Why the Fed Is Moving to Same-Day Clearing for E-Checks

Looking to speed up clearing time for electronic checks on the automated clearing house, The Federal Reserve Banks on Monday announced the first change to the settlement windows for the ACH network in 35 years. The change, which is set to take effect in the second quarter of next year, will allow debits originated for check conversions and for consumer transactions stemming from the phone and Internet channels to be settled the same day, rather than on the next business day. By speeding up clearing times for these consumer transactions, the Fed hopes to identify return items sooner and make the ACH network more flexible for emerging payment channels like mobile phones, says Richard Oliver, executive vice president at the Federal Reserve Bank of Atlanta and the Fed's product manager for retail payments. “I don't believe same-day [settlement] is necessary for mobile payments, but it will be a step forward,” he says. Besides mobile payments, a slew of alternative-payment products have emerged over the past few years that rely on the ACH for funds transfers. For these new systems, “clearly faster clearing is better than slower clearing,” Oliver says. He adds that same-day settlement will mean better risk management, since suspect items will be isolated sooner. “The earlier you identify the return item, the better the chance of collecting it,” he notes. A number of banks using the Fed for ACH clearing have been trading transactions directly to speed up settlement, Oliver says, a move that he says has sent a signal to the Fed, which acts as one of two so-called ACH operators, or switches, as well as other ACH network participants. “That's a sign from the industry that perhaps it's time to start exploring a change in settlement schedules,” Oliver says. The other operator, New York City-based Electronic Payments Network, is also investigating same-day settlement, says Rossana Salaris, who, as a senior vice president with The Clearing House Payments Co. LLC, runs EPN. The effort is still in its earliest stages, she says. “Our banks are seeing the role the ACH can play in new consumer applications, [and are asking] where do we need the network to go?” says Salaris. The Fed's new settlement window will allow deposits made by 2:15 p.m. to be settled by the close of business that day, following a routine that already exists for returned transactions, Oliver says. The new window is voluntary, allowing financial institutions to opt in to use it. This, says Oliver, means only those banks that want to take advantage of faster clearing will need to make operational changes. Corporate and consumer credits are not eligible for the new window.