ACH and the Future of Electronic Payments: BAI Convenes the Ultimate ACH Panel
At its Payments Connect conference BAI assembled a dream ACH panel, consisting of:
Jan Estep, CEO NACHA
Rich Oliver, EVP Retail Product Manager, Federal Reserve
Rossana Salaris, SVP, Payments Products, The Clearing House
Stephanie Sturgis-Griffin, CEO Pariter Solutions
The session was moderated by Fred Brothers of eCom Advisors.
On stage yesterday afternoon we had all the necessary folks to not only define the future of ACH but make it reality: the NACHA rule making body, the two largest network, and the largest processor. I was eager to hear what they had to say and impressed by the candid discussion of competitive pressure from alternative payment providers and the imperative to settle ACH transactions faster.
As I’ve commented previously, ACH continues to be a critical enabler of the transition from paper checks to native electronic payments as well as of check conversion via ARC, BOC, and POP. The rapid growth of check conversion (most notably ARC) has tapered off, and the network is looking to other payment types as drivers of growth. Significant change is underway, in efforts to support International transactions (via IAT, not without challenges along the way) and now same-day ACH settlement for some transactions.
As an introduction, Fred Brothers shared an anecdote to illustrate the diminishing importance of checks. He coined the term “refrigerator float” to describe the inconvenience of receiving a check that needs to be deposited. You stick it on the fridge with a magnet to remind you to do something with it. And it sits there until you accumulate another check or two. (I personally have overcome this challenge by using USAA’s iPhone RDC application.) Fred’s point is that among banked consumers, there is very little use of paper checks. This has lead to significant changes for the Fed [to be explored in a subsequent BAI post].
Fred also noted that cash remains important among the 25.6% of households that are underbanked or unbanked. And for the first time, last year Internet banking overtook branches as the primary banking channel in the U.S..
Q. What are the high growth opportunities for payments in the next 5 yrs?
Janet Estep: Before answering, Jan Estep acknowledged the danger of making predictions. She noted that those transactions that yield the most value for the users of the ACH network will grow. Native electronic transactions (direct deposit, created 40 yrs ago) are the foundation, what the network was designed for: secure funds flow without paper or plastic. Direct deposit will continue to grow, despite unemployment at 10%. But WEB and CTX grew at almost 10% throughout 2009 (ubiquity, efficiency, and information with the payment) continuing to drive adoption. NACHA has proposed utilizing WEB for mobile scenarios, as it has the necessary security provisions, as shown by gradually decreating rate of unauthorized debit returns.
Stephanie Sturgis-Griffin: Seconded that predictions are risky. Volume growth has indeed slowed down somewhat. But ACH has a healthy incremental volume growth. Much of the focus for banks is on channels, versus core processing – e.g. mobile and web when it comes to volume growth. Banks continue to chip away at B2B volume. It is important that channel specific solutions focus on the needs of both payers and payees. We need to focus on the on customer experience, value from a payment and information perspective. As well as addressing banks need for efficiency, payments risk management, and evolving regulatory requirements.
Rossana Salaris: When we look at what is going on in the industry as volumes shift, growth is due to check electronification: an interim step in the migration from paper to electronic. There has also been more and more PPD debit and WEB – if we can get half of the remaining check volume to go to ACH, it will double ACH volume. This is huge opportunity.
Rich Oliver: Huge amount of untapped volume related to hourly payroll. This could be direct deposited instead. The market research that Rosanna quoted is being repeated this year, so we will soon have updated payment statistics. [Editors note: preliminary results of the 2010 Federal Reserve Payments Study will be available at the end of the year, with full results in early 2011.]
Q. The majority of cash is concentrated among the under banked. What about shift from direct deposit to prepaid. Those cards are being used as a substitute for DDA accounts. Other than a paper check, there is not much difference between a general purpose reloadable prepaid and a DDA account. And consumers cannot overdraft.
Janet Estep: The ACH network underlies prepaid settlement, credit card payments, etc. so as payroll goes to cards, many transactions will also be funded by ACH. I see it as complementary vs. competitor – there are different needs for businesses and consumers, payroll cards work better in some situations. If some people are adverse to having a bank account, they have an alternative. Although the rules, regulators, safety and security that are associated with bank accounts are not necessarily there for prepaid.
