Endpoint: Leading the Industry to “Faster”

Simply saying that users want faster payments isn’t enough, says Jan Estep, who outlines NACHA’s new proposal for same-day settlement.

The phased approach enables functionality to build over time, creating value for participants at each step along the way.

Jan Estep is president and chief executive of NACHA—The Electronic Payments Association, Herndon, Va.

Is faster better? If you listen to the little girl in the AT&T commercials, it is. In her mind, speed means you won’t get bitten by werewolves.

While we don’t literally have wolves at our heels, the reality is that payments need to speed up. Moving funds faster can better meet user expectations, while reducing counter-party risk and supporting innovation. Moreover, it offers opportunities to ensure the U.S. stays in sync with other countries as they, too, upgrade and move to faster systems.

Today, the automated clearing house network serves as the backbone for payments. It not only supports native ACH payments like Direct Deposit and Direct Payment, but it also enables settlement functionality for credit and debit cards, ATM transactions, and beyond. By speeding up processes within this ubiquitous foundational system, we provide greater opportunity for all.

But what do we actually mean by speed? What is “faster?”

Key Questions

The Federal Reserve recently issued research results that concluded, “Overall, faster payment features are preferred to slower payment features,” citing that “69 percent of consumer payers and 75 percent of business payees indicated preference for instant or one-hour payment speed.” The key additional questions are these: To the user, what does faster really mean? What functionality will support his or her specific needs? Is it validation of good funds? Is it the official settlement of funds? Is it the funds availability in the user’s bank account?

Near-real-time messaging as well as multiple settlement windows per day can give users what they want by offering flexibility and efficiency. Take the U.K.’s Faster Payments system, which is often referenced when comparing the U.S. payment system to other geographies. In that case, the U.K. Payments Council worked with the industry and built a near-real-time messaging capability to create, in the Council’s words, “a service that enables customers to make and receive immediate payments 24 hours a day, 365 days a year.”

From a customer’s perspective, this is a near-real-time payment, even though the funds officially move via bank-to-bank settlement only three times per day.

The Faster Payments service started with traditional applications—person-to-person (P2P) payments and bill payments—and has moved to more innovative applications, such as mobile-payment support. It built services and demand over time.

Likewise, in the U.S., enabling multiple same-day ACH settlement windows better serves the needs of hourly payroll or last-day tax payments, while real-time messaging may be used to move funds when cash is needed immediately. The perspective we should take is to enable greater functionality for existing payments, and also build layers with new functionality to respond to specific market needs. This approach provides a logical, methodical way to allow for innovation and creativity to drive market dynamics.

The First Step

Think of the “ACH Blueprint,” developed by NACHA in 2012 with broad industry input. Picture an ACH architecture in which a near-real-time messaging system, supported by more frequent settlement, is layered on top of the network. Modularly building upon, and leveraging, the infrastructure that exists will help move the industry forward efficiently and effectively to serve all financial institutions, large and small businesses, and consumers.

Regardless of how we design more immediate payments from bank accounts in the U.S., the first step we can take in the near-term is to enable multiple settlement windows per day on the ACH network. In March, NACHA announced that we are seeking industry input on aspects of what we call a “phased approach” to move the ACH network from today’s next-day settlement to three same-day settlement options that would be available for virtually any ACH network transaction.

The phased-implementation approach proposes incremental functionality that will provide greater value to end users. This functionality would include the existing morning settlement window, plus a mid-day and end-of-day window, as well as greater certainty for faster funds availability. All of this provides a solid foundation on which to build innovative services into the future.

As currently outlined, a first implementation phase would provide a foundation to better enable same-day ACH credits to support use cases such as payroll, P2P payments, and expedited bill pay. A second phase would introduce same-day ACH debits and enable a wide variety of consumer bill-payment use cases like utility, mortgage, loan, and credit card payments. A third phase would improve the service level across the network and further reduce counter-party risk by adding a second same-day settlement, and it would accelerate funds availability.

When fully implemented, there will be two additional same-day ACH settlement windows instead of just one. Although this functionality will require a greater investment, one of the core points of the phased approach is that it enables functionality to build over time, creating value for participants at each step along the way. Enabling three settlement windows per day could then be used to support a real-time messaging system.

The Future of Payments

To lead the industry toward same-day ACH settlement, we are thoughtfully and methodically collecting and analyzing feedback on this approach. We are being precise in our questions and definitions. Simply saying that users want “faster” is not sufficient in today’s environment.

We have asked FIs large and small about potential volumes and operating costs. We have discussed the functionality and volume potential with service providers. We have encouraged businesses to submit their thoughts on volume and use cases. We are at the point now where we have started evaluating this feedback, with the goal of moving into formal rulemaking later this year.

Enabling same-day ACH is a first step toward the future of payments. Same-day settlement provides the foundation on which to build innovative services to meet the needs of end users into the future, and it is the solid architectural framework that can support payments in the future.