Networks: Under Construction

 

The automated clearing house network remains a huge and critical payments player, but its initiatives don’t grab headlines like mobile payments or even prepaid cards do. So just what is the ACH up to these days?

By Jim Daly

For the automated clearing house, it’s tough trying to get attention when the spotlight is shining so intently in 2012 on all the gee-whiz stuff about mobile payments, prepaid cards, and when chips are going to be added to credit and debt cards.

 

Even NACHA, the ACH network’s governing body, gave tacit acknowledgement to the new order of things when it booked Steve Streit, chairman and chief executive of prominent prepaid card program manager Green Dot Corp., as the keynote speaker for its annual payments conference that begins near the end of the month in Baltimore.

 

But it turns out that there’s plenty going on at NACHA, although many of its initiatives, such as same-day transaction settlement or electronic health-care payments, are not exactly new. It’s just that getting things done in the diverse, political, and technologically complicated world of the ACH takes lots of time.

 

Other initiatives, such as Secure Vault Payments (SVP) for one-time Internet retail and bill payments and the EBIDS bill-pay system, are moving into rollout, NACHA’s early development work largely being complete.

 

NACHA can credibly declare victory in another major effort: converting paper checks sent for bill payments or written at the point of sale into electronic checks. Consumers are writing ever-fewer checks these days, and more of the remaining ones are being converted.

 

“For a decade, the real growth engine in the ACH was converting checks,” says Bob Meara, senior analyst, banking, for consulting and research firm Celent LLC. “That’s not the situation anymore.”

 

‘Moving Forward’

 

Today, NACHA’s growth is coming from those transaction codes such as WEB that begin electronically, not with paper. And NACHA is looking for longer-term growth in markets where paper still dominates, the perfect example being health care.

 

What follows are brief progress reports about some major NACHA projects.

 

Health-Care Payments. Few business processes can match the Byzantine nature of medical billing and the plethora of participants involved, with insurance companies and government playing leading roles. Credit card networks and merchant acquirers long ago identified patient co-pays as a major new payments market.

 

NACHA’s effort focuses mostly on the business-to-business aspect with the aim of enabling doctors, dentists, and hospitals to be paid electronically by insurers through the ACH.

 

In mid-March, NACHA issued a request for comment (RFC) on proposed ACH rules changes that would facilitate payment as well as the proper routing of remittance information that the medical industry demands. Comments are due April 27.

 

If successful, NACHA says the effort could eventually add 2 billion in private-sector and Medicare payments over the ACH network annually.

 

“Health care is an area that is definitely moving forward,” says Janet O. Estep, chief executive of Herndon, Va.-based NACHA.

 

Measuring the extent of electronic payments in health care today is a notoriously tough job.

 

“It is difficult to quantify the potential impact that full utilization of EFT [electronic funds transfer] would have on a national level due to limited statistics on private-sector health-care reimbursement volumes,” says the RFC. “Depending on the source of information, the percentage of payments currently made by EFT varies from 10% to 40%.”

 

Three Options

 

NACHA’s health-care effort takes its cues from the federal Patient Protection and Affordable Care Act of 2010 (PPACA), which made conversion of medical records and claims settlements to electronics a national priority.

 

A year ago, the National Committee on Vital and Health Statistics recommended that the U.S. Department of Health and Human Services (HHS) designate NACHA as the body to set standards for electronic funds transfers involving health-care payments. The department has done that.

 

HHS in January also adopted the so-called CCD+ ACH transaction type as the EFT standard for payments to health-care providers. With CCD+, a business-to-business code, dollars and remittance data flow separately. A “re-association trace number” is included in the CCD addenda record so that the provider can match the payment with the remittance data.

 

Up to 40% of health-care transactions by EFT might sound like electronic payments have already made considerable inroads in medicine, but there are plenty of sticklers. For the ACH, the most important is reuniting the payment data with the accompanying remittance information. Frequently, providers don’t have the point-of-sale and back-office technology to make that happen, especially smaller practices.

 

The request for comment seeks ways to remedy the process, which today is fraught with pitfalls. The NACHA document notes that health plans may not include the re-association trace number with the EFT payment. Trace numbers also may be placed in the incorrect data field, and providers may be unaware that they must request delivery of the payment information from their financial institutions.

 

The NACHA document doesn’t give any cost numbers for implementing enhanced ACH payments in health care, but asks respondents to the RFC to provide estimates.

 

The document does note that originating depository financial institutions (ODFIs) will incur one-time programming costs to adopt new codes and descriptors for medical payments. Receiving depository financial institutions (RDFIs) would have to program their systems to identify CCD entries coming from ODFIs.

 

NACHA offers three options to enhance the ACH network for health-care payments. The first would require automatic delivery by RDFIs of required CCD+ re-association data elements to health-care providers within two banking days of settlement.

 

The second is basically the same but would make delivery optional upon the provider’s request. The third option would have the RDFI give or make available re-association data elements by the second banking day after settlement, but the specific manner of delivery would be determined by the RDFI and the medical provider.

