Is the ACH the Best Path to Faster Payments?

Is the ACH the Best Path to Faster Payments?
Yesterday, NACHA issued a press release announcing initial steps towards same-day ACH. This is a second attempt at accelerating ACH payments. Rather than a “big bang”, this second attempt advocates a phased approach, inviting banks to invest in three projects instead of one. The sentiment seems worthwhile, but I’m not convinced that this is a good idea. In considering faster payments, there are many considerations. Among them: what exactly needs to be faster and who is the customer? Who stands to benefit from faster payments? What Needs to be Faster? Particularly in the case of real-time payments, it is important to distinguish: 1) Notification of payment 2) Payment guarantee/ funds availability and, 3) Settlement In my view, accelerating 1 and 2 are more important than 3 and less costly to bring about. Who is the customer? Who would stand to benefit the most? Many assert strong and growing consumer demand for faster retail payments. We see more interest than demand, particularly if costs are factored in. Celent surveyed over a thousand US consumers in August 2013. In part, we explored payment expectations. With little variation across age demographics, more consumers expect instant confirmation of payment (59%) than expect real time gross settlement (42%). Other factors weigh more heavily than speed. When I Pay Source: Celent survey of US consumers, July 2013, n=1,053 In my view, merchants and regulators are more invested in faster payments than are consumers. Faster payments mean earlier access to funds (retailers) and less systemic risk (regulators). That’s why most systemically important payment systems are RTGS. Faster payments are a certainty – in time. What’s far from certain is how it comes to be – what rails are used. Some advocate using the ACH. I disagree. Moreover, I find the current dissatisfaction with the ACH amusing. Designed as an efficient, electronic, float-neutral payment system, the ACH is highly effective at fulfilling its designed purpose. More recent demands on the ACH, while not without efficacy, have also resulted in increased cost and complexity. Same-day ACH, in my opinion, is simply not compelling. If enacted through a rules change and offered optionally at a premium price, it may succeed, but would result in precious little use. Real-time ACH would be altogether different – a fool’s errand in my opinion. The ACH works splendidly when used as designed. An analogy if I may. The NACHA press release stated: “The Network has always served as a foundation upon which we can build and innovate to meet the growing needs of today’s users and those of tomorrow.” That sounds a bit like inviting telco’s to build more phone booths in response to consumer’s demand for mobility. The “square peg in a round hole” analogy may work as well. I’d love to hear your views.

Faster…or fast enough?

Faster…or fast enough?
My last post mentioned that I was on a panel at International Payments Summit talking about real time payments. The topic is one that has cropped up many times recently in analyst inquiry calls in the last few months. With all the activity in the market, such as the decision in Australia to implement such a system, it’s perhaps not that surprising. What is surprising though is the number of myths and misunderstandings surrounding the topic. I thought it worth highlighting – and straightening – just a few here. #1. Real time isn’t always really real-time The most frequent myth is that everything end-to-end is suddenly instant. In reality, most (though not all) real-time systems are real-time in notification and authorisation, not settlement. In fact, in some systems in certain situations, settlement can take place days later. The starting point should be what needs to happen, and at what speed. In deed, for many payments, its the certainty, not the speed that matters. #2 Real time isn’t p2p One belief is that there is a pent-up demand for real time to enable p2p (or perhaps, more accurately, a2a) transactions. The use case is often quoted to be that of splitting a dinner check – one person pays the restaurant, the rest then have to find a way to pay the payer. But in reality, how often does that happen? The default in the UK at least would be tell the restaurant how to split the check across multiple cards. Even if that weren’t the case, the numbers of times that this happens would not be large enough to justify the investment on its own. The starting point should be use case driven though: who would benefit from sending – or receiving – funds faster than the current method. In most systems so far, these have been typically b2c or c2b, or indeed, mandated so the business case isn’t the issue. #3. Real time isn’t just payments In many instances around the world, real-time systems are often running 24/7. That poses, at the very least, 2 problems. Firstly, what other systems are required to run in real time, 24/7? Fraud checking, authorisation, notification and authentication systems are amongst the obvious, but banks have found dependencies on many others, and not just in the sending side. Secondly, maintaining systems becomes far more complicated if they have to always be available, and being “always on” means that maintenance becomes more important than ever.

