- 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.
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.
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.
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.