ORLANDO — With some big banks moving payments off the automated clearing house system, pressure is mounting for the network operators to offer faster settlement — but there is some disagreement over how.
The Federal Reserve banks announced a plan last month to deliver same-day ACH settlement, but payments executives this week criticized the plan, which they said favored originators. The executives offered a new proposal that shifts more float advantages to receiving banks.
The debate comes as banks and nonbank payments providers are developing a variety of alternatives to the ACH system, a trend that has raised concern that a major exodus from the well-established format could raise costs for those left behind. Offering faster ACH settlement, bankers say, would make the network more competitive with the emerging payments formats.
"If banks don't do this, they will discover that someone other than a bank will figure it out for them," Richard R. Oliver, an executive vice president at the Federal Reserve Bank of Atlanta and manager of the Fed's retail payments office, argued Tuesday in a packed auditorium here at the Nacha Payments conference. "If you look around, the nonbank innovation is tremendous."
A few big banks are reported to have stepped outside the ACH network to send some transactions directly to big receivers. Some large credit card processors, Citigroup Inc. and Capital One Financial Corp. in particular, are said to be using a "direct send" approach, delivering ACH files directly to trading partners instead of sending the transactions across the ACH networks.
Citi and Capital One have declined to discuss their direct-send strategies, but observers have said that the main benefits are faster collection and faster notification of bad checks, compared to the regular ACH network, which typically settles transactions within two days.
And bankers say image-exchange networks, which can offer same-day settlement, are increasingly popular for settling consumer checks that might have been converted to ACH payments in the past.
Heidi Miller, the chief executive of the JPMorgan treasury services unit of JPMorgan Chase & Co., said in a keynote address that same-day ACH settlement could bring back to the ACH network the payments that have shifted to direct-send and make it more competitive with check imaging.
"Same-day ACH is a necessary facility to level the playing field with image exchange," said Miller, whose bank is the nation's largest originating depository financial institution.
She singled out for criticism Pariter Solutions LLC, which she said could draw a billion transactions per year from the ACH network and potentially raise costs for those that continue to use it.
Pariter, a joint venture of Wells Fargo & Co. and Bank of America Corp., was formed last year to create a single, shared ACH system that the two banking companies could use to settle payments between themselves. They have said they expect Pariter to go live by the end of next year.
Miller said that direct-sends, Pariter, and other strategies that take volume off the ACH network raise costs for everyone else and reduce the effectiveness of fraud-fighting systems that Nacha, the electronic payments association, has installed in recent years.
"There is a real risk in not leveraging the infrastructure that we now use," she said.
Stephanie Sturgis-Griffin, Pariter's chief executive, wrote in an e-mail Wednesday: "The focus of Pariter has always been and continues to be the efficiency and scale of bank-side ACH processing."
With a growing consensus that same-day ACH is needed, debate has grown over how to deliver it.
The Fed's same-day service, which is expected to be available on an opt-in basis in the second quarter of 2010, would let originating banks pay a fee to receiving banks that will accelerate the settlement of e-check payments, mainly accounts receivable conversion. These payments are all used to debit consumer accounts.
"The sender gets earlier availability of funds and faster notification of returns," said Oliver, the Atlanta Fed official. "The receiver needs compensation for that because they are going to be debited sooner."
Danne Buchanan, the executive vice president of e-business at the $55.9 billion-asset Zions Bancorp. in Salt Lake City, supported the idea of same-day ACH settlement but said the Fed's model favors originators. "I think the world of Rich [Oliver], but I don't like this idea," Buchanan said during the session at which Oliver spoke.
Buchanan criticized the structure of the Fed's plan, saying it is tilted toward the originating depository financial institution. "The float risk accrues to the ODFI. The risk benefit accrues to the ODFI. The only benefit to the RDFI is fees," he said.
He put forward an alternative, which he dubbed the "Nacha proposal," to let receiving banks post payments on the same day but not actually settle until the next day.
"If they post the same day and settle the next day," he said, "a host of benefits accrues to the RDFI."
Buchanan said the Nacha proposal is not a formal initiative from the Herndon, Va., trade group but summarizes ideas that many Nacha members have long been discussing privately.
A key benefit of the concept is that the receiving depository financial institution would be able to report a lower deposit balance to reserve against with the Fed, cut its interest obligations and reduce its FDIC premiums, Buchanan said.
These are all float benefits, Buchanan said after the session. "ACH guys don't get this. Check guys get it instantly."
The Fed plan does not require a Nacha rule change, though Oliver said the ACH rules could be changed to provide a formal framework for same-day payments.
He said that bankers should also consider same-day ACH payments for credit transactions in which the originator pushes a payment to the receiver. "I think it's really important that we have an industry dialogue about the credit side," he said.
Rossana Salaris, a senior vice president at Clearing House Payments Co., said the debate over same-day ACH has stirred strong passions among bankers. "There are those who love it. There are those who absolutely hate it," she said.