Inside NACHA’s Same-Day ACH Proposal

Enhanced functionality. Ubiquity. A business case. The three things that NACHA CEO and President Jan Estep says makes NACHA’s Same-Day ACH payments proposal not only attractive to the FIs and the payments ecosystem but also a whole lot different from the proposal that was presented to banks in 2012. MPD CEO Karen Webster recently caught up with Estep to get the details on NACHA’s proposal, how it could stimulate innovation within the sector and why it complements real-time payments.

KW: We’re here with Jan Estep, CEO of NACHA to talk about NACHA’s plan to deploy Same-Day ACH, meaning that banks would be required to make funds available to consumers and businesses on the same business day provided that a transaction was flagged as Same-Day ACH.

NACHA has asked for comments from the payments ecosystem on its new Same-Day ACH proposal, which will go to members for a vote. If adopted, NACHA would amend its operating rules to enable the Same-Day processing option for most ACH payments.

You’ve tried this once before back in 2012 and it didn’t fly. Why do you think things will be different now?

JE: We’ve actually been socializing what we’ve called this phased approach for same-day ACH since March, and we’ve received favorable feedback from businesses, and financial institutions of all sizes since we started talking about this new capability. The key difference is that there is significantly enhanced functionality, versus what we issued to the industry back in 2012.

There would be two additional same-day clearing and settlement windows made available, so that in the end, the ACH network could have the capability to settle three times in a day. We would also have very specific instructions around ACH credit availability, mandating that funds have to be made available to end-user accounts by the end of the business day. That really assures an end user like a consumer that they can go to their ATM and take out cash, or that a business has the funds in their account available by the end of the business day to invest in other ways.

These plans will require more effort on top of what the ACH network offers today, but we also think it will greatly enhance the value to the end users.

KW: Why do all banks have to agree to participate? Isn’t it possible for banks to opt in if they want to provide this service, or opt out if they don’t?

JE: One word that we use in the ACH network quite regularly is ubiquity. That definition to us means that there is the certainty of absolutely being able to reach any of the 12,000+ financial institutions in the United States. So it really is a mandatory requirement on the receiving end, not the originating end. What that does is give value to the originator of the payment – someone making a payment really can then be assured that they don’t have to guess which financial institutions participate or not. When there are so many financial institutions in the U.S., that surety of knowing who you can reach is important.

Secondly, we’ve received feedback over the last few years asking us to make sure that it’s mandatory. We actually have indications that opt-in doesn’t work. The Federal Reserve of ACH operators has had an opt-in same day ACH program over the last couple of years. Although some banks and credit unions have joined, most have not. It’s again because the originators that they support don’t see the full value unless they can reach everyone.

NACHA has also had a real-time payments service available as an opt-in service since 2008. Very few financial institutions have signed up because again their businesses they support aren’t interested unless they know they can reach all end-points, so being ubiquitous and having that implemented via a mandatory rule is what we think is key to providing value.

KW: Speaking of value, let’s talk about the business case for Same-Day ACH Payments. You described the differences between the proposal in 2012 and the proposal today, and the enhanced functionality that’s part of this new one. What business case is being presented to the banks to get them all to agree?

JE: Again, what we’ve heard since 2012 was that it was too middle-of-the-road. There wasn’t enough functionality, and it wasn’t worth the investment to change the technology. So we started by defining enhanced functionality, and then employed an outside research firm to look at the use cases and asked, “If we had this functionality, would you use it?”

That really is an important part of the business case – to say there’s a need in the industry, the volume will be generated, and what we found that there was over 60 percent of projected ACH volume for same-day would come from traditional ACH payments. So a business case is created by saying there’s a need in the industry. Bill payments or invoices due that day, or to support traditional ACH applications like payroll, better supporting hourly workers, or if a payroll file is missed, being able to repair it and submit it on the same day to ensure that payroll payments are delivered. Or B2B payments – the ACH network today supports voluminous information with the payment, being able to send a payment same-day with all of the invoice information to support that to afford the opportunity of straight-through processing on the same day to make that last-day invoice due date.

Lastly, when you look at the ACH network, the ability to pass information without a payment is a nice capability. To support things like enrollment, or account information, or things about returns – all of those will be enhanced with the same-day clearing and settlement functionality

KW: There’s a lot of talk about Real-Time versus Same-Day. What advantage does Real-Time offer that Same-Day doesn’t? Sounds like Same-Day works just fine with use cases that you just outlined.

JE: Part of what we’ve done, through research and conversations and surveys, is finding out where same-day ACH fits. That’s not only compared to something like real-time payments that the United States is moving toward. That’s also compared to check, or credit card, debit card or wire. Those are all alternative payments, and we think it is great. We support the efforts to move forward with real-time payments because the feedback that we’ve received is that same-day ACH and real-time payments can be complementary.

