use the same payment processing code as online transactions,” Herd explains.

Additionally, by using the same coding as Internet-based transactions, “NACHA can still provide different types of requirements, like risk management, to protect against fraud,” Susan Pandy, NACHA senior director of Internet and e-commerce, tells PaymentsSource.

NACHA also is creating training materials and is looking to regional payment associations to train financial institutions. It eventually plans to add more information to the rules as mobile-ACH payments becomes more mainstream, Pandy adds.

Despite the attention recently to mobile ACH as a payments method, it remains to be seen whether the payments industry will adopt it, Aite’s Moussa says.

“Companies are trying to reproduce a system that already is working, which is credit and debit card payments,” he says. “In order to be a player in the payment field, you really have to spend a lot of money to become a household name.”

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