The Surging ACH

No, that’s not an oxymoron. The big, 46-year-old network, with links to virtually every bank in the country, is on a growth tear. Here’s why.

One of the biggest untold stories in the payments industry lies ready to hand for anyone who wants to check the numbers. It’s about a network growing at a steady annual rate exceeding 7%.

At first glance, that may not seem remarkable. But the network is the automated clearing house, and with links to just about every financial institution in the country, it’s huge. It’s also old, founded in 1974, before the Internet, before mobile phones, and back when paper checks ruled supreme.

Big, sprawling networks with roots in old technology don’t typically enjoy accelerating growth. But these days the stars are lining up for the ACH.

Today, checks are in decline, and the ACH is, relatively speaking, on a tear. Factors like the Web, the gig economy, slicker bill payments, and mobile person-to-person transfers are taking off, and what many don’t see is that it’s often the ACH operating the machinery behind the curtain.

‘The Least-Cost Payment’

That faster growth rate is also the result of an often overlooked economic fact. Compared to the card networks and even checks, the ACH is pretty cheap, something that just adds more momentum to the network’s growth. “Cumulatively, it feeds on itself. It’s the least-cost payment,” says Bob Steen, chairman and chief executive of Bridge Community Bank in Mechanicsville, Iowa.

The network processed 24.7 billion transactions last year, up 7.4%. That follows an almost equally hot 2018, in which transactions grew 7%, adding impetus to a system that had been, relatively speaking, in the doldrums for years.

“The statistics are showing an accelerating growth,” says Michael Herd, senior vice president at Nacha, the Herndon, Va.-based organization that governs the ACH. In fact, he adds, “2019 was our highest growth rate since 2008.”

Processors that handle ACH transactions are reporting similar results. Growth lately “is really strong across the board,” says David Fortney, an executive vice president at The Clearing House Payments Co., a New York City-based company controlled by many of the nation’s biggest banks.

By “across the board,” Fortney is referring to everything from business-to-business transactions moving away from checks to bill payments to peer-to-peer transfers.

Especially active in the B2B category, he says, are health-insurance remittances, which he says are finally moving away from checks. “It was a long time coming. I think we have several years of outsize growth potential there,” he says.

All told, B2B transactions were up 12% last year, according to Nacha figures. Internet-based transactions are also on a fast-rising slope. These jumped 13% in 2019.

‘Revenue Generator’

As some may ask, what took so long? Businesses are inherently conservative beasts, slow to adapt to new ways of doing things, including payments. Dealing with ACH files is no exception.

“It’s just taken this long for everybody to get more comfortable,” notes Michael Bilski, chief executive of Roseville, Minn.-based North American Banking Co. “It’s just part of our vernacular now.”

So much so that the economy, once swarming with checks, is seeing far fewer of the pieces of paper. Total check volume in 2018 came to 16 billion items, down 21% since 2015, according to the Federal Reserve’s latest triennial payments study.

Checks presented for payment, that is, not converted to ACH in biller lockboxes or at the point of sale, fell 18%. As a fraction of core non-cash payments, checks have dwindled from a 58.8% share in 2000 to 8.3% in 2018, the Fed data show.

“The shift in B2B payments from checks to ACH and other electronic transactions is happening,” says Nacha’s Herd. “There’s been a prevailing conventional wisdom that businesses are stuck on checks. That’s a myth.”

Expert observers are seeing the same thing as lower costs and network reliability drive businesses to adopt ACH. “Banks and corporates are getting serious about embracing change,” says Patricia Hewitt, principal at Savannah, Ga.-based payments consultancy PG Research & Advisory Services. “Banks are figuring out ACH can be a revenue generator for them, and corporates are getting more comfortable with it.”

Or, as Bilski puts it: “ACH is really where it’s at. It’s cheaper and reliable as hell.”

Where the switch away from checks is particularly apparent is in payroll, where businesses are increasingly seeking electronic methods to replace paper paychecks, Herd says. This effort involves a method called direct deposit, the original ACH application. “We’re seeing a robust increase in use” of this channel, Herd notes. “Direct deposit is on fire.”

He credits the shift to a trend exemplified by mobile-driven segments of the economy like ride-sharing platforms, which favor electronic deposit of payroll for its speed and practicality. Now, the ACH is looking at a related change that could meet operators’ requests to be able to pay gig workers more often.

“We’re hearing what industries are interested in is more frequent payment cycles, not just faster payments,” Herd says. “We have the capability of supporting more-frequent paydays. We are listening and responding.”

‘Path of Least Resistance’

Another recent change in payments technology is also fueling ACH growth. That 13% rise in Internet payments last year had much to do with consumers funding digital wallets from a growing variety of fintech companies.

Meanwhile, fintechs like Plaid Inc., which Visa Inc. in January agreed to buy for $5.3 billion, act as “enablers” of the ACH’s rising volume of digital payments, according to Herd.

Plaid, founded just seven years ago, connects payments startups with their customers’ bank accounts. That funding access is what San Francisco-based Plaid enables for a range of companies, many of which didn’t exist a decade ago, including fintechs like Acorn, Betterment, Chime, and Square, as well as Stripe and Venmo, a unit of PayPal Holdings Inc.

But ACH payments rely on information that may not always be practical to obtain, such as a recipient’s account number and bank routing number.

“There are multiple directories that help to do that, but they aren’t necessarily complete,” says Sarah Grotta, director of the debit and alternative products advisory service for Mercator Advisory Group, a Marlborough, Mass.-based consultancy. “Clarifying that area is a good place to start.”

