Long a staple of Social Security disbursements and direct deposit employee payouts, the ACH network has incrementally, and somewhat quietly, broadened its reach over the last two decades to establish a significant presence in almost every major payment category. And that presence looks poised for growth.
Two recent events indicate that the ACH's primary oversight body, NACHA - The Electronic Payments Association, is pushing harder than ever before to make the ACH a more mainstream payment player.
In June 2010, NACHA approved ACH payments for the mobile commerce sector, which finalized an uncharacteristically swift decision to include mobile payments under its existing e-commerce guidelines, according to Patti Murphy, President of payment consultancy The Takoma Group.
"In the past, it's taken a long time to get things out of NACHA," Murphy said. "But more recently NACHA has sped up its cycle, as evidenced by the mobile payments format mapped to its web transactions. That's something it's never done before. They used to have to start from scratch - a brand new transaction format for everything - and everything took two or three years before it came out."
Another sign that NACHA is intensifying its ACH push was the Federal Reserve's decision, also in June, to roll out a limited, same-day ACH settlement service on Aug. 2. Plans for the service had originally been revealed in 2009, but the June disclosure specified a starting date and laid out the rules. Same-day settlement of ACH, a scenario NACHA has talked about for years, is now on the horizon.
Until now, virtually all ACH transactions have used day-after settlement. That's still quicker than the two- to three-day float time typical of checks, but it tends to lag behind the settlement of card payments.
Same-day settlement will begin as an opt-in service for banks that originate ACH payments and will cover only certain types of ACH transactions, among them are consumer checks converted to ACH and person-to-person money transfers conducted online or over the telephone.
According to industry observers, the pilot program is likely to set the stage for a broader same-day settlement offering down the road, and its unveiling signals a breakthrough for a network that began in the 1970s as an alternative to paper checks but now appears to be striving for a greater share of the payments market.
"Make no mistake about it, the Federal Reserve, through their announcement of a new same-day settlement, opt-in product, has single-handedly changed the competitive relevance of the ACH system," Dan Fisher, President and Chief Executive Officer of payment and technology consulting firm The Copper River Group, wrote in his blog. "The new service is a small first step to changing the entire payments system by offering a same-day settlement feature that ultimately will be able to compete with and match up to the transaction efficiency of the card networks."
ACH transactions involve connecting one bank to another for such things as direct deposits, electronic payments and money transfers, using only checking account numbers and the receiver's routing number as the primary payment vehicle.
This obviates the use of an intermediate payment device, like a debit card or check. Some ACH transactions do originate as checks, but pass through the settlement network only as account and routing numbers.
Transaction information is sent from its starting point to an originating depository financial institution (ODFI), which then either credits or debits an account at a receiving depository financial institution (RDFI). In most cases, the transaction is routed through a third-party processor on its way to the RDFI, which can be either the Federal Reserve or a private operator.
As it currently operates, the ACH is a "batch processing, store and forward" system, meaning transactions are stored until the end of the day and then sent off together for processing.
The ACH began as a collaboration between the Federal Reserve and some of the country's largest banks, and for a time the network's governance was divided between several regional associations with distinct rule sets. NACHA was founded in 1974 to establish uniform rules for a national ACH network.
According to NACHA's website, ACH payments exceeded 1 billion annually by 1988; 18.2 billion ACH payments were made in 2008, an increase of 1.2 billion over 2007. "The 2007 Federal Reserve Payments Study revealed ACH payments had the largest compound annual growth rate, 18.6 percent, of all U.S. noncash payments," according to NACHA.
The first ACH payments involved payroll direct deposits for the United States Air Force, followed closely by Social Security benefits payments, according to Michael Herd, Managing Director, ACH Network Rules.
Among the ACH's earliest adopters in the corporate world were large service providers, such as insurance firms and utility companies, that used recurring billing to dock relatively small sums of money from huge numbers of clients on established timetables.
For such companies, the ACH provided a relatively safe and simple way to dramatically cut the time and expense of traditional billing by mail.
Champions of the ACH say it is a cheap, convenient alternative to paper checks that skirts both postage costs and the tedium of manual sorting.
"If you're a consumer or a merchant, it's cost effective, and that's probably the best thing going," said Bryan Smith, President of N.D.-based ACH processor InterceptEFT. "Simplicity of clearing is nice, and you don't have different levels for [processing] business cards and all that. It's a system geared for low dollars and high volume."
The other main selling point of ACH processing is that the network doesn't impose the percentage-based interchange fees levied on merchants by the card networks.
NACHA rules call for a flat fee on all financial institutions that use the ACH network, and allow them to impose their own fees on secondary players. What those fees consist of is completely determined by the parties directly involved; by and large, merchants pay lower fees on ACH transactions than they do for card acceptance.
"There was a big movement about 10 years ago to charge interchange for ACH transactions, so that these RDFI's can be recompensed for some of the work they do," said Brandes Elitch, Director of Partner Acquisition for check processing and guarantee firm CrossCheck Inc. "But that was a big political football at NACHA, and they decided there would never, ever in the future be any discussion of interchange. They realized the merchants hate interchange more than anything else."