There are times when immediate movement of money or the message that the payment will be there soon is very important. It might be an emergency situation, or when businesses are waiting to unload goods at the dock, they need to know via a message perhaps from their financial institution that the payment is assured to them. They can then drop the goods and move on. That’s different than saying there’s an existing relationship between entities with an obligation for today, and the funds can move into the account, which would be a same-day ACH payment. Again, it’s complementary because use cases are distinct, and both will give new choice to end-users.

KW: Let’s talk about the fee that’s part of the proposal. Receiving banks will receive payments for enabling the service from the originating bank. What feedback have you received on that aspect of your proposal? 

JE: As we talked about the business case earlier, it really focuses on the use cases, the volume, and the fact that this would be a mandatory, rule requirement for receiving financial institutions in order to fulfill that value proposition. As part of the proposal, we have also presented the idea of an interbank fee that would be a nominal fee paid by the originating financial institution to the receiving financial institution. That balance is one of understanding that originating financial institutions have the opportunity to create and then support new innovative payment applications with same-day ACH. The receiving financial institution does have the mandatory requirement not only to implement but to also support on an ongoing basis.

What we’ve heard that really matters is the ubiquity. We do believe that interbank fee is a good way to make that connection and assure that all receiving banks can receive the payment.

The other feedback we’ve gotten is that entities are appreciative of the controls that are suggested with the proposal. The fee would go down over time if volume reaches a significant level higher than what is originally projected. It’s why the use cases, the volume, the value and the cost are all part of this research we’ve been doing over the last year.

Our hope would be that if same-day ACH is used at a greater volume than projected, that’s good, and the incentive to use the ACH network for same-day ACH is that the fee could go down over time. That would be a win-win for everybody.

KW: So you described a number of use cases that support the enhanced functionality that banks are looking for and looking to offer their consumer and business clients. What are thoughts with respect to how this capability will stimulate innovation in the sector?

JE: I think it will perhaps be in three different ways. First, to recognize that the ACH network supports payments that are ACH payments in and of themselves – credits and debits that are available now with next day ACH, and tomorrow with same-day ACH. It will inspire new uses. It may help certain entities move away from check where they thought the only way to do this was to hand it to someone else and run to their bank or credit union and get it cashed. So I think being able to do it same-day and electronically will open up some new uses.

The second way is recognizing that even today the ACH network is often viewed as a foundation for innovation. It allows businesses, financial institutions, solution providers and processers to look at it and ask how they can layer new services and capabilities on top of that. Given this, the ACH network is supporting a lot of new innovative users today. This really increases the potential for innovation with a more solid foundation supported by three settlement windows per day.

The last way it really spurs innovation is by recognizing that same-day ACH serves as a clearing and settlement mechanism for other payment types. It reduces counter-party risk by officially moving those funds between financial institutions. In this way, more frequent clearing and settlement in the ACH network can also provide benefits to other types of payments. It can help the merchant acquiring environment by moving the funds between parties more rapidly. It can help credit card settlement between entities. All of those things are subtle differences that I think can become more real over time.

KW: Walk us through the time frame. I know comments are open for awhile – what happens once that comment period closes?

JE: We really hope to receive feedback in a lot of different ways with our request for comments in the next 60 days. The information we have on the website articulates it in a lot more detail – asking for feedback that we would like to receive from others.

After we’ve received the feedback, we’ll take a few months to analyze that, and it will be reviewed by our rules and operations committee, and rules work groups that include a lot of constituents from many different areas within the industry.

Based on the feedback, our hope is that by Q2 of 2015, we’ll be able to issue a ballot to our diverse set of members and the RFC now calls out a timeline for implementation for 2016 to 2018.

Jan Estep
President and CEO, NACHA

NACHA’s President and CEO Janet O. Estep provides executive guidance for the organization, striving to lead the organization with integrity and vision. Estep guides NACHA’s daily operations and rulemaking processes, and encourages the development, promotion and use of electronic payment solutions such as Direct Deposit via ACH and Direct Payment via ACH. Her responsibilities include ensuring that the ACH Network remains a safe, high-quality payments system through enforcement of the fair and equitable NACHA Operating Rules, which govern the Network and guide risk management and create certainty for all participants. Estep also leads NACHA in industry collaboration, education and dialogue to facilitate the balance between innovation and risk management, thereby strengthening the Network and helping the industry create valuable payment solutions.

Prior to joining NACHA in 2008, Estep served as executive vice president of U.S. Bank’s Transaction Services division, and was accountable for the general management of the division, which included Elan ATM & Debit Services, ATM Banking Product and Operational Support, ATM & Kiosk Services, and EFT Network support. She joined U.S. Bank in 1997 with responsibility for its Merchant Payment Services division, previously holding a variety of management positions in technology-intensive companies. Before joining U.S. Bank, Estep was general manager of the Twin Cities laboratory and vice president of sales and marketing for Pace Analytical Services. She also spent 15 years at IBM in a range of field and corporate positions.

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