Same Day ACH Will Be a Boon for Web And Mobile–But How Soon?

Now that same-day clearing is coming to the automated clearing house network, payments players are starting to parse the impact the faster settlement time will have on emerging payment methods that rely at least in part on the ACH. While many payments executives are enthusiastic about the change, some experts argue the new service is unlikely to win widespread adoption any time soon.

Following up on a proposal it first put forward in March 2009 (Digital Transactions News, March 2, 2009, the Federal Reserve last month announced it will begin offering same-day settlement for certain ACH transactions beginning Aug. 2. The move, which speeds up clearing time by one day, applies only to Fed-processed ACH debits. The Fed is one of two switches for the national ACH system and handles 57% of all ACH traffic. 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.

“For us, for people executing payments, this is one more step toward pushing out alternative payment options,” says Conrad Sheehan, president and chief executive of mPayy Inc., a mobile-payments provider in Chicago that relies on the ACH and stored-value accounts to move funds. “It’s particularly well-suited to mobile payments.” Sheehan argues merchants will benefit by getting funds a day sooner, which reduces risk and uncertainty. Consumers will like speedier settlement, too, he argues, especially for small-ticket sales and micropayments, for which many consumers prefer a cash-like alternative. “Consumers at small values aren’t playing the float game,” notes Sheehan.

Bob Meara, who follows the ACH and image exchange as a senior analyst for Celent LLC, agrees that Internet and mobile transactions, which rely on ACH codes like WEB rather than check conversions, could help drive adoption of the Fed’s new service. Bank participation in the service, called FedACH SameDay, is voluntary. “It’s going to be the 100% electronic methods that are going to produce the impetus,” Meara says. Last month, NACHA, which regulates the ACH, announced its membership had formally approved using the existing WEB transaction code for mobile payments (Digital Transactions News, June 24).

But Meara says it’s likely to be a matter of years before meaningful volume starts flowing through the faster clearing service. One major roadblock, he says, is that adoption by so-called receiving banks—the financial institutions that serve consumers in ACH transactions—will 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 says.

The Fed addressed the issue at least in part with its pricing for FedACH SameDay. 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, some six-tenths of a cent, on originating banks–double the fee they pay for next-day settlement. That could discourage some originating banks, Meara argues, especially as alternatives like image exchange have become less costly. The added fee burden will also make faster clearing significantly more expensive for merchants and billers. “ACH has pretty cut-throat pricing already,” says Meara. “Inevitably, [originating banks] will have to pass the cost on.”

But mPayy’s Sheehan argues the new service still has value for merchants, particularly when compared to higher-cost alternatives like credit and debit cards. He also expects that originating banks that elect to participate will also participate as receivers, a move that could eventually encourage smaller receiving institutions to come on board. “To the extent the big originators are also big receivers, you could have a cluster,” he says. “It would be a hard argument to make if you want your money faster but you won’t give up faster.”

Similarly, Meara is more optimistic for the service’s long-run prospects than he is for the short term. “I don’t think this is going to light a fire under anybody this year,” he says. “But it is inevitable and a worthy experiment.”