The Decade’s 12 Greatest Developments in Payments: #7 How the ACH System in the U.S. is Encouraging Electronic Payments Innovation

Payments went electronic in the first decade of the 21st century in the United States. Electronic payments account for more than half of all payments by dollar volume and more than two thirds of all noncash payments. A major factor in what you might call the greening of the payments industry has been the growth of the Automated Clearing House (ACH) system for directly debiting and crediting depository accounts. ACH transactions have grown exponentially over the last decade and the ACH system has spawned numerous important innovations in the payments business.

Let’s begin with the stats. In terms of number of transaction electronic payments overtook paper checks in around 2003 according to an estimate from the Federal Reserve Board and from the Office of the Comptroller of the Currency. The growth of credit, debit, and ACH transactions all played a part in that. When it comes to the dollar value of transactions though ACH is a far bigger payment player; the average ACH transaction is much higher than the average debit or credit-card transaction.

ACH entered the decade on a tear. The number of transactions grew by 16.2 percent between 2000 and 2001. There were about 8 billion ACH transactions in 2001 worth $22.2 trillion. Growth rates slowed down during the decade nevertheless resulted in impressive gains. There were almost 15 billion transactions worth $29.9 trillion by 2008. A lot of the ACH transactions involve business-to-business or involve the government paying people. There’s evidence though that consumers really toook to ACH during the past decade. A 2007 Federal Reserve Board study found that mid-decade — between 2003 and 2006 — consumers increased their use of ACH by 19 percent per year.

The ACH system has spawned a number of innovations. As more and more consumers use online banking they have used the ACH system for electronic bill pay. That in turn has increased the appeal of online banking and created a positive feedback effect. Electronic checks are becoming a substitute for plastic at the point of sale. Wal Mart simply scans the paper check and asks for a signature just like for a credit card. eBillMe has used ACH-based online banking to build an online payments alternative as have other companies. PayPal of course is steering its account holders to input their checking account numbers rather than using cards. One of the most recent innovations is “decoupled debit” which allows an entity to issue a debit card that relies on the ACH system to take money out of the cardholder’s checking account; that way consumers don’t have to get their debit card from the same institution where they hold their money. It is too early to tell whether this latest innovation will catch on.

Backed by the Fed the ACH system will continue to erode the use of paper checks. Going into the next decade it is likely that we will see more innovation that relies on this inexpensive and convenient method for transferring money.

Previous Great Developments in Payments During the Last Decade:


#8 The Magstripe Lives On

#9 Shanghai Surprise

#10 Collateral Damage from the Financial Crisis – Consolidation and Regulation

#11 How the World War on Interchange Fees Transformed the Card Industry

#12 American Express Goes Global

David S. Evans bio