Same-Day ACH's First Phase Gives Banks a Platform, Not a Silver Bullet
Starting today, banks and credit unions will get two extra chances every 24 hours to handle Automated Clearing House (ACH) credit payments. But by itself, same-day speed may not be enough to meet the demands of an increasingly digital world.
The changes from Nacha and the Federal Reserve, which will come in increments over the next three years for different types of transactions, are substantial. Financial institutions will be in a better position to accommodate the global trends toward faster transaction processing, changing payroll needs and a less clunky settlement procedure as more bill payment and account transfers move to mobile apps.
But Nacha's move — which is part of a broader strategy to maintain relevance for ACH in a world where speed is more important than ever — is not a revolution.
"Same-day is great, but not quite as good as real time," said Linda Coven, a senior analyst with Aite Group. "It's still a 'batch.' It's adding a couple of extra windows a couple of times a day."
The first phase of Nacha's changes, effective today, addresses credits only and adds a new morning submission deadline at 10:30 AM ET, with settlement occurring at 1 PM ET. An extra afternoon submission deadline of 2:45 PM ET has settlement at 5 PM ET, along with the traditional overnight window.
"The key here is the ubiquity. Users from any bank can reach anyone else with a same-day payment because of these new clearing and settlement windows," said Janet Estep, president and CEO of Nacha.
While emphasizing that same-day ACH isn't "real time payments," Estep said the same-day settlement provided by the added ACH rails will make it easier for banks to design ancillary financial products in concert with mobile banking platforms, or collaborations between banks to expand faster transfers, bill payments and other digital transactions.
The ACH network has a "skinny" architecture that provides connections to 100% of American bank accounts—and this network allows banks to innovate off of it, Estep said. "We don't tell or prescribe what the user interface should look like, but for those financial institutions that are looking to serve their customers in more convenient ways," Estep said.
Same-day ACH is not a new concept; the Federal Reserve and Estep have lobbied for the change for years, and after much squabbling, banks agreed in 2015 to implement the extra settlement windows. There is still some question as to how much banks can benefit from the changes, with the argument being the relatively limited number of use cases—generally large business payments with limited benefit for retailers.
Nacha says it has examined as many as 63 use cases and notes that 99% of current ACH volume is eligible for same-day ACH, though the initial debit-focused phase will mostly impact categories such as payroll. Employment terms are changing, making payroll a more frequent activity as companies increase contract and freelance work. That requires banks to be more nimble in delivering payments to workers.
"It's important for certain types of transactions," Coven said. "Certainly payroll, which is the primary domain of ACH. There aren't really any competitors to ACH for payroll processing."
Banks are also under pressure to respond to disruptors that claim to offer real time payments. Dwolla, for example, has positioned itself as an alternative to ACH, particularly for small businesses and community banks; and Visa's recent pact with PayPal gives the card network a leg up on ACH within the PayPal ecosystem.
"They are recognizing they are facing competitors and they know they have to add extra rails," Coven said.
Banks and credit unions have an advantage with interoperability, because they've been connected for decades, said Nancy Atkinson, a senior analyst with Aite Group. "But younger customers won't care if the services are provided by 'trusted' banks or by technology providers. So banks need to be serious about modernizing their payments to stay in the same," Atkinson said.
There are also advantages for banks that go beyond marketing ACH's speed speed, Coven said. "There's extra messaging. It's not just the payments, it's the message that does along with it payment. It's the agreement of the service performed, the bill and the need to get paid and the communication around the payment that moves faster."
Same-day ACH may also pose security risk for banks. Same-day processing will put more stress on internal anti-fraud efforts at banks, said Joe Bernik, Intel Security's CTO for Financial Services, in an email from Intel's external public relations firm. The move may also increase malware risk, according to Bernik.
The shorter settlement windows actually work in banks' favor in security risk, Estep said. "Knowing funds can move from one party to another up to three times each 24 hours mean there isn't as much temporary risk between the time the payment is made and when it is received," Estep said.
The next phases of Nacha's same-day ACH evolution include both credits and debits, which will take effect over the next two years.
"The real benefit to this will be same-day debit. Right now it's credit, which is all 'push payment,' so the party who owes the money has to initiate the transaction," Coven said. "With same day debit, you can have collections, so a health club or an organization with dues can collect on the actual due date."