What’s in Your Mobile Wallet? It Might Be the ACH

Mobile payments funded through the automated clearing house network are not unusual, but a growing corps of processors and tech companies are working to increase the ACH’s share.

As mobile payments begin what appears to be a long climb to general consumer acceptance, the major actors in electronic payments face decisions involving the funding choices consumers have for wallets housed on their smart phones.

Purely economic concerns are of course a major factor, but nuances abound as financial institutions, wallet providers and tech companies compete for wallet share and consumer favor.

For consumers, the easiest and most prominent choices today to fund mobile wallets are credit and debit cards. With Apple Inc.’s Apple Pay, for example, all the iPhone user has to do is take a picture of a card and it’s instantly loaded into Apple’s Wallet app.

But a number of players are working to retrofit the automated clearing house network for the mobile era.

Adapting the ACH

The ACH began life in the mid-1970s as the network that gave America direct deposits of payroll checks and Social Security payments. It’s been criticized for slow settlements, often two business days, but it has strengths in the form of low costs and its ubiquity in connecting more than 10,000 financial institutions.

Now, say ACH partisans, the network can and should be adapted for mobile payments. And this is before several major proposals to speed up U.S. payments have even been completed.

Still, banks and credit unions have strong motivations to promote card-based funding for mobile wallets. The Visa- and MasterCard-branded credit and debit cards they issue have some big advantages beyond their powerful network brands, including a hefty flow of transaction-based interchange revenues—particularly on rewards credit cards—and their ability to guarantee merchants funding for authorized transactions.

“If it’s their branded mobile wallet and it’s their card in that wallet, they [issuers] are more likely to embrace that card because of the interchange,” says Matt Wilcox, senior vice president of marketing strategy and innovation in the Digital Banking Group of banking and payment processor Fiserv Inc.

These same financial institutions, however, have other motivations that work in favor of other funding models. Financial institutions often say they need to offer their customers choice, and they want to make sure their mobile wallets are competitive in an arena in which tech companies—Apple, Alphabet Inc.’s Google unit and Samsung Electronics Co. Ltd., to name some of the most prominent—have come out with high-profile wallet offerings and command the loyalty of millions of consumers. Then there are the coming mobile wallets from retailers, including Wal-Mart Stores Inc.’s Walmart Pay.

“What’s important to the credit unions is that they not be disintermediated,” says Jesse Chunn, head of merchant strategy at CU Wallet LLC, a Los Angeles-based credit-union service organization and a member of the Payments Innovation Alliance set up by ACH governing body NACHA.

Merchants, of course, are always looking for low payment-acceptance costs, which would make them naturally receptive to ACH funding for mobile wallets.

“I would think that the driving force there is getting away from the card model, where interchange has to be paid,” says Nancy Atkinson, a payments researcher and senior analyst at Aite Group LLC, Boston.

King of Mobile Payments

As with issuers, however, the picture for merchants also is more complex than just the sticker price of a transaction. When they dip their toes into the mobile-payments waters, merchants want wallets that are secure, offer fast contactless transactions, enable them to deliver offers to their customers, and in general promote their brands.

So far, the king of mobile payments is PayPal Holdings Inc. PayPal reported that mobile payments totaled $20 billion in 2015’s fourth quarter, up 45% from a year earlier, and accounted for nearly 25% of the firm’s $81.5 billion in total payments for the quarter. A year earlier, mobile’s share was 21%.

Not only is PayPal’s online and mobile volume the envy of competitors, but so are its margins. Although down by more than two percentage points from a year earlier, PayPal’s so-called transaction margin still came in at a hefty 61.1% in the fourth quarter. PayPal calculates the figure by subtracting expenses and transaction and loan losses from total transaction revenue, divided by total revenue.

One reason PayPal has such high margins is that it encourages its account holders to back their accounts with bank accounts, rather than credit or debit cards, so that PayPal can access the ACH and avoid paying high interchange rates. The exact card-ACH mix is a secret. A spokesperson for San Jose, Calif.-based PayPal did not respond to a Digital Transactions request for comment.

