Ordering Priorities

Cover Story

Transaction volumes are rising as NACHA executes on an ambitious agenda of new payments initiatives. Can everything  the ACH network’s governing body  wants come to pass?

By Jim Daly

Think you’re busy? Of course you are, but the folks at NACHA, governing body of the automated clearing house network, are really busy. They’re simultaneously managing projects ranging from retail Internet payments to a new electronic-billing system to health-care payments and other initiatives.

Their goal: Convert the ACH from a big, little-known network once mainly concerned with direct deposit, Social Security payments, and transactions among banks and businesses known and trusted by each other into one that can handle one-time consumer payments on the Web and transactions from high-growth markets such as bill pay and health care.

“Maybe it’s spaghetti and they’re going to throw it against the wall and see what sticks,” says Nancy Atkinson, a senior analyst at Boston-based Aite Group LLC who closely follows the ACH. “At a very high level, what strikes me is NACHA is doing what they need to do to stay relevant.”

The question is whether NACHA can wave all of its base runners home. Some of its initiatives, including the Secure Vault Payments service for retail Internet payments and EBIDS for bill payments, are finally in the commercialization stage after years of planning and testing.

Others, notably same-day settlement, are encountering some resistance. Government regulation, meanwhile, affects much of what NACHA does, and possible Federal Reserve rules on debit card interchange could spill over into the ACH world.

And with its diverse membership and association structure that requires a fair degree of consensus, getting everyone to sign off on a big project can be tough. In taking ACH payments beyond their traditional boundaries, NACHA has faced lukewarm responses from some banks that fear the low-cost ACH could threaten their higher-revenue payment businesses, notably debit and credit cards and wire transfers.

“I don’t necessarily think they have more than they can handle, but I do think they suffer from not getting the full endorsements from their membership for all of their initiatives,” says Beth Robertson, director of payments research at Javelin Strategy & Research, Pleasanton, Calif.

Some initiatives, especially health care, are not for the faint of heart. Health payments require a system that not only moves money around, but also exchanges related remittance data and claims information among insurance companies, banks, medical providers, and patients at the right time. Many observers regard today’s system as a complicated, inefficient hodgepodge of paper and electronic files.

“The health-care payment cycle is very unusual, it’s very complex,” says Stuart M. Hanson, vice president of health-care treasury product management at Cincinnati-based Fifth Third Bancorp.

‘Strong Pipeline’

Despite the challenges, NACHA has little choice but to move forward because opportunities to displace cash and paper checks still abound and competing systems, everything from credit and debit cards to PayPal and a host of Internet rivals, show no signs of standing still.

Volumes in some ACH electronic-check payment codes, notably ARC, for accounts-receivable conversion of checks mailed to lockboxes, are growing slowly or falling as consumers write fewer checks The future belongs to what NACHA calls “native” ACH payments that start and finish as electronic transactions.

Janet O. Estep, president and chief executive of Herndon, Va.-based NACHA, notes that the association’s Payments 2011 conference this month in Austin, Texas, will feature two new tracks: mobile payments and health-care payments.

Those topics have been the subject of past sessions, but giving them their own tracks shows the importance NACHA now attaches to them as it strives for what Estep says is ubiquity, efficiency, and the ability to pass payment and associated data among ACH transaction originators and receivers.

“Both of those speak well to the attributes of the ACH network,” she says.

Here are status reports about several key NACHA initiatives and major issues facing the ACH network.

Secure Vault Payments – After more than five years of discussion and testing, NACHA late last summer moved its alternative to credit and debit cards for one-time Internet purchases and bill payments into commercialization, a process backers expect to complete later this year.

NACHA has entrusted the heavy lifting to Denver-based software developer and switch operator eWise Systems USA Inc., which is recruiting merchants and banks. SVP got a big lift in November when U.S. Bancorp, the nation’s fifth-largest bank, signed on as a provider. It’s expected to go live this spring.

Before U.S. Bank, SVP’s primary bank participant had been Synovus Financial Corp., a large regional holding company based in Columbus, Ga.

“Transaction volumes will grow rapidly from the time U.S. Bank actually launches and we bring on merchants,” says Richard Brierley-Jones, executive vice president at eWise.

About 12 merchants, including some universities, currently accept SVP, but Brierley-Jones expects that count to grow rapidly as eWise adds more acceptors through gateways and resellers that include independent sales organizations.

