NACHA Payments 2014 Roundup

NACHA Payments 2014 Roundup
After attending IPS, NACHA Payments is always a slightly strange experience. Not bad, just quite a different set-up. IPS is very international – if anything the UK is under represented – and more senior. NACHA offers much to the more junior member of staff, particularly those seeking to renew their AAP accreditation. This means that the attendance is much, much higher, but that there is a real mix of people. As a result, some of the sessions are detailed, nitty-gritty discussions, great for learning about areas I don’t usually cover. The main topic of conversation for me was real-time payments. I’ve spoken a couple of times in the past at NACHA on the topic, partly because of my involvement in the UK Faster Payments scheme, and clients will know about my forth coming series of reports on the topic. Real-time was also mentioned in numerous places across the agenda, with several friends and former colleagues speaking. The focus of my first report was also the starting point for many of my conversations – addressing the many myths that seem to pervade about real-time. These include:
  • that it’s only in the UK and Singapore (it’s not – there are at least 35 other systems globally)
  • that its new and leading edge (its not – at least one system is 40 years old)
  • that it’ll canabalise wire revenue so should only be a p2p proposition (multiple examples proving that this doesn’t have to be the case!)
Shortly before NACHA Payments, NACHA announced it’s enhanced Same Day ACH proposals which also came under great debate. It’s my belief, and shared by a growing number of people, that the Fed has decided the US *will* have a real-time payments system. As such, one group of people saw this announcement as being a response to ensure that NACHA is not bypassed in some way. Jan Estep, the CEO, of NACHA, was on one of the panel sessions, and was asked about how this attempt will be any different to the previous NACHA proposal. The vote on that proposal received a Yes from the majority of banks, but not the 75% voting majority to pass it. It’s widely believed a handful of big banks effectively blocked the proposal. To my point at the beginning about there being a large operational audience, Jan gave an excellent and detailed explanation of how this proposal differed from the last. But a number of the audience suspected that the question was rather more pointed and was really asking why the blocking banks would suddenly vote for this now. That specific question was never addressed. By the time the conference finished, I was left with the impression that the debate had turned a corner, or at least moved into a new phase. Over the last year, I’ve increasingly found that people have formulated their opinions on the subject. But as my discussions highlighted, there are a lot of misconceptions, and I’m not always sure some of the people contributing to the debate aren’t muddying the waters further. I think the next step for the Fed is to address that, and even if it stops short of compiling a list of requirements, a view on what isn’t the solution would be helpful. I understand the logic of the NACHA proposal, but I fear it’s a short-term solution to a long term problem.

Real-time Payments: Different questions, funnily enough, get different answers.

Real-time Payments: Different questions, funnily enough, get different answers.
Bob recently posted some views on the same day ACH – as always, great points, well made. Somehow, in Twittersphere, some of the comments got attributed to me, and from that some of those have got re-interpreted as me being anti real-time payments. As my daughters would say, whatever! That’s not the point of this blog. What really struck me was the fact that some saw Bob and I as having different opinions. I would say that I don’t believe we do (at least not in the majority of the issues), but that we were addressing different questions, and, unsurprisingly, end up with different answers. To crudely paraphrase Bob’s post, he quite rightly points out that the business case, based on today’s business, doesn’t stack up. Secondly, he points out that consumers don’t really want real-time payments – how many of us wake up with the urge to make a payment?! Let’s pose a different question, the one I’ve been primarily discussing. If you were starting with a blank piece of paper, would you replicate what we have, or would you build something better and faster? A no brainer. Second question. The current system is roughly 25 years old – do we think that the same system will still be good enough in another 25 years? The answer is again obviously no. No-one in the industry who’s close to this thinks that this isn’t going to happen. The questions we’re really asking are when, what is the trigger, how quick and how soon (i.e. incremental improvements or big bang)? Interestingly, there seems to be less discussion on how, with ACH seeming to be the default. Whilst I’m not suggesting that ACH isn’t an option or even where the majority of other systems have developed worldwide, it’s interesting in that there are already real-time systems in the market, running primarily on card backbones. The answers to those questions are still much for debate. And who gets to answer them even less so. One noticeable difference compared to some countries is the governance of payments in the US. I believe – and please correct me if I’m wrong – that there is no single body who could regulate and dictate such a change. Equally, there is no body managing the future direction of the payments industry. Which, considering that in revenue terms, the US payments is bigger than both the US hotel and US airline industry *combined*, is both remarkable and perhaps something of a risk to the industry. As the US faces more regulation in the same way as many other regions around the world already have, a joined up, united front would seem an absolute need. We may not all agree when we need real-time, but I’d be curious to know whether we agree on the need for an overarching payments body to protect our interests going forward. This blog is written on the eve of Nacha Payments, and the real-time topic is already dominating the discussions before the event has even started. The Nacha announcement has been met with a wide range of responses, but with more than a few suggesting that Nacha has both over stated their position, and that the solution misses the point. The week is shaping up to be very interesting.    

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.