Is MCX Betting On QR Codes and ACH?

Is MCX Betting On QR Codes and ACH?
In my recent report on Digital Wallets, I discussed a number of players which while still keeping their cards close to their chests, have a potential to significantly influence the payments market. One of them is Apple, which made headlines recently with their patent for cash distribution without ATMs – see Bob Meara’s excellent blog and my related comments for more details. Another one is MCX (Merchant Customer Exchange), a joint mobile wallet initiative amongst a number of the US retailers. The initiative was announced in August 2012, but the details have remained scarce since. The participating retailers have been talking about their desire to have a collective voice in shaping the future of mobile payments, and protect their data and customers. They have talked about developing a wallet, but it hasn’t been clear if they also had ambitions to create a new payment scheme or would rather rely on the traditional cards in their wallet. So I was intrigued to come across an article that appears to shed a little more light on MCX ambitions in payments. Citing sources close to MCX, the article suggests that MCX is indeed planning to build a new payment system based on QR codes and ACH payments cutting the transaction costs to 4c. Two cents would go to the FI for processing an ACH payment and the other two would go to the technology partners and towards future MCX development. If it is indeed a confirmation that MCX are inclined to build alternatives to cards, then it is very interesting. However, it is still not clear how such a payments system would work:
  • Would the QR code identify the customer, the merchant’s payment request or just the merchant?
  • Would the customers be asked to register their bank account details with MCX wallet in the cloud? I can imaging this would be a big stumbling block for many consumers.
  • Will the transaction be based on ACH debit or credit?
  • If it’s debit, how will the authorisation happen? If there is no authorisation, will the fraud costs just become unacceptably high negating any savings on the interchange? There is speculation that consumers would be asked to register their debit card, which would be used for authorisation over card network rails, and then the transaction would convert into an ACH debit for clearing and settlement. If that’s the case, the overall transcation costs need to include the authorisation fee as well. And it sounds very similar to many decoupled debit propositions, most of which have failed to ignite the market so far.
  • If it’s credit, the authorisation challenge turns into the authentication challenge. One way to solve it would be to ask a customer to log-in to their bank account (e.g. through a mobile banking app) and authorise a payment to the merchant. Somebody would also need to pass a token to the customer’s bank with the payment request details. This is pretty much how Online Banking ePayments (OBeP) networks work; however, attempts to build such a network in the US (e.g. NACHA’s Secure Vault Payments) have again had limited success so far.
More questions can be raised and that’s just about the technical aspects of the solution. Commercial and other questions might prove to be just as difficult to answer. Will the banks co-operate? Will the proposed restrictions for participating retailers to accept other types of mobile payments (e.g. Isis or Google) work against MCX? Will the stated desire not to share any customer data amongst the participants limit the commercial opportunity? And will the (inevitable) delays to a project of such scale and uncertainty grind the intiative to a halt before it even has a chance to take off? Only time will tell if MCX succeeds. For now, I suggest we continue to keep an eye on its progress with a healthy dose of scepticism.

Do Recent Announcements Bode Well for Same-Day ACH? Color me unconvinced.

Do Recent Announcements Bode Well for Same-Day ACH? Color me unconvinced.

Earlier this month Aptys Solutions announced the availability of same-day ACH support on its PayLogics platform primarily used by midsize banks. On about the same timing, Fiserv made known the availability later this year of a separately licensed module to its PEP+ product used by most large US banks. The enhancement is currently being pilot tested at Citigroup. So, it looks like in short order, the technical hurdles of same-day ACH adoption may be lowered for many US banks. Does that mean swift adoption of the service will follow? Color me unconvinced.

The Achilles heel of the new service is fundamental. A significant number of financial institutions must opt-in to the service before originating depository financial institutions (ODFIs) will have anything meaningful to offer to their customers. The service stands in sharp contrast to what has been one of the hallmarks of the ACH, namely “universal” accessibility among financial institutions. In Celent’s view, the opt-in nature of the new service combined with higher ODFI pricing has resulted in protracted adoption. Available payments platform upgrades won’t change this.