Rich Oliver: US Treasury faces this when addressing unbanked. It has the most promise there. But understand that there are needs in other communities, too.
Fred Brothers: Our industry uses the terms “unbanked” and “underbanked” almost interchangeably, but there’s a big difference. The larger segment is underbanked (17.9%; 21.million households). At eCom we prefer the term “Underserved.” They have an active bank checking or savings account, and may do some transactions through their bank, but they rely on cash and other alternatives such as money orders, check-cashing services, payday loans, rent-to-own agreements, pawn shops, refund anticipation loans, etc. The number of housesholds with no banking relationship whatsoever is smaller than people realize (7.7%; 9 million households). (Source: FDIC).
Q. What can we learn from how other countries? How have other markets approached payments (with a focus on ACH-like transactions rather than cards, please)
Rich Oliver: Thinking about it as we try to grow FedACH International services. Both what we can learn to do, and what we can learn NOT to do. Don’t have to look to Europe, etc. to understand payments availability. Often their EFT are even slower than ours. SEPA demonstrates the criticality of standards in executing payments across borders. Payments follow commerce, commerce is global. In Silicon Valley when a company starts up, creates an website, they are International to start. The Internet has no borders.
Environment in Europe, checks not dominant and decreasing. Therefore they must be efficient. We must pay more attention to risk as we move money cross border (AML, terrorist financing) which offers new challenges beyond domestic transactions. Regulators have been very aggressive in some markets (declare end of checks) or get involved in pricing (cross-border should be priced similar to domestic). We should focus on efficiency, risk – but not mess with the marketplace and pricing.
Janet Estep: We can learn from others. But we can collectively learn with each other, too. An idea emanated a few years ago from NACHA’s Global Payments Forum council, which includes organizations from many countries. The International Payments Framework will start moving ACH transactions in the first quarter of this year from country to country. This uses existing railways, infrastructure, and leverages standards. Not reinventing the wheel
Rossana Salaris: In England faster payments takes advantage of the immediacy of ATM network, and settlement via ACH. We can offer better products by breaking down silos between ACH, ATM, wire – banks can combine features and functionality of various rails to develop new products and services.
Q. Same day ACH – we’ve been talking about it for years. Will we make material progress in the next couple years?
Rich Oliver: This is a topic I am really fond of. Obviously, we think we have to do better. I ran both check and ACH at Fed. When check folks created same day check solution, knew world was upside down. Banks exchange items directly, to improve availability. Only introducing same day because the ACH network needs to offer the service level that is desired. Same day functionality for those who what to use it will hit the market next quarter. We’ll experiment. There is a lot of enthusiasm for debit. The silos get more outspoken when we discuss credit. The UK Faster Payments, credit push example is relevant. In the US we have some credit push at the consume level via wire (40% of Fed wires are consumer, I believe it is similar for the Clearing House). The only way to get hourly payroll in ACH is to offer credit push. We need to explore the business case. With interest rates at a quarter of a percent, who cares about early availability. But early notification of return items is very good. The ACH infrastructure is capable, we need to leverage what we’ve got. We’re positioned to do it. And just need to manage it from an overall corporate (bank) revenue perspective.
Stephanie Sturgis-Griffin: I will focus on two words Rich mentioned. When the Fed introduces same-day, he said we will need to “experiment.” As far as the business case, the focus for Pariter as a technology provider and processor, is requires investment and on-going enhancements to ACH network. We need to look at core processing plus additional features for enhanced risk mitigation, etc. As we develop business requirements, do we assume that presentment and settlement requirements are the same, or are they potentially separate to encourage participation? We all need to examine the impact of same-day – what changes to the core ACH platform are necessary? What changes to upstream and downstream implications? Changes to DDA platforms (homegrown and vendor), G/L systems, in order to be viable? We need to take a paced approach, so that we can understand what industry is getting into. Some things will work really well, others will require adjustment. Need to be very focused on customer experience – of both originator or receivers.
