The Fed’s Same-Day ACH Service Gets off to a Slow Start

More than eight months after it introduced same-day settlement for automated clearing house transactions, the Federal Reserve has attracted only a handful of banks for the service. “It’s been a long struggle,” Steven Cordray, retail payments project manager at the Atlanta Fed’s Retail Payments Office tells Digital Transactions News.

Speaking on Monday at Payments 2011, a conference sponsored by NACHA, the regulator for the ACH, Cordray revealed that banks representing just 30 routing numbers have signed up so far for FedACH SameDay, the service it launched Aug. 2. Some institutions can account for multiple routing numbers, implying that fewer than 30 banks are participating as originators, receivers, or both. “The adoption rate has been minimal so far,” Cordray told a standing-room-only crowd of bankers. As if to underscore his point, he added that “volumes are minimal, participation has been anemic” for the service, which cuts the ACH’s typical next-day settlement time in half.

Meanwhile, businesses have a “healthy skepticism” about the service, even though in general they favor same-day settlement because it speeds up funds availability by one day and generates faster results on return items, says David T. Bellinger, director for payments at the Bethesda, Md.-based Association for Financial Professionals, which represents corporate payments executives. That skepticism, Bellinger tells Digital Transactions News, stems from the fact that FedACH SameDay is voluntary for banks and applies only to certain ACH debits, such as check-based conversions and Internet and telephone-initiated entries. “It’s not going to get broad adoption until it’s mandated,” he says. Bellinger appeared at the conference on the same panel as Cordray.

Moreover, the service handles only Fed-processed transactions. While the Fed processes 57% of all ACH traffic, it is only one of two network switches. The other one, The Clearing House Payments Co. LLC, has not introduced a like service.

Observers have faulted the Fed service since it started for excluding ACH credits, which businesses would like to see added, and for its opt-in approach, which leaves merchants uncertain whether receiving banks are participating and makes it harder for originating banks to sell businesses on using the service. Speaking to Digital Tranactions News, Cordray also blamed low interest rates for the service’s lack of appeal so far. With low rates, banks and merchants have less to gain from shaving a day off of settlement times. And even banks that want to opt in have been slowed by third-party software that needs to be updated for faster settlement, he said. The one-day speed-up represented the first major change in ACH settlement windows in 37 years.

The exclusion of credits, which allow payors to push payments electronically from their accounts to payees’ accounts, has often been blamed on banks’ fear that same-day clearing could allow the relatively cheap ACH to threaten their lucrative wire-transfer business. But panelist Gareth Lodge, a U.K. payments analyst, said a British version of FedACH SameDay, known as Faster Payments Service, has had no impact on wire transfers since its launch in May 2008. Indeed, adjusting for a collapse in the housing market, the U.K. wire business has actually grown, he said. Wire transfers are typically used for large-value payments, such as down payments on homes, rather than for small-value bill payments and retail transactions, he pointed out.

The Fed service’s weak start could ultimately hurt banks. Bellinger warned the audience that businesses’ interest in faster settlement could lead them to work with non-bank players to reach endpoints they can’t reach through FedACH SameDay. Banks would still play a necessary role in processing payments, but they would collect a smaller share of fees, he said. He urged banks still on the sidelines to start participating. “We want to press you to take advantage of same-day ACH because it’s in your best interest,” he told the crowd.

But a mandate to push all banks into participating in same-day settlement may be some time in coming. While Jan Estep, NACHA’s president and chief executive, said in a keynote address at the conference that “it is hard to imagine a future without changing our processing and settlement windows,” NACHA is in the information-gathering stage of an investigation of the issue, she said in a statement to Digital Transactions News.