 

‘Not Hearing a Lot’

 

Estep wouldn’t say how long it will take NACHA to digest all the comments it expects to receive by month’s end, but ACH network observers believe that getting a viable payment solution that efficiently moves associated data will take some time.

 

“Part of the difficulty with health-care payments is that there are many moving parts and a very high degree of adjudicating claims,” says Celent’s Meara. “There is not a convenient electronic way to package all that on top of moving payments electronically. As a payments segment, it’s certainly growing up, but the challenges go well beyond payments.”

 

Same-Day Settlement. The idea of speeding up the usual one-day clearing process seems intuitive enough and could boost the ACH’s prospects with mobile-payments providers whose business models rely on the ACH and its competitiveness with check-image exchange, which can clear transactions in a day.

 

But the idea’s been around for years. The Federal Reserve, which processes more than half of ACH transactions, started a voluntary program for same-day clearing in 2010. Yet same-day clearing seems to have made little headway over the past year.

 

“I’m not hearing a lot,” says Nancy Atkinson, a senior analyst at Boston-based Aite Group LLC who keeps close tabs on the ACH. “My sense is that it’s not ready for pilot.”

 

NACHA issued a request for comment about its same-day settlement plan, officially dubbed Expedited Processing and Settlement (EPS), last September and extended the November 2011 deadline for comments to December. The association received about 350 comments, and its rules group is about halfway through its evaluations, says Estep.

 

“Overall, there was very high level of support for the notion of improving processing and settlement times on the ACH network,” Estep says.

 

The EPS proposal calls for a capability to clear and settle ACH transactions on the same day they are submitted by originating banks. EPS would apply to both debits, or transactions in which merchants pull funds from consumers’ accounts, and credits, payments initiated by consumers to pay merchants.

 

The proposal also would require that all RDFIs, the financial institutions that serve consumers in ACH transactions, support EPS. To help control risk, it calls for transaction caps of either $25,000 or $100,000 per entry, and asked for comments on each.

 

NACHA is expected to prepare a ballot to its membership based on what it gleans from the comments about EPS. But Estep is keeping her cards close to the vest on exactly what NACHA will ask its members to approve, or when, though the proposal aimed for a system to take effect in March 2013.

 

“We’re looking for a good cost-benefit equation,” she says.

 

‘Healthy Pipeline’

 

NACHA’s deliberate course on EPS likely reflects disparate opinions in the banking community about the merits of same-day settlement. RDFIs would have to make technical changes in their systems and don’t want to lose float any sooner than they have to, according to Meara.

 

“It’s going to require every bank in the country to make some changes,” he says. “Nobody wants to do that unless there’s a compelling interest.”

 

Another political hurdle: banks’ fears that same-day clearing could undercut higher-margin payment services such as wire transfers.

 

Secure Vault Payments. NACHA conceived of SVP as a way to make the ACH a player in one-time Internet payments, a market dominated by credit cards. The idea was to appeal to consumers who did not have or didn’t want to use cards online, usually because of security concerns. With SVP, consumers use their online-banking credentials to access the service but don’t provide any account data to merchants.

 

Having done the conceptual and early-stage development work, NACHA has largely turned over SVP to Denver-based eWise USA, operator of the SVP switch. The service isn’t generating a lot of transactions yet because it only has about 20 acceptors, mainly universities and public agencies.

 

On the bank side, about 40 now offer the service. The biggest is Minneapolis-based U.S. Bancorp. In January, Regions Financial Corp., a large regional banking company based in Birmingham, Ala., signed on, joining other regionals such as PNC Financial Services Group Inc. and Union Bank of California.

 

Craig Olsen, executive vice president and general manager of U.S. payments at eWise, says his company is talking with the nation’s three largest banks, as well as many more regionals, about offering SVP.

 

“The pipeline from a bank perspective is, I would say, very healthy,” he says.

 

‘Great Takeup’

 

A big objection to SVP that eWise is hearing from banks is that financial institutions currently must take on a fair number of operational tasks themselves in order to offer the service to their customers.

 

To address that, eWise is working on a new technological platform that will handle most of the back-office operations and provide a uniform consumer experience while still being branded by each provider bank. Olsen expects that eWise will begin rolling out the platform this autumn.

 

“If we leave the responsibility 100% to the banks to enable themselves, that’s not a recipe for success,” he says. “Most banks would prefer to engage in a service which takes minimal [development] from them. This is a pretty common theme.”

 

EBIDS. Similarly, the EBIDS online bill-payment system is a NACHA baby that’s become a toddler. In 2010, NACHA selected The Clearing House Payments Co. LLC, a New York City-based company whose Electronic Payments Network runs one of the nation’s two ACH switches (the other is the Fed), to build a biller directory and run an authentication system for the new service.

 

EBIDS had its commercial launch in February 2011. The directory of billers that can accept EBIDS payments has grown from 30 to 150 in the past 12 months, and the service generated 19 million new ACH transactions in 2011.

 

“There has been great take-up,” says Estep.

 

Take-up for health care clearly will take some time, as might same-day settlement. But with established payments players sensing fresh opportunities in mobile payments and other new markets and new tech companies entering the business seemingly by the day, NACHA may need to push banks hard for take-up lest the ACH be left behind.