Why saying ‘yes’ to same-day ACH settlement makes sense
By Cary Whaley
As I consider the Automated Clearing House (ACH) and the migration from next-day to same-day settlement, I am reminded of the biblically inspired lyrics from the 1960s song “Turn! Turn! Turn!”
To everything … there is a season … and a time for every purpose … .
The time for adopting same-day ACH is now.
Last year, NACHA–the Electronic Payments Association put forth the Expedited Processing and Settlement Rule in support of same-day settlement ACH transactions. But like in Congress where a majority vote doesn’t always rule, the measure failed to get the necessary supermajority of volume-weighted votes from the association’s members. That vote missed the opportunity to improve the ACH network to ensure its continued viability, accessibility and relevance.
Recently, at the Payments 2013 conference, ICBA expressed its support for same-day ACH and released a whitepaper outlining its rationale for supporting same-day ACH. The whitepaper notes that the technology:
– levels the playing field between community banks and larger competitors, many of which already offer same-day payments via on-us transactions, direct exchanges, proprietary exchanges among limited-participation groups and book-entry transfers within proprietary or closed systems;
– supports emerging technologies like mobile and person-to-person payments, which would enable recipients to have real-time or near-real-time access to funds regardless of when settlement occurred;
– benefits banks that originate corporate payments, allowing them to collect payments faster, particularly for card issuers that are required to provide credit for payment on an account on a same-day basis;
– allows prompt, efficient delivery of payroll (such as paying a terminated employee on the day of termination, a requirement in many jurisdictions, or properly processing payments for hourly/temporary workers up through the morning before the payroll date);
– benefits receiving banks and their customers by fostering the faster flow of funds, an increase in the use of direct deposit, reduced counterparty settlement risk and expedited processing of debit returns resulting in earlier re-crediting for the receiving bank; and
– reduces overall settlement risk, including counterparty risk, to all network participants. For example, a bank that receives a same-day ACH credit will know before the close of business that the transaction has settled, eliminating a concern of an overnight default at the originating bank.
Weighing the benefits
While there are associated costs of same-day ACH, its immediate and long-term benefits far outweigh any drawbacks, ICBA maintains. Among its benefits:
– Same-day ACH participation reduces deposit balances overnight in proportion to the same-day ACH debit dollar-volume moved from next-day to same-day settlement;
– Receivers of same-day transactions using the Federal Reserve service incur no operator-imposed transaction fees; and
– Interest expense on receiver accounts in proportion to the aggregate same-day dollar volume is reduced for receiving banks.
Even with these benefits and the ability to remain competitive in a marketplace that increasingly expects faster payments, receiving banks should be mindful of several operational and cost considerations:
– Same-day ACH requires receiving banks to more frequently pick up files from the Federal Reserve, which could extend staff hours to accommodate the late-afternoon processing window (particularly if the receiving bank wants to process returns on the same day);
– The management of late-day debits and the impact on correspondent balances must be addressed. The FedACH Risk Receiving Depository Financial Institution Alert Service that monitors the receiving bank’s incoming FedACH files is a possible solution;
– There is the possibility of unexpected late-day debits to accounts. This issue can be addressed by offering controlled-disbursement account services similar to those offered for checks; and
– ACH processing system upgrades may be necessary.
Jumping on the momentum of ICBA’s public endorsement for same-day ACH were Marie Gooding, first vice president of the Federal Reserve Bank of Atlanta, and Janet Estep, president and CEO of NACHA.
“The expansion of FedACH SameDay Service supports industry movement toward faster clearing and settlement of ACH payments while meeting the changing needs of financial institutions of all sizes and their customers,” says Gooding in a recent ICBA release on the topic.
Estep meanwhile noted NACHA’s support for the Fed’s decision to expand its FedACH SameDay service, which she says “provides significant opportunities … to help meet organizational goals and customer needs.
“We will continue to work with ICBA and the industry to advance efforts around multiple settlement windows per day.”
Technological innovation has raised customer expectations regarding faster payments. If lower-cost enhancements like same-day ACH—a scalable service in which all banks, regardless of their size, can participate—can be supported with changes like rules modifications and selected advances in technology, community banks should consider proactively supporting such an evolution before they fall prey to competitive encroachment or a policy mandate.
After many seasons of industry study, debate and delay, the time for same-day ACH is now.
Cary Whaley is vice president, payments and technology policy at ICBA.