Brierley-Jones adds that more Top 10 financial institutions should be on board later this year. By 2012, he predicts SVP will be available to 30% of U.S. online-banking consumers thanks to “a very strong” pipeline” of current and prospective banks.

That’s potentially 20 million or more users, the target being consumers who are concerned about online privacy and don’t want to use credit cards but will pay using their online-banking program.

Full-Bore Commercialization

In March, eWise announced the formation of what it calls the SVP Marketing Advisory Council with representatives from NACHA, eWise, banks, and merchant groups to promote the service. “Ideally our objective here is to make Secure Vault Payments a household brand,” says Dean Seifert, eWise senior vice president of sales.

The consumer banks will get less revenue with SVP than they would in interchange had the buyer used a credit card, which has caused some observers to wonder about how strong SVP’s adoption will be among banks. NACHA has consistently said SVP appeals to a different type of buyer than card users, but who’s right probably won’t be known until long after the rollout is complete.

EBIDS – The number of acronyms in the ACH world rivals that of the military; the one for bill payments stands for Electronic Billing Information Delivery Service. Like SVP, EBIDS is now in the midst of commercialization, overseen by a NACHA designee, New York City-based The Clearing House Payments Co. LLC. The Clearing House’s Electronic Payments Network runs one of the nation’s two ACH switches; the Federal Reserve runs the other one.

Like SVP, EBIDS aims to attract volume by making transactions easy from online-banking sites. Once notified of a consumer’s enrollment, the biller generates an ACH file containing amount owed, minimum payment due, and due date. This record flows via the ACH from the biller’s bank to the consumer’s bank, triggering an e-mail to the consumer alerting him that a bill has been received.

Upon logging in, the consumer can view the entire bill by clicking on a hyperlink. Specialized single-sign-on technology authenticates the consumer so he doesn’t have to log in again to view the bill.

When the consumer pays the bill on his bank’s site, the bank creates an ACH credit that flows back to the biller’s bank. The consumer receives online confirmation that the payment was made and the biller receives funds within one or two days. Since the payment is an ACH credit rather than a debit, Regulation E rules giving consumers 60 days of recourse on payments don’t apply.

NACHA announced at its payments conference a year ago that EBIDS would move into commercialization, but that process didn’t get going full bore until early this year. Citibank Inc. has joined the original four banks—Wells Fargo & Co., Dollar Bank, JPMorgan Chase & Co., and HSBC.

Verizon Communications remains the major biller. More than 30 others are participating as “Pay Only” billers in which consumers can pay them through a scaled-down version of EBIDS that doesn’t offer full bill presentment, or bill details apart from the amount owed and due date.

‘Big Players’

David S. Fortney, senior vice president of product development and management at The Clearing House, says his firm “accomplished all the near-term deliverables” that it outlined a year ago. Volume from September 2009, when the pilot started, through early 2011 totaled 13 million transactions, he says.

The Clearing House’s main goals now are to continue building its biller directory and add banks that will bring the payers to the billers.

“The biggest issue with anything like this is the two-sided market,” Fortney says. “If you’re a biller, you would want to wait for all the banks to jump in so your investment gets maximum return. If you’re a bank you want to wait for the billers with all of their customers to maximize your investment.”

Fortney, who says The Clearing House also is working on persuading Pay Only billers to trade up to full presentment, says he’ll have a progress report at NACHA’s conference. “I’m pleased with the interest we have; big players are on the table,” he says.

Health-Care Payments – The numbers are staggering: According to a 2009 report from insurer UnitedHealth Group Inc., some $161 billion could be saved over 10 years by integrating electronic health-care payments and the accompanying remittance advices.

And the U.S. Healthcare Efficiency Index compiled by Emdeon Inc., a provider of revenue and administrative automation services to medical providers, pegs the current efficiency rate at 43%. That means only 5.5 billion of an estimated 12.9 billion annual transactions and reports involving claims, submissions, eligibility, payments, and remittances are electronic. Paper dominates the payment process even more, with only 10% of transactions electronic.

Apart from their controversial effort to expand medical coverage to the uninsured, the Obama Administration and Congress, which passed the Patient Protection and Affordable Care Act of 2010 (PPACA), have made conversion of medical records and claims settlements to electronics a priority. In the wake of earlier laws and the new one, NACHA has identified health care as a big opportunity.

“It gives the ACH network and health-care entities the support to take advantage of electronic payments,” says Estep.

