Is faster ACH a gold mine or a minefield for acquirers?
Same-day Automated Clearing House transactions exist, in part, as a first step in the faster payments initiatives taking place in the U.S. But are they lucrative enough for acquirers to add to their portfolio?
Even though ACH costs less than credit card interchange, the difference may not be compelling enough to win over merchants that are happy with cards and mobile wallets. But same-day ACH does have a devoted audience — delivering 13 million transactions in the last three months of 2016 — and a growing interest among government agencies and businesses.
Indeed, most of that traffic was direct deposit or business-to-business transactions, leaving those in the merchant acquiring business still scratching their heads a bit about which way to approach a less expensive, but potentially riskier, payment option for their clients.
Those who wait out technology trends to see if something better comes along might actually be taking the best approach. Some clearly believe that the growing number of person-to-person payment networks will overtake same-day ACH, rendering the ACH option redundant.
"Many processors out there are trying to offer very similar solutions, and you have to have something that stands out," Jeremy Epstein, managing director of the technology banking group at The PrivateBank, said during a presentation at the annual Midwest Acquirers Conference in Chicago. "ACH is not going to be a big revenue driver, it's going to be a small piece of revenue, but there are processors out there losing money because the merchants need ACH and they are not providing it."
For those ISOs and agents willing to add same-day ACH to their portfolio, there is no shortage of companies offering to make it easier for them to onboard merchants.
Because same-day ACH is quickly becoming an integrated solution, it stands out as an ideal service to fill out an acquirer's product suite, Epstein said.
"It is less expensive and more cost effective as a fixed fee instead of a percentage of each transaction," Epstein added, noting merchants will find it appealing as transactions shift to ACH because "some consumers want to make an electronic payment, and they don't have a credit card, but have a checking account."
However, getting sales staff motivated to sell something that doesn't bring a lot of revenue into the company coffers, and bump up their own commissions, remains a challenge.
"One of the things we struggle with as a third-party payment processor is finding the sales force out there that wants to sell same-day ACH," said Kim Olszewski, vice president of transaction processing at iStream Financial Services.
A faster ACH product is "a great value-add to your other services, but it is not a huge revenue driver," Olszewski said. As such, iStream encourages its staff to sell ACH alongside credit card products, simply adding between 20 and 30 basis points to the ACH deal.
"You also have to be creative with ACH sales, something different from what others are offering," Olszewski said. That differentiator could take the form of creating split payment setups between the merchant and a cash advance company; using a limited use account platform; or establishing a pre-fund settlement account to ease some of the risk of same-day ACH.
And there is plenty of risk — especially in the eyes of those who help businesses and merchants navigate payments risk.
"Same-day ACH is a new product and every time a new product is rolled out, no matter how buttoned-down it seems, fraudsters find a way back in," said David Barnhardt, executive vice president of product at GIACT, a payments risk management software provider.
It is common for fraudsters to use stolen personal credentials to open checking accounts and initiate ACH transfers, and a danger exists for same-day transactions to be processed before a bank is certain the funds exist in an account.
In short, Barnhardt has been a voice in processors' ears reminding them there is little room for error in processing same-day ACH transactions because it doesn't have the same type of authorization and verification process as credit cards. But that alone should not scare processors and acquirers from giving same-day ACH a fair shake.
"The fraud numbers pale in comparison to credit cards, which are much easier to steal [than a checking account linked to ACH]," Barnhardt said. "Credit card losses are in the hundreds of billions, while ACH is in the high hundreds of millions."
The success of same-day ACH ultimately may come down to how many consumers want to use it for retail purchases.
It is understood that same-day ACH is a fit for payroll deposits and for businesses to make faster payments to suppliers. And retail merchants may be looking at it more from that standpoint.
However, the Merchant Customer Exchange's failed CurrentC mobile wallet — which relied on ACH as a way to cut costs for merchants — may have left many retailers unsure as to whether ACH has a place at their point of sale. CurrentC never made it past pilot after more than two years of trying, and Chase Pay ultimately bought the technology, presumably to put the loyalty aspects of it into play.
Though same-day ACH will always have its use cases, the authorization and verification methods of P-to-P products like the bank-supported Zelle will put those services in a position to transfer funds faster and potentially safer than ACH, Barnhardt said.
Even though Zelle has had a rocky start in how it handles enrollment, it is considered a turning point for faster payments in banking circles and a system that should jump-start further improvements and even more collaboration amongst banks on the payments front.
"If I am reading the tea leaves correctly, in five years Zelle will be competing with same-day ACH," Barnhardt said.