A Rival Emerges to the Fed’s Plan for Faster ACH Clearing

A Federal Reserve Bank proposal to speed up settlement times for certain automated clearing house transactions has provoked at least one electronic-payments executive to offer an alternative proposal that he says will accelerate clearing times without the threat to banks he sees in the Fed's idea. Danne Buchanan, chief executive of NetDeposit Inc., a Salt Lake City-based payments-software vendor and unit of Zions Bancorporation, says ACH debits should be posted on the same day by financial institutions if they are received by 8 p.m. Actual settlement would occur by 10 a.m. the next day. This schedule, which Buchanan says simply follows the practice used in check clearing, contrasts with current ACH practice, which calls for next-day posting and clearing. But it also contrasts with a proposal advanced last month by the Fed under which debits would clear the same day if received by 2 p.m. (Digital Transactions News, March 2). The Fed plan, which is voluntary for banks, is set to be implemented by the second quarter of 2010. Buchanan argues the Fed proposal would deprive banks that receive ACH debits of a day's worth of interest income on the cleared funds. His plan, he says, would allow banks to hold on to that income by posting on the same day but not clearing until the next morning. Meanwhile, under the Fed plan the originating banks get the benefit of the accelerated float, Buchanan argues, which they will promptly negotiate away in bidding for the business of corporate clients. “It will destroy the value within the payment system,” he charges. Richard Oliver, executive vice president at the Federal Reserve Bank of Atlanta and the Fed's product manager for retail payments, counters that the Fed proposal will let receiving banks save a day's worth of interest by posting debits earlier to their customers' accounts. The Fed might offer pricing as part of its plan that would compensate receiving banks for the interest income they would give up, though Oliver stops short of confirming this. “We are examining what type of pricing approach will do the most to further the service,” he says. Both Buchanan's plan and the Fed proposal address growing concern in the ACH network with so-called direct-send arrangements between banks. Under these agreements, banks handle ACH items directly in bilateral exchanges, bypassing the ACH network and any risk controls the network might have offered. The arrangements also have the potential to drain revenue out of the network, critics say, as the trading partners avoid network fees. Meanwhile, they say, transaction costs rise as fewer payments flow across the fixed-cost network. “When you bypass the ACH, transactions become invisible to the world,” says Buchanan. “You can't get a network view any more.” Data on actual direct-send activity is not easy to come by. “It's hard to estimate that,” says Oliver. “But it's a substantial number, and there could be more to come.” Many view Pariter Solutions LLC, the common processing platform announced last year by Wells Fargo & Co. and Bank of America Corp., as the latest and most prominent outgrowth of the trend toward bilateral exchanges (Digital Transactions News, May 20, 2008). Oliver and others say much of the direct-send traffic originates from large credit card issuers looking to accelerate the movement of funds when their cardholders pay their bills with a check. Many issuers convert those checks to ACH debits using a format called accounts receivable conversion (ARC). Regardless of the reason, the idea of speeding up settlement on the ACH network, if even just for debits, is attracting increasing interest. At a recent conference sponsored by NACHA, the regulatory body for the ACH, Buchanan and Oliver presented their rival proposals?and debated their merits?in front of a standing-room-only crowd.