Consumers simply are writing fewer checks. And check-conversion services supported by the U.S. automated clearinghouse system are experiencing the impact directly. They simply aren’t needed as much as they were a decade ago because consumers have more electronic options available to them to pay billers and merchants.
It is perhaps because of this, or perhaps just partly so, that NACHA, which oversees the ACH network, is turning its attention more these days to pushing for expanded use of ACH credits, which could speed up settlement times and improve transaction security.
In 2012, 21 billion checks were written, 2.7 billion (13 percent) of which were converted electronically to ACH transactions, according to the 2013 Federal Reserve Payments Study. Three years earlier, in 2009, some 27.8 billion checks were written, 3.3 billion (12 percent) of which were converted to ACH transactions. And in 2006, 33.1 billion checks were written, just 2.6 billion (8 percent) of which were converted to ACH.
ARC and BOC volumes down
As the data show, ACH volume associated with back-office conversions (BOC) done by merchants accepting paper checks and accounts receivable conversions (ARC) handled by billers receiving mailed checks have plummeted (see chart). In 2013, there were 1.72 billion ARC payments, down 14 percent from 2 billion in 2011, according to NACHA. Similarly, last year there were 178,262,806 BOC payments, down 8.8 percent from 195,494,682 two years earlier.
In an interview with PYMNTS.com, Jan Estep, NACHA president and CEO, noted that almost 90 percent of the ACH network’s volume now is native transactions, meaning paper never entered the process. That’s a far cry from 10 years ago with ARC and more recently when BOC first came on the scene.
“Both of those really raised the infusion of efficiencies in the businesses that were accepting checks for payment, primarily bill payment,” Estep said.
ACH debit versus credit
Unlike in countries that have virtually eliminated checks, where ACH credits outnumber ACH debits, the U.S. has many more debits than credits, Estep said. Last year, ACH network payments totaled 22 billion, up 4 percent from the previous year. Of the 17.55 billion ACH transactions that flowed through ACH operators (non on-us), 10.2 billion were debits, and 7.35 billion were credits.
ACH debits tend to involve bill payments, where the billing company is authorized to pull payment from the consumer’s account. Credits typically involve direct deposit of payroll funds or when a consumer wants to pay a biller manually when a bill is due.
Fraud on ACH transactions is very low. The unauthorized-debit return rate last year was 0.0288 percent, Estep said, noting unauthorized credit returns don’t exist because no authorization is needed.
“That’s why it’s the cleanest payment type in the U.S. today, and it’s one reason why we’re promoting its use for payment,” Estep said. “ACH credit is both a wholesale and retail payment that doesn’t have an authorization part needed to move my own money.”
As such, it invites opportunities to better enable ACH credits to support clean, fraudless-prone payments, she said. “What we need that we don’t have today is a vehicle to better direct ACH credits so I can easily pay you from my account to yours and know how to direct that,” Estep said. “As an industry, it has not provided easy-to-use tools for that purpose.”
In 2012, NACHA reached out to the industry by creating the ACH Blueprint, which defined what the organization thought the industry should focus on as opportunities over the next five to 10 years. It highlighted eight such opportunities, with ACH credit being among them as a means to overcome business’ aversion to direct debits and to support consumer mobile online payments.
“Credit requires a lot less oversight than debit because it doesn’t require an authorization,” Estep said. “If people want to move money more rapidly, they can do so via an ACH credit” done through same-day settlement, she said.
Over the past six months, discussion on such topics has created confusion in the industry over faster or “real-time” payments, Estep noted. “A messaging or authorization layer is very distinct from the settlement layer,” she said.
Credit or debit card payments and opt-in programs like Secure Vault payments use real-time “good funds” authorization models, but the funds don’t move until the transaction settles. Discussions now are centered on the number of settlement windows needed to support ACH payments between parties, as well as when funds become available, Estep said.
“So ‘real time’ depends on the authorization, the settlement or the availability of funds to the end recipient, and when they have cash in hand from the transaction,” she said. “Each is distinct and requires distinct decisions and technology.”
Today, there are no “ubiquitous solutions” that require absolute participation by all players. As such, disparate programs operate differently and with limited participation. With ACH, there are opt-in rules that allow for same-day settlement of credit transactions between financial institutions, but it’s not ubiquitous, Estep said, noting NACHA rules require next-day settlement of ACH credits.
“If you don’t have surety of reaching all 12,000-plus financial institutions, you don’t have surety of that network,” she said. “You need ubiquity so you don’t have to do so many processes.”
Indeed, the ACH network connects all banks, but it’s a matter of messaging and authorization that gives the appearance of real time, or ubiquitous, same-day settlement, Estep said. It requires surety of settlement by connecting banks and movement of funds via ACH to shore up the system, she said.
“If we make incremental improvements to settlements across ACH, it affords us more opportunities when looking at messaging or authorization that is less risky than other mechanisms,” Estep said. “The more we can move to ubiquitous messaging or authorization, which we’re not close to in the U.S. today, the more user friendly it will become in the future.”
When “real time” ACH payments occur on a broad scale is anyone’s guess. Danilo Portal, chief operating officer at National Payment Card Association, which supports mobile-and card-based ACH point-of-sale payments, believes it’s just a round the corner, however.
“Real-time ACH is being promoted by NACHA, but it’s not there yet,” he said in a PYMNTS.com interview. “It will take a couple of years before the platform interface may be available.”
Infrastructure changes are necessary between banks, and that affects implementation, Portal said. “A lot of people are getting involved in setting standards, and that takes time,” he said.