One might cite the rapid industry adoption of image exchange infrastructure over the past several years to argue that the opt-in approach is sound and should work again in the case of ACH. There are at least two reasons why this won’t be the case.

  1. Image exchange presented a compelling business case based on cost reduction from the start. Not so for the FedACH SameDay service, which carries a premium for ODFIs versus the next-day legacy service. Moreover, post Check 21, the Federal Reserve immediately began deconstruction of its physical check processing footprint. This created a significant and growing cost increase for financial institutions that persisted in paper check clearing, strengthening the business case for image exchange. There is no similar dynamic at work in the ACH.
  2. Image exchange–adopting banks didn’t have to sell the service to clients to benefit from adoption. Instead, image exchange began as a payment system innovation that later, once a critical mass of participation occurred, was offered to clients as image cash letter (ICL) deposits and accelerated funds availability. In the case of FedACH SameDay Service, without something to sell, there is little benefit to ODFIs beyond its use to settle on-us transactions (at a higher cost).

So, what can we expect? A number of large, early-adopter banks invested heavily in image exchange infrastructures, but significant industry adoption took several years. As more banks connected to the various image exchange networks, the business case for subsequent adoption improved. The same dynamic will be at work for same-day ACH. Early-adopting banks won’t have much to sell clients, because so few RDFIs will be available. Client adoption will fuel RDFI adoption, and vice versa.

What would be compelling, perhaps, is a broadly available same-day alternative accompanied by a NACHA rules change—particularly if both debits and credits were included. That would give banks something to sell, both for existing ACH customers, for expedited consumer payments (in return for a meaningful fee) and as part of the growing interest in mobile P2P payments.

ZashPay User Impressions

ZashPay User Impressions
While attending Fiserv Analyst Day 2010 on Thursday last week, I unwarily volunteered to participate in a live demo as part of a presentation of Fiserv’s digital channels solutions. This was a bit risky since at the time, I had been an iPhone user all of twelve hours. Fiserv launched ZashPay in July 2010 and has commitments from over 400 FIs. It’s off to a very good start. After announcing my name and cell number to the entire crowd, I received a text message from ZashPay in seconds indicating “Steve Olson sent $25.00” and included a unique transaction identification number. Steve is Group President of Fiserv’s Digital Payments Group and was assisting with the demo. Taking all of about 10 seconds to receive the text, the demo seemed successful enough and for $25.00 it was an equitable transaction considering my risk of embarrassment. Then, I began thinking about how clearing and settlement would occur. The following day (Friday) I reviewed the message and visited the ZashPay website to see about making Steve good for his $25.00 promise. The website was simple and intuitive, with an obvious invitation to enter a unique transaction code provided within the SMS in order to receive payment. zashpay As expected, I was required to enroll in ZashPay in order to process the payment, since my primary depository financial institution does not offer the product. It took a strong stomach to enter such sensitive information as my social security number, birth date and address all in one place. This would likely dissuade some consumers from using ZashPay apart from being offered by their financial institution. Steve’s payment was credited to my DDA two business days later. Since I took action on a Friday, payment was not received until the following Tuesday. As a receiver of ZashPay payments, the experience was straightforward and did not carry a fee. I appreciated the immediacy of the SMS notification compared to PayPal which notifies using e-mail. If my primary financial institution offered it as part of its mobile banking suite, I’d be a regular user since I carry little cash and leave my check book at home. But sending carries a fee – 75 cents per transaction goes to ZashPay, plus whatever the ODFI charges for the ACH transaction. So, maybe I’ll keep sending money using PayPal.