The National Committee on Vital and Health Statistics within the U.S. Department of Health and Human Services has recommended that the department designate NACHA as the body to set standards for electronic funds transfers involving health-care payments. The NCVHS also has recommended that health plans use the so-called CCD+ ACH transaction type as the EFT standard for payments to health-care providers.

With CCD+, a business-to-business code, dollars and remittance data flow separately. A “re-association trace number” is included in the addenda record so that the provider can match the payment with the remittance data that it receives via another delivery channel, according to NACHA.

‘The Next Punch’

But converting this paper-dominated world means upgrading the often primitive point-of-sale and back-office systems of many doctors’ offices and hospitals, and linking merchant acquirers, payment processors, specialty technology providers, and insurers so that hospitals, clinics, and patients have the capability to make or accept electronic payments with the accompanying non-payment information.

“It boils down to technological sophistication,” says Hanson of Fifth Third, which has a big health-care payments service for businesses. Some companies, generally larger ones, today send 60% to 70% of their payments over the ACH network, while with others, it’s “virtually nothing,” he says.

Further, electronic payments and their associated data must meet the privacy and other requirements set forth by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Hanson would prefer that health payments use another B2B ACH code, CTX, which has richer addenda fields than CCD+, but usage of that code could run afoul of HIPAA’s privacy provisions.

Meanwhile, PPACA mandates that rules to implement its EFT and remittance-advice provisions be in place by July, with an effective date of Jan. 1, 2014.

Does that mean that all that paper is really going to be gone in three years? Hardly. Medical administrators are simultaneously dealing with an assortment of new laws and mandates, and many, especially those in smaller organizations, are struggling, according to Hanson.

“The big challenge is health-care providers just have a ridiculous amount of stuff on their plates right now,” he says. “You look at the CIO of a small hospital, he doesn’t know which direction to look for the next punch.”

Same-Day Settlement – In these  days of instant communications and real-time authorizations, why not speed up the ACH clearing process? Payment recipients certainly appreciate getting their money faster, and same-day clearing could help mobile-payments providers whose business models rely on the ACH.

Plus, the Federal Reserve last summer started a voluntary program for same-day clearing. What’s not to like?

Things, as they often are in payments, aren’t as simple with same-day settlement as they might at first seem. The move by the Fed, which handles 57% of ACH transactions, speeds up settlement by one day and represented the first major change to ACH clearing windows in 37 years. But it applies only to Fed-processed ACH debits.

Consumer check conversions, as well as Internet-initiated and telephone transactions, are eligible. This range of transactions embraces both check-based conversions as well as payments that are electronic from the start, such as WEB-coded online bill payments.

Strict Limits

But a major roadblock, Celent LLC banking analyst Bob Meara told Digital Transactions News last summer, is that adoption by so-called receiving banks—the financial institutions that serve consumers in ACH transactions—would be slow, in part out of an unwillingness to make technical changes and in part because they don’t want to lose float any sooner than they have to.

Without enough receiving banks on board, originating institutions—the banks that serve merchants—will have a hard time selling the new service, Meara said.

The Fed addressed the issue, at least in part, with its pricing for its FedACH SameDay service. While originating and receiving banks split the Fed fee for conventional next-day settlement, receiving banks can process same-day payments at no charge. Instead, the Fed imposes the entire fee burden, six-tenths of a cent, on originating banks—double the fee they pay for next-day settlement.

But that could discourage some originating banks, especially as alternatives like image exchange have become less costly, according to Meara. The added fee burden will also make faster clearing significantly more expensive for merchants and billers.

Other observers attribute some of what they say is a lukewarm reception by banks to same-day clearing to the possibility of the ACH displacing more lucrative services.

“That’s suffered because of concern about cannibalizing wire-transfer revenue,” says Javelin’s Robertson.

Possible solutions include mandatory participation, but that would require a NACHA rules change. The issue remains a hot topic of discussion, but when it will be settled, so to speak, is unclear.

Debit Card Regulation – Banks and NACHA deal with government regulations routinely, but the Federal Reserve’s proposed rules to implement the so-called Durbin Amendment in 2010’s Dodd-Frank financial-reform law created an amorphous yet potentially disruptive force in ACH payments.

Durbin calls for strict debit card interchange limits. The Fed’s preliminary proposal would impose 12-cent caps, an effective cut of 70% or more from current revenues.

