September 28, 2011
The automated clearing house network took a crucial step toward faster transaction movement last Friday when NACHA, the network’s governing body, distributed a request for comment on a proposal for same-day settlement. NACHA sent the 22-page document, which sets out a proposed system called Expedited Processing and Settlement (EPS), by e-mail to both financial institutions and non-banks that process ACH payments or otherwise have a stake in the network.
Comments are due on the proposal, which technically amounts to a change in NACHA’s operating rules, by Nov. 18. NACHA will then prepare a ballot for a vote on the measure by its membership in the first quarter of next year. NACHA proposes that, if approved, the EPS system will go into effect March 15, 2013. Approval will require a supermajority, or around two-thirds, of members’ votes.
NACHA’s proposal comes as the ACH finds itself under increasing pressure from competing payment channels to speed up settlement time. Check image exchange, for example, is capable of clearing funds the same day, while increasingly mobile consumers and merchants are looking for faster payments. “If I want to pay my bill the same day, I can’t do that with traditional ACH,” Jan Estep, president and chief executive of Herndon, Va.-based NACHA, tells Digital Transactions News. “Expedited bill pay is something consumers and businesses are looking for.”
At the same time, some financial institutions have formed direct links among themselves outside the network in part to enable faster funds movement, especially on returned items, a development that concerns NACHA. “It’s harmful, it takes transactions away from risk management [provided by the network] and means less volume efficiencies,” Estep says. “This may privilege just a few, but to the detriment of many.”
The EPS proposal calls for a capability to clear and settle ACH transactions on the same day they are submitted by originating banks. Currently, ACH transactions are typically settled the day after they are submitted. EPS would apply to both debits, or transactions in which merchants pull funds from consumers’ accounts, and credits, payments initiated by consumers to pay merchants. The proposal also requires that all so-called receiving financial institutions, the banks that take in ACH transactions and then debit or credit accounts, support EPS. To help control risk, it calls for transaction caps of either $25,000 or $100,000 per entry, and asks for comments on each.
While the Federal Reserve has operated a same-day ACH service since August 2010, merchants and some industry analysts have faulted it because it is limited to debits and does not require participation by receiving banks. Critics say that has severely limited the service’s utility, while creating uncertainty among businesses and originating banks about whether particular receiving financial institutions will support the faster payment.
While acknowledging that EPS will impose new costs on both originating and receiving institutions, NACHA in its request for comment stresses the need for ubiquity, or the certain knowledge that any endpoint in the network can handle any given transaction.
That appeals to businesses and addresses a key shortcoming in the Fed service, says David T. Bellinger, director for payments at the Association for Financial Professionals, a trade group that represents corporate financial officers. “Corporations have the assurance they will actually reach the party they want to reach,” he says.
Bellinger likes most of what he sees in the proposal, which he says the Bethesda, Md.-based AFP helped influence. He says businesses are especially keen about faster returns, which can help contain losses. “A lot of people are supportive across the value chain,” he notes. “We don’t see too many downsides.” But he is wary of the proposed transaction limits, calling them “unnecessary.” Originating businesses, he says, could easily evade the limits by breaking up large transactions into a series of smaller ones. “If they are necessary to give banks comfort, it’s not a deal-killer for us,” he says.
A more serious issue could arise not from NACHA’s proposal itself—which doesn’t address bank pricing for EPS--but from the fees originating banks could levy for the service, Bellinger says. With feelings still raw from a titanic battle over debit card interchange, businesses won’t tolerate high-end premiums for faster transaction settlement, he warns. Yet, “We’ve heard of banks talking about charging a hefty premium for this,” he says.
While merchants and other businesses might be willing to pay extra fees up to a point, Bellinger says, banks risk losing business if they overprice EPS. “The vast majority of corporates won’t use it,” he says. “If banks are smart, they’ll price it with a small premium.”
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