10 Reasons Check Volumes will Hasten their Decline in the US

10 Reasons Check Volumes will Hasten their Decline in the US
It’s certainly no news flash that US check volumes have been declining. Depending on whom you talk to 5% to 7% annual rates of decline (checks written) over the past few years seems likely. Another Federal Reserve check study is in the works this year to add precision since it has been since 2007 since the last data point. That Federal Reserve sponsored study concluded there were approximately 33 billion checks written in the US in 2006, down from nearly 38 billion in 2003. But what will the future hold? The tendency is to assume past performance is a good predictor of future results. In other words, many expect this rate of decline to continue. Here are ten reasons to suggest that won’t be the case. 1. CashEdge (www.cashedge.com) Perhaps best know for its online account opening capabilities, CashEdge has launched P2P payment products Popmoney and a suite of small business payment products. 2. Boku (www.boku.com) Boku is a relatively new player in the mobile payment arena. Its focus is on the payment of virtual goods and offers flexible pricing models tailored to micro payments. 3. FreshBooks (www.freshbooks.com) Boasting over 800,000 users, Freshbooks is a web based IBPP solution targeted to small businesses. It makes online invoice creation, presentment, tracking and reconciliation incredibly easy. Not surprisingly, payments aren’t by check. PayPal is a favorite option. 4. PaySimple (www.paysimple.com) is an alternative web based utility for small business bill presentment and payment. The application is payment system agnostic, supporting electronic check (ACH), direct debit and credit cards. 5. iPay Technologies (www.ipaytechnologies.com) is an online bill payment solution provider targeting community financial institutions. Its efforts are bringing check payment cannibalizing services to 3,700 community banks and offers solutions for both consumers and small businesses. 6. IP Commerce (www.ipcommerce.com) provides a “managed commerce services platform”. Its aim is to provide a platform for rapid development of commerce enabled applications. Said simply, IP Commerce is accelerating the development and deployment of electronic payment alternatives. 7. Mopay (www.mopay.com) is the Mobile Messaging and Payment unit of MindMatics AG. Unlike Boku, Mopay is a B2B enabler, with coverage in over 60 countries. 8. Square (www.squareup.com) Hype aside, Square’s aim is to increase the incidence of credit card acceptance by marrying an extremely easy acquiring process with tiny card readers that plug into the audio jack of any iPad, iPhone or Android device. Square’s micro business target market is known for its reliance on cash and check payments. 9. Vendorin (www.vendorin.com) is a trading partner network built to facilitate the easy opt-in for electronic payments. It vastly simplifies the challenge of migrating from paper to electronic B2B remittances. 10. PayPal (www.paypal.com) is the household name in our list. Once primarily associated with eBay, PayPal is quickly becoming a force in B2B payments. Its PayPal Mobile iPhone P2P application enjoyed more than 1 million downloads in its first three weeks. And, this is by no means the end of the list. Said simply, viable alternatives to check and cash payments are multiplying – at an astonishing rate. There has been activity in the B2B financial supply chain space for some time. Now, there are more options there than ever before, and it is becoming easier for smaller businesses to enroll than with earlier incarnations. Mobile payments, particularly P2P, are hot now with banks by the hundreds implementing solutions to adorn mobile banking platforms with P2P payments capability. I wouldn’t be surprised to learn of check volume declines of the order of 10% to 20% per year over the next few years given the accelerating activity among alternative. This would be roughly three times the historic rate of decline.

ACH: The Glory Days may be Over

ACH: The Glory Days may be Over
NACHA and the ACH have been on a roll for most of the decade, posting impressive network transaction growth rates year after year. From 2000 through 2008, total ACH volume (network + off-network) has almost tripled from 6.9 billion to 18 billion transactions. But from our perspective, the Glory days are nearing an end. This can be seen in the recently released Q1 2009 network volume statistics, with total network volume up just 1.9% versus year ago. Prior to the invention of check conversion SECs (ARC, BOC, POP, RCK, TEL and WEB), the ACH was used almost exclusively for recurring transactions. Indeed, it was designed specifically for this purpose. Network volume was dominated by cash concentration activity and prepaid credits (direct deposit of pay checks) and debits (recurring bill payments). But after years of promotion, the growth engine slowed to an idle. Then came check conversion, beginning with POP introduced in 1999. The collective check conversion introductions have produced impressive results. Through 2008, check conversion activity accounted for 38% of total network volume (32% of total ACH volume), up from just 6% in 2002.
Check Conversion has Rapidly Become a Significant ACH Contributor

