The Federal Reserve Bank of Atlanta has signed an eight-figure contract with IBM to modernize the central bank's automated clearing house services as the industry gradually moves to speed up payments for the digital age.
It’s a project that’s likely to be mirrored at banks around the country in the next year or two, as the ACH system evolves from settling payments in the current three to five days to same-day settlement starting in September (per changes in NACHA rules), and on to faster payments beyond that.
"There’s a lot of change happening in the ACH world," said Keith Melton, director of commercial payments at IBM and a member of the Federal Reserve’s Faster Payments Task Force. "The windows to process ACH transactions are going to get smaller and smaller. Not only do central operators at the clearinghouse and the Fed need systems that can handle those changes, the commercial banks will as well."
The move comes at a time when the Federal Reserve keeps prodding the industry to catch up with countries like the U.K. and Singapore, where payments already happen at the speed of the Internet.
The Atlanta Fed serves as the central operator for the ACH network. Billions of ACH and check payment transactions electronically flow through its systems each year.
Brian Egan, senior vice president of the retail payments office of the Atlanta Fed, said its current mainframe system already supports same-day settlement. It's an optional service right now, used by a small number of banks in low volumes. The new technology will help the Fed adjust and scale up as all banks shift to quicker settlement times, Egan said.
However, the motivation behind the software purchase is a general need to cut costs and become more efficient, Egan said. “We’ve been trying to modernize our payments processing infrastructure to take advantage of changes taking place in technology and ultimately reduce cost,” he said. “That’s what this effort is about, trying to streamline and make more cost effective and efficient our current processing platforms in the electronic check and ACH space.”
The IBM Financial Transaction Manager for ACH software will be used to upgrade the system the Fed uses to input, process, clear, settle and provide billing and accounting functions for all ACH payments in all 12 Fed districts.
The Atlanta Fed has already been using IBM’s Financial Transaction Manager to handle electronic checks for four years; the Fed bank processes 30 million electronic checks a day. Having ACH and electronic check payments on the same platform will help lower costs, Egan said. Fewer tech support people will be needed, for instance, since there’s only one system they need to understand, not two. The bank also uses the IBM software as its core processing engine.
“We think by bringing the check and ACH systems together, we can reduce the number of environments we have to support,” he said. “We think we can reduce some of the technical folks we need to support changes because of the [more intuitive] user interfaces. These cost takeouts won’t happen until after we’ve gotten implemented and into production, so that’s a couple of years away.”
The Fed’s software demands are somewhat unique – for one thing it processes more than 100 million items a day. One might think its options for a new system would be limited. However, when Egan’s team sent out a request for proposals, it received responses from six vendors. (It also considered building its own system in-house.)
“A couple of them, after we had some dialogue with them, decided to opt out of the discussion, but we still had detailed conversations with four,” Egan said. IBM’s system appeared to provide the best cost proposition over the next five to 10 years, Egan said. Another factor was that IBM’s software met most of the Fed’s requirements.
Also, moving from a mainframe to a distributed application “gives us the capability to be more nimble in some respects,” Egan said. “We don’t have to get programmers to go do changes now, as happens with a mainframe. There are more user interfaces created in this system that allow the end user to make changes and get things done faster than we could in past.”
The timeline for the project has not yet been set. The Fed signed the contract with IBM at the end of last year and is having its first meetings with the vendor this week.
“We’re doing a detailed deep dive in the system and what it does and how we should go about building a project plan, when they can deliver some of the requirements they’ve laid out,” Egan said. “Once we have that, we’ll develop a project plan with time frames. Our goal is to get this in as quickly as we possibly can.”
Egan estimates it could be three years before the new ACH is fully in production.
“Traditionally when we’ve done these big programs, they take 18-36 months to accomplish, sometimes longer,” he said. “It depends how much work we have to do with testing interfaces as we build a project plan. We want to make sure that when we put this in that ACH payments continue to flow because you still want to get paid.”
Under the Hood
IBM says its FTM system, which has been around since 2011, is used by banks in other parts of the world, such as Lloyds in the U.K. and another customer in Singapore, to support their countries' faster payments initiatives.
Egan said he doesn’t expect financial institutions that use the Fed to feel any difference from the new system for some time. They will not need to make corresponding changes to their payments systems and the new IBM software will be transparent to them.
Eventually, however, the system should allow the Fed to offer them new services. For instance, better data gathering in the IBM software will let the Fed offer banks better monitoring of their customers’ payments. They could flag any payment that’s over a certain limit, such as $1 million, and provide instructions about whether or not to process the file.
“It would give them some capability to manage credit risk, customer risk and financial risk with a customer who may be sending more value than the bank would like them to send,” Egan said.
It will be interesting to watch how commercial banks cope with the move to same-day settlement and faster payments, and how many have to invest in software the way the Fed has.
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