Former Federal Reserve Bank of Atlanta EVP, Rich Oliver, says that NACHA’s recent decision to create a same-day ACH environment will create “a nice bridge to the ultimate nirvana of a real-time retail payments environment.” In a PYMNTS inclusive, Oliver writes that not only is the change doable, but it’s doable in a time frame that is reasonably short. And, after digging into NACHA’s proposal, he also says that it addresses the one critical element that has to be present to ignite any such payments endeavor: the recognition that an economic incentive to change on the part of the originators and the receivers of ACH entries must be addressed.
Several years ago I had the opportunity to fulfill a bucket list item by playing golf with my son at St. Andrews in Scotland. We teed off in 45-degree weather with a 20 mph wind and spitting rain. Perfect! As we made the turn to the back nine, the leaden sky suddenly yielded to the sun and the gloomy landscape became gloriously illuminated (and our game became a bit more inspired)! NACHA’s recent decision to make a second attempt at creating a same-day ACH environment is much like my St. Andrews experience, a glimmer of sunshine in an otherwise dreary payments landscape. The question, of course, is whether the time is now right for such a change.
In reviewing the proposed approach to same-day ACH in NACHA’s Request for Comment (RFC), I believe that they have done a good job of addressing the concerns raised by opponents of accelerated ACH processing the last time around, including the need for increased functionality and the economics of same-day services. First, let’s recognize that robust functionality has been created in this proposal, adding two new settlement windows instead of only one and setting the end of the business day as a deadline for funds availability. The proposal recognizes the economic incentive to change is a question for both originators and receivers of ACH entries. Moreover, the incentives vary depending on whether the item is a debit or credit. Originating financial institutions have the opportunity to create and charge for value-added same-day products (there is no telling what a company would pay for an emergency missed payroll), and they can, as interest rates rise, develop earnings from a day’s earlier availability on debit items. Receiving financial institutions always realize earnings from the deposit of credits, but they also bear the burden of a day’s earlier loss of funds from debited accounts.
However, receiving financial institutions will have to make potentially expensive changes to their backrooms to implement same-day posting and to manage two new settlement windows per day. NACHA has proposed a version of receiver compensation to help defray a variety of costs necessary to address the increased functionality. The contemplated fee clearly will help offset the initial expense burden and accelerate transition. At question is how much, as NACHA proposes, the fee might be reduced over time as one-time investments are depreciated and volume ramps up.
A critical part of same-day ACH rulemaking is that the service would be mandatory. Ubiquity is a major key to the success of any payments product as it stimulates both customer reach and economics. Creating ubiquity through mandatory rule changes is nothing new in the ACH world and in NACHA’s rulemaking process. In fact, one of the cornerstones of ACH success has been ubiquity and NACHA has been aided in that process in the past by the ACH operators who first chose many years ago to serve all banks, and then instituted their own mandatory moves in the 1980s to an all-electronic ACH. As economically challenging as that change was, it became the key to the success of ACH as we know it today.
Finally, some will opine that we should not move ahead with same-day ACH at a time when both the Fed and The Clearing House have suggested the possibility of building a real-time retail payments solution. While I am certain that technology and entrepreneurship will eventually lead us to such a state, I am also sure that the issues and economics surrounding a real-time environment are far greater than those associated with a same-day ACH. A quick look at the fee structures surrounding real-time solutions today should convince us that we should not expect businesses to pay the same level of fees for the pleasure of depositing payrolls or collecting monthly bills. Nor should we expect banks troubled by decreased earnings in the near real-time debit card world to jump at the chance to invest in near-term real-time solutions for vast numbers of retail payments.
It seems to me that the changes necessary to implement same-day ACH are eminently doable in a reasonably short time frame, and that same-day ACH will create, if nothing else, a nice bridge to the ultimate nirvana of a real-time retail payments environment. Let’s remember as we look back at other major economic and technological changes in payments, whether it’s chip and PIN cards or the original implementation of ATM networks, a decade may not be sufficient time to fully transition and earn the benefits of change from a truly ubiquitous and real-time solution.
NACHA has built a compelling case for moving forward with same-day ACH by addressing the concerns raised by earlier opponents. Now would seem to be the time to focus once again at meaningful changes in the service levels and efficiency of our nation’s payments system by approving NACHA’s proposal. It would be a ray of sunshine.
Richard R. Oliver
Former Executive VP, Federal Reserve Bank of Atlanta
Richard Oliver, a payments system consultant, retired in 2011 as an Executive Vice President of the Federal Reserve Bank of Atlanta, where he spent 38 years overseeing technology and payments system services, including check, ACH, and wire transfer. From 1998 to 2010, he was the Federal Reserve System’s Retail Payments Product Manager with profit and loss responsibilities for the Fed’s $750 million check and ACH businesses. During 2010-2011, Oliver served as head of the Retail Payments Risk Forum, where he co-led a mobile payments industry effort to explore the evolution of mobile payments in the United States. He is currently providing strategic planning and payments consulting and speaking services to industry organizations.
Oliver received an undergraduate degree in Mathematics from the University of Nevada, a Masters in Information and Computer Science from the Georgia Institute of Technology, and an MBA from Georgia State University. He also attended executive development programs at the University of Tennessee and Harvard University. In 2010, he received the prestigious George Mitchell Payments System Excellence Award from the National Automated Clearinghouse Association.
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