PayPal, however, has to deal with the ACH’s shortcomings, just like everyone else. And lots of people are looking to make the ACH faster and able to provide greater assurance that funds will be there when the payment settles.

Des Moines, Iowa-based Dwolla Inc. is probably the most prominent of the tech startups looking to turbocharge the ACH. But there are more, including New York City-based Buy It Mobility (BIM) Networks Inc.

Founded in 2009 but not pursuing its present course in mobile payments until 2013, the firm offers merchants a white-label mobile wallet with ACH funding playing a prominent role.

BIM Networks differentiates itself by offering guaranteed next-business-day settlement—assuming the payment comes through by 3:30 p.m. Eastern time—and condensing customer enrollment down to a less than a minute.

“We can get enrollment done in about 40 seconds,” says chief executive Adam Frisch, adding that competing wallets typically need at least a day, often two or three, to complete testing and risk assessments.

BIM Networks transactions average 1.5 to 1.8 seconds, Frisch says. The company supports such technologies as QR codes, near-field communication, and beacons.

“We’re agnostic,” Frisch says. “We make it really easy for our merchants. We accommodate whatever technology the merchant has today.”

BIM Networks, which claimed 3 million consumers on its platform as of last October through an undisclosed number of merchant partners, got an endorsement that same month from Merchant Customer Exchange LLC (MCX), the retailer-controlled consortium developing the CurrentC mobile wallet. MCX said it would use BIM’s platform to provide an ACH option for its retailers’ customers.

‘Very Valuable Things’

Such new offerings as that of BIM Networks have CU Wallet’s Chunn looking on with approval. Chunn’s job is to work with merchants on how to accept mobile payments. As such, CU Wallet offers the PayPal-owned Paydiant, another white-label wallet service, and services from several other partners, according to Chunn, but he wouldn’t say if BIM Networks is one of them.

While credit unions certainly are interested in interchange revenues from card-backed mobile wallets, they also want to work with merchants to develop mutually beneficial relationships, according to Chunn.

For example, a merchant, through a mobile wallet, could partner with a credit union to find a credit-union member who has never been in that merchant’s store, but the data indicate that member might become a good customer.

“That’s the kind of information that credit unions have,” he says. “Those are very valuable things, in our belief, much more valuable than any interchange discussion.”

But unlike general-purpose payment cards, the ACH lacks an authorization system that can guarantee funds will be available in one-time transactions, such as a consumer using a mobile wallet for a purchase.

“Credit cards have some ways to validate that funds are available,” notes Aite’s Atkinson. “With ACH, you really don’t have that immediate feedback loop, so that is a difference.”

That could change as NACHA, The Clearing House, and the Federal Reserve work on various proposals to make U.S. payments faster, even approaching real-time settlement. And that’s also one reason why processors, tech companies such as BIM Networks and Dwolla, and financial institutions are working on their own new-and-improved ACH payment systems.

“ACH is actually an [area] of huge opportunity for FIs,” says Chunn, a former MCX executive.

A Transaction Boom

Brookfield, Wis.-based Fiserv, a big provider of core bank processing as well as payments processing, is expecting a transaction boom as its bank and credit-union clients roll out mobile wallets for their customers.

“We’re seeing activity within the mobile device, within the mobile-banking app … increase dramatically year over year,” Wilcox says.

Fiserv offers a variety of electronic rails for bill payments, person-to-person payments, and debit transactions. Its Pep+ ACH network is used by most of the top 50 financial institutions, according to Wilcox. Later this year Fiserv plans to roll out real-time bill payments that will go over the ACH.

Wilcox hopes that the efforts by NACHA and others to speed up U.S. payments result in an improved ACH and better payment services in general, including mobile wallets.

“What people are hoping will happen is that these solutions will come together … and at least become interoperable,” he says. “The marketplace is starting to choose.”