In the past 12 or so years, the ACH has adopted a number of new channels, a development that sources have said reflects NACHA's desire to grab market share from mobile providers and the card brands. In addition to its recent step into mobile commerce, the ACH has gained footing in the brick-and-mortar space with paper check to ACH conversion, joined the e-commerce mix and branched out to include cross-border transactions, among other actions to broaden its reach.
Together, the same-day and mobile additions to the ACH are likely to make the network a significantly more competitive player. Same-day settlement will give ACH a greater competitive edge in its battle against the traditional check market by moving money more quickly into corporate coffers and cutting the risks of extra float time, which include insufficient funds and a lag in detecting fraud.
In conjunction with the ACH's mobile presence, same-day clearing could also transform the business of wiring money by allowing consumers and businesses to make on-the-spot transfers.
"There are money service businesses available at one of the retailer merchants where if you need to send money to one of your friends, you can just walk into that store, pick up the money service business phone and say I want to send money," Fisher said. "Small-value payments and the transfer of person-to-person small value payments is going to be huge." Observers say it may not be long before people are commonly doing the same thing via cell phone.
Perhaps the most important benefit of both e-commerce and mobile commerce to the ACH is the use of third-party authorization. One of the biggest hurdles to wider acceptance of ACH use has long been the paperwork it necessitates, which presents problems of both convenience and security. But in e-commerce environments, consumers can protect banking data and expedite payment by creating an account with their bank or another third-party provider.
According to Fisher, the opportunities of the mobile and e-commerce spheres have prompted NACHA to shift at least some of its focus from competing in its longtime comfort zone within the check world toward emerging markets.
"[NACHA] sees some real growth opportunities in web and telephone but doesn't see growth opportunities in any check-based products because check volume is declining," he said. "Mobile-, Internet-, telephone-based transactions are growing. The emphasis should be on [alternative payment channels], but also to provide alternatives to credit and debit cards.
"Clearly a same-day settlement system would be a good alternative to those two options today. ... If NACHA doesn't innovate it will not be so much competing as surviving."
Murphy said the ACH's quick transition into mobile reflected a fear among the banking industry players, who make up much of NACHA's membership, of losing ground to alternative payment providers, particularly phone carriers that are honing in on mobile commerce by adding Internet purchases to consumer cell phone bills. She said this push into the mainstream is risky for a product that has long been primarily niche-based.
"Something that really jumps out at me is that ACH has nothing that comes close to" the Payment Card Industry Data Security Standard, she said. "It is my feeling, and a lot of others have said this also, that it's not as secure a mechanism as the card network is." She added that people trust the card networks, and losing consumer trust "is what you have to be careful about."
Murphy said the biggest problem area with the ACH is the need to fill out banking information to initiate a transaction, though the problem is mitigated by third-party authentication. She also said the back-end ACH network lacked the protective controls and monitoring elements used in the paper check system, such as Positive Pay, the automated fraud detection tool offered by SafeChecks.
But Herd said the organization had a strong track record of limiting fraud through requirements like multifactor authentication between communicating parties and the encryption of payment information in transit.
He also said NACHA had recently implemented a stronger back-end monitoring service for the detection of fraud that allows overseers to "monitor and track any type of problem with transactions, pinpoint the source where they entered the network and go after them." He said the system had contributed to a decline in unauthorized transactions over the network.
Herd said the use of a third-party authenticator with mobile and e-commerce payments makes the ACH more secure than paper checks, adding that checks are often more trusted simply because they're a more familiar option. Indeed, while many consumers are wary of providing bank account information for payments, some of those same people will, without hesitation, pop open their checkbook and write a check that contains the same data.
"I think consumers need to know, and companies as well, that the information for an ACH payment is the same as that for a check transaction," Herd said. "Your checks have your account information on them, and you give them to someone to pay and they have it.
"One of the reasons we tell companies to use direct deposit instead of issuing paychecks is that exact reason: because their biggest vulnerability to payments fraud is giving up numbers at the bottom of their paychecks. But if you use online banking, you can set up bill payments to go through your online bank, and you don't have to give that information out."
In an email to The Green Sheet, published April 12, 2010, issue 10:04:01, Janet O. Estep, President and CEO of NACHA, wrote, "The effectiveness of sustained ACH Network rules, risk management and enforcement measures has created a subsequent decline in unauthorized debits. An indicator of potential fraudulent activity, unauthorized debits had a substantive 13.8 percent decline in fourth quarter 2009 compared with fourth quarter 2008, and the overall unauthorized rate for debits was a tiny 0.036 percent.
"Unauthorized activity related to checks converted at the POS and for online bill payment is even lower, and those rates also have been dropping. Clearly, these statistics speak for themselves about the safety that is inherent to the ACH Network."
Fisher, who's as gung-ho as anybody about the ACH's long-term prospects, predicts the ACH will shift farther and farther away from its origins as a check replacement option and increasingly toward new markets.
Among other things, this could help popularize decoupled debit cards, he said. Such cards already use the ACH system and thus mark the convergence of the ACH and card hemispheres.
"That's where the innovation is going to come in, where somebody can essentially walk in with the card attached to their [bank account] and swipe that card," he said. "That transaction can be processed that day and settled by the end of the day, and interchange is not paid on it. Merchants would definitely be interested."
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