One solution aiming for that clarification is a Nacha initiative called Phixius, set to start up next month to act as a directory for ACH payments (box). Without some kind of easily accessed, accurate information, many businesses are likely to go on writing checks, say some observers. “A business will write a check because it’s the path of least resistance,” Grotta says.

Even now, though, there are signs that may be changing. “We’re seeing more and more invoices with the ACH information with them,” says Steen of Bridge Community Bank. He notes this is a big change in just the past two years.

‘Pleasantly Surprised’

For now, the ACH is gearing up for future growth by addressing the demand from business for faster payments. Nacha introduced same-day credits in 2016 and then debits a year later, and by all indications the new categories are taking off fast.

Same-day payments, which shave a day off the typical two-day processing-and-settlement time for ACH, totaled 250.4 million in 2019, up 41% from 2018. Dollar value came to $247 billion, a 55% annual increase. That comes to just 1% of all ACH transactions, but businesses are watching that number closely as they respond to increasing pressure for faster transactions.

Faster payments are especially critical in the newer transaction categories like ride share and free-lance services, which are adopting the option. “Same-day ACH is growing very quickly,” says TCH’s Fortney, whose company offers a fledgling real-time payment service to help slake the growing thirst for faster payments. The same-day numbers posted in 2019, he adds, represented “a big milestone.”

Even faster growth could be on the horizon. Nacha last month implemented a rule raising what had been a $25,000 ceiling on same-day transactions to $100,000. And in March next year, the network is set to add a third settlement window at the end of the processing day.

Under the rule change, the Fed will keep its National Settlement Service open until 6:30 p.m. Eastern Time, one hour later than its current closing time. The Fedwire Funds Service will stay open a half hour longer until 7 p.m. As a result, the latest daily deadline for same-day ACH will occur at 4:45 p.m. Eastern Time, two hours later than the current cut-off.

That move is expected to open a geyser of volume from the Western states, which will get more time to submit transactions each day. Even now, some 4.5% of all new volume on the ACH is processing as same-day transactions, according to Herd. “We have been pleasantly surprised,” he says, by the uptake of the service so far.

‘A Whole New Channel’

One other source of potential volume lies in selling merchants on using debit cards that rely on the ACH rather than the card networks. Some companies active in this area see potential in convenience stores and gas stations, which face a daunting task getting ready for a card-network deadline later this year to convert to EMV at their gas pumps.

Companies that aren’t ready for EMV will bear responsibility for card fraud. “The petroleum and convenience-store industry are going to get shocked by the liability shift,” says Mark Horwedel, a payments-industry consultant. “It will be interesting to see what they do with all the fraud coming their way.”

Sensing an opportunity, Buy It Mobility Networks Inc. offers a mobile app consumers can use to pay merchants directly from their bank account. “We’re opening up a whole new channel for ACH,” says Adam Frisch, the company’s founder and chief executive.

BIM, which has deals with some major brands, including Shell and Phillips 66, stresses consumer rewards, such as discounts off each gallon of gas, to boost adoption and usage. Merchants pay for the rewards, but feel they are still ahead of the costs of credit card acceptance, Frisch says.

Much the same logic could apply in other merchant categories, even without the costs and pressure of an EMV conversion. If that proves true, the ACH could be entering a golden age, particularly if consumers respond favorably. Few of them, however, are likely to mind how their transactions are processed.

As Steen of Bridge Community Bank says, “Consumers don’t care about the plumbing.”

 

A Credential Checker for the ACH

A platform to help ensure payments are made to the proper entity is set to debut next month. Dubbed Phixius, the Nacha-developed platform will provide a way to enable the secure sharing of payment-related information.

That’s important because the platform, announced in February, could save businesses time in vetting new payees and ensuring the payment is properly made, Nacha says.

Phixius will not be a conduit for payments. Instead, Phixius supports payment information shared between payees and payers and can include instructions for multiple payment types, including ACH, wire, card, and others, says George Throckmorton, Nacha managing director and executive director of Afinis Interoperability Standards. “It’s within the instructions that the payment type is specified,” he says.

Afinis is a standards organization under the auspices of Herndon, Va.-based Nacha, the rules-setting organization for the ACH.

Phixius, which the consulting firm Ernst & Young LLP helped develop, will be the enabler for credential-service providers and will authenticate their customers and establish trusted information about them, such as mailing address and telephone number, Throckmorton says. Credential-service providers will provide downstream services to the business, which likely won’t even be aware of Phixius, he says.

In one possible use case, an employee in an accounts-payable department needs to issue a check to a new vendor, but the vendor must be added to the company’s master list of accounts. As things stand now, Throckmorton says, that process can be time-consuming. Typically, businesses have approximately 3,000 accounts on the master list, he says.

To enroll the vendor, the employee has to find the relevant data. That’s where a credential-service provider connected to Phixius can expedite the process, Throckmorton says. “They can strongly authenticate with their customers,” he says of the credential-service providers. They then, within moments, can share that trusted information with their client so a payment can be issued. It automates a task that currently is a manual one, Throckmorton says.

And if the provider does not have the vendor’s trusted information, it can connect to Phixius and check if another Phixius provider might have the information, he says.

The two roles for Phixius are to enable the sharing of this trusted information and to ensure the information is up to date, says Throckmorton.

It will accomplish the latter by sending notifications to credential-service providers whenever the trusted information for a participant is updated, Throckmorton says. That will be made possible by using blockchain technology.

Phixius also will incorporate application programming interface technology and rely on its Afinis Interoperability Standards to help ensure the system works across users.

There will be a fee to connect and use Phixius, but when last checked this was still being determined.

—Kevin Woodward