Rich Oliver: I am less concerned by the impact of changing the settlement timing. As a result of Check21 check settlement timing changed, and consumers and businesses have adapted.
Q. Will we be real-time by 202o? You all up here, and people in the room, are going to make this happen. Are we going to be there? Yes/No and why?
Janet Estep: The ACH network will have to continue to evolve. As processing everything faster is expected throughout the economy, people will expect ACH transactions to flow faster, and we do have the capability. So it would be silly to say No. We are better off doing it before we are told to do it (by regulators).
Rich Oliver: In this world today, either we figure out how to do it or someone else will. We see this from PayPal, but then Vocalink started offering faster payments (In Finland the faster payments system was outsourced to Vocalink). European banks are paying attention and so are we.
Rossana Salaris: By 2020 we have to do something. Regardless of what actions regulators may take, consumers definitely will demand it. My 13 year doesn’t know what cash is. He has an iTunes card, a cafeteria card at school, gets together with his friends for electronic parties with Xbox. If we wait for regulators, consumers will get it somewhere else. We need to adjust the rails so that whatever payment products evolve can ride the rails – otherwise, we’ll be talking about Vocalink and PayPal in 2020.
Stephanie Sturgis-Griffin: The capability will be there, banks and third parties need to develop channels that deliver value to both payment originators and recipients. Finality of settlement is often treated as a commodity that not everyone understands fully. We need to work with regulators to ensure consumer laws adapt accordingly.
Fred Brothers: If we don’t build faster transaction capabilities (same day and eventually real time), nonbank providers will. “What’s the definition of PayPal?” They’re the biggest direct internet bank in the world. They’re also the fastest and cheapest way to move money in near-real time between 50+ countries. “What’s the definition of Wal-Mart?” Quite possibly the biggest bank in the world, 5-10 years from now.
Q. What about mobile and P2P, will they clear faster? Consumers are tired of looking at balances where transactions take 2-3 days to be reflected.
Janet Estep: These are growth areas, which can take advantage of the WEB transaction. But “mobile” means so many things. Mobile financial services info? Mobile commerce (discounts/promotions, coupons, loyalty programs)? Mobile payments (bar code on device, NFC, at POS or remote)? The WEB SEC is designed for Internet-initiated transactions, and WEB is utilized for a lot of bill pay. As we think about the requirements of mobile bill receipt and mobile bill payment there are choices including timing and funding. How much information needs to accompany the payment? The tools exist, we need to understand how we want to do mobile, and what the business case is.
Rossana Salaris: Consumers are still paying businesses with checks. Why can’t mobile device be the next step in drawing funds form checking account? From bill payment it can extend to casual payments (consumer to consumer). Home banking (online bill pay) needs to support a broader range of transactions. If it allows initiation of a payment with just an account number and RTN from home banking to anyone, then mobile is the next extension.
I am in the mobile payment business. We are using WEB transactions for notification, account management, and payment. Three types of transactions. When network statistics are published we cannot distinguish between the three. Will we be able to track the growth in payments by channel at the network to better understand fraud, etc. ?
Janet Estep: WEB for mobile is the first step, mostly bill pay to start, rules for security are in place, don’t have to make any technology changes. Recognize that we need to adapt, there will be more change into the future. Believe we need an indicator, not necessarily a new SEC code. We need to explore how to make it easy to track by channel for risk management as well as assessing market acceptance.
Fred Brothers: A year ago we did some research and we were stunned to find that of consumers with smart phones, 40% had done mobile banking, 20%had done bill pay by device. We are reprising that survey now, and expect the number will be much bigger now.
Q. What about using ACH to fix issues related to check imaging – replace bad images, send IRD via ACH rather than paper substituted.
Janet Estep: Yes
Rich Oliver: There are some legal challenges, but also some precedents (ACH is used for destroyed checks today). You are right.
Q. Other providers will deliver new faster processing and capability if we do not, large banks are working outside of the ACH network already.
Rich Oliver: With low interest rates, the business case pressure isn’t there like it was. But we don’t have ten years, if we care about who owns the channel.