Fresh Breach Memories

Many of Durbin’s provisions are vague, however, which forced the Fed to try to define what exactly is and is not a debit card transaction subject to interchange regulation. In its draft rules released in December, the Fed largely excluded ACH transactions from regulation but did leave an opening for regulation of decoupled debit cards.

Such cards are issued by financial institutions that don’t hold the cardholder’s demand-deposit account and use the ACH to withdraw funds from the DDA at the customer’s bank.

Decoupled debit cards are a very small part of the debit world. The larger and potentially more damaging effect on the ACH from Durbin might come, some observers speculated over the winter, if reduced debit interchange caused banks to try raise ACH fees to compensate for lost revenues, or if the new rules somehow caused heavy ACH users such as PayPal or other online alternatives to credit cards to change their business models. But for now, it’s all conjecture, and in March a move started in Congress that could delay Durbin’s implementation until its potential effects can be studied more fully.

“The future is uncertain in that area,” says Estep. “Our role in terms of tracking legislation is to make sure we understand any impact for all participants in the network.”

Data Security – Some payments executives have expressed concerns in recent years that the ACH is vulnerable to rising fraud. Attempts at a related type of fraud, check fraud, have risen (“Vet Those Checks,” February, 2010), but so far, the numbers seem to support NACHA’s assertion that ACH fraud is well under control. Estep says the volume of unauthorized ACH debits fell 4% in 2010 versus 2009. “That continues to drop,” she says.

Still, with memories still fresh of some huge credit and debit card data breaches in the past four years at retailers and payment processors, NACHA can’t afford to drop the fraud-control ball. “The more the ACH goes toward direct interface with consumers, the higher [a priority] fraud risk and general risk management becomes,” says Aite’s Atkinson.

International ACH Transactions – NACHA adopted the IAT code in 2009 to succeed two older codes. The main point was to better identify money flows to and from the U.S. to meet U.S. Treasury Department anti-money-laundering dictates.

IAT, however, also created new business opportunities. Dennis Simmons, president and chief executive of Dallas-based regional ACH association SWACHA, says IAT makes it easier for smaller banks to capture a share of the legitimate international business heretofore dominated by large banks.

“I think there’s a growing awareness that the IAT transaction has the capability, the ability, to enable small and mid-size regional institutions to send transactions internationally without having the big guys involved,” he says.

While its volume admittedly is much smaller than other NACHA payment codes, IAT’s grew 13% in 2010’s fourth quarter, faster than that of 12 of 13 other ACH payment categories.

If anything, all of NACHA’s recent activity shows that it’s not your banker-father’s ACH anymore. Perhaps NACHA should go all the way and consider an IPO, which would free it from needing so many sign-offs from its bank masters. MasterCard Inc. first and then Visa Inc. in recent years changed their ownership structure from bank-controlled associations to public companies, notes Javelin’s Robertson.

“They’re both doing a lot of innovative product development,” she says. “Maybe NACHA should look to them.”

 

Spinning ACH Success in a Shrinking Market

Specialty payment processor Solutran Inc. is finding opportunity in a declining market. Based on its transaction volume, Plymouth, Minn.-based Solutran estimates it has 48% of the market for back-office conversion, or BOC, the ACH code that enables retailers or processors working on their behalf to convert paper checks to electronic-check transactions in their back offices.

Solutran says it has 12,700 store locations using its BOC service, called Spin, and thousands more will add it soon. “By the time we get to November this year, we’ll be over 20,000,” says company president and chief executive Barry J. Nordstrand.

But customers are writing fewer checks in stores, according to the Federal Reserve’s 2010 Payments Study. Consumers wrote 2 billion checks at the point of sale in 2009, down from 4.4 billion in 2006, according to the study. Among Solutran’s retailer customers, same-store check volumes are declining in the 12% to 15% range annually, Nordstrand says.

So why base a business case on a payment method that’s going away?

“It’s simple—it saves them money,” says Nordstrand, noting that retailers still receive enough checks that Spin reduces their processing costs and return fees and makes funds available faster. Solutran believes there’s still enough milk in the BOC cow that it is recruiting more banks to offer the service to business customers. Nordstrand says a Top 5 bank, which he couldn’t yet identify, is working on a Spin implementation.

Nordstrand agrees the BOC party will eventually end, and Solutran is preparing for the future. The company is in the third year of what Nordstrand says is a three-year program to create “new infrastructure” that will enable it to add new business lines. Spin is actually the company’s second-largest product, behind an electronic benefits transfer processing service for the government’s Women, Infants, and Children (WIC) program.