Check Conversion has Rapidly Become a Significant ACH Contributor

For the multiplicity of eCheck SECs, the vast majority of check conversion volume has come from ARC and WEB. ARC was adopted by a significant number of large billers and retail lockbox operators because, at the time, ARC offered compelling savings versus paper check clearing methods. WEB has been propelled by PayPal transaction activity, with significant growth over the past two years in particular.
ARC and WEB Dominate eCheck Volume

ARC and WEB Dominate eCheck Volume

But, what lies ahead for check conversion? We see growth, but a far cry from the glory days gone by. In large measure, this is a direct result of the inexorable decline in consumer check writing. There are at least two additional factors. • Electronic bill pay will likely continue to grow at 5% to 7% annually for the next few years, but a good portion of that growth will cannibalize ARC volume as electronic initiated payments displace ARC conversions of mailed remittance. • Even though POP and BOC will see continued adoption by retailers, the resulting ACH volume will be unimpressive.
POS eCheck Volume will Decline Amidst Continued Retailer Adoption

POS eCheck Volume will Decline Amidst Continued Retailer Adoption

This likely outcome is perhaps why NACHA and the network operators have begun merchandizing same-day ACH. We provided a position on that initiative in an earlier post, Same-Day ACH: Whose Interests Would be Served?

Same-Day ACH: Whose Interests are being Served?

Same-Day ACH: Whose Interests are being Served?
Most everyone knows that the Federal Reserve announced recently that it would launch a same-day ACH settlement option to be available in the second quarter of 2010. The service enhancement would be offered optionally, would require opt-in, and would carry ostensibly higher pricing to the originating bank (ODFI) to compensate the RDFI for the accelerated debiting of funds – although the pricing plan was not announced. The accelerated clearing option would be available only for select debit transactions, eChecks, but would not be offered for ACH credit transactions – at least not initially. Some debate surrounds the specific mechanisms surrounding same-day settlement of what for years was a future dated transaction. The Federal Reserve unveiled its plan which some argue unduly favors ODFIs. Meanwhile, a number of industry executives advocate an alternative appearing to offer a stronger value proposition to receiving FIs. The latter proposal, known as the “NACHA concept”, would destroy a longstanding ACH system attribute; float neutrality. The result would look remarkably like today’s check clearing system. The Federal Reserve’s proposed initiative appears adequately researched to us, and meets the stated objective just fine. Why the controversy? A larger question is this: Whose interest is same-day ACH supposed to be serving here? What hitherto unmet need is being met with either of these initiatives that cannot be met with an existing, alternative payment method? Celent finds the motivation for same-day ACH suspect. The often stated driver for same-day ACH is the growing network risk of direct sends occurring among several large banks, bypassing the network and thus “robbing” network operators of coveted transaction volume and its’ resulting revenue. A network based same-day option, some argue, would thus blunt the impact of such out-of-network activity by making ACH network based services more competitive. Not likely. Those same financial institutions have been clearing checks using direct exchange for years because doing so was less costly than using clearinghouses. Similar dynamics are at work with image exchange, and they will likely remain at work with ACH. A more viable argument for same-day ACH is to help the ACH network remain competitive with image exchange. Ironic isn’t it that after a decade of trumpeting the virtues of check conversion (faster returns among them) we are witnessing such a dramatic evolution of the ACH to improve its competitive position versus check clearing mechanisms? Ironic too is that the last ten years of ACH evolution, specifically check conversion, while bolstering ACH network volume, has also increased return rates and costs associated with the added complexity the changes created. Same-day ACH will likely only make matters worse by adding additional complexity. I suspect that when the dust settles a year from now, we’ll see relatively little same-day ACH volume. That is, unless we collectively think beyond competing payment systems and their institutionalized self-interests and deliver real value to consumers. Using same-day ACH for expedited payments would be one such approach.