Payments 3.0: Where is the ACH Going?

Where is the ACH Going?

George Warfel • george.warfel@edgardunn.com

Thoughts about the current evolution of the automated clearing house network:

Will There Be New Features for the ACH?

The answer is yes, but an evolutionary approach might be the best way forward. The discussion of potential changes devolves to two issues: products vs. infrastructure.

Models in other countries put building the infrastructure first and then waiting to see what products populate it. But many in the U.S. argue that a better approach would be to analyze what payors and payees need, develop the products, and then decide what infrastructure will do the job best.

What Other Countries Are Doing

The Payment Services Providers (PSP) legislation in the European Union requires banks to cooperate in providing the new non-bank PSP companies with access to customers’ account balances. It envisions that banks will handle payments to and from customers’ accounts made via a PSP or a traditional bank transaction equally.

The strategy of Australia’s Reserve Bank and the Australian Payments Clearing Association’s New Payments Platform is to offer an open platform for which anyone (a bank, a processor, or an innovator) can invent new payment methods. Once certified, the new payments methods will be overlaid onto the national platform. One advantage is innovations will enter the market being seen as having been reviewed as trustable.

Is the ACH the Right Channel for New Payments?

Today, the ACH moves 18% by volume and 61% by value of the nation’s payments. If you included checks that move on the ACH, volume would hit 30% and value tops 90%. Most new-media payments are designed to use the card rails. Once the sender/receiver features and functions are in place for mobile or other ways of initiating payments, the majority of new payments become card transactions. But there is no inherent reason new payments couldn’t be done on the ACH.

Can Surety of Payment Be Achieved Without Speed?

On Mexico’s SPEI system, payments move every 20 seconds using an algorithm that searches out the best combinations of debits and credits that will bring about the maximum number of successful transactions.

Although we hear a clamoring for the ACH to be faster, when we dig deeper it seems that what many seem to be asking for is surety. Speed is one way to do this. But a combination of a faster messaging layer on top of multiple settlement windows might meet the needs of many payors and payees.

Business Models and Businesses

Underlying all is the question of the business-governance models. The U.S. benefits from a system in which both a government and a private operator provide ACH services. The E.U.’s proposal, while encouraging new participants, is bank-centric. Australia’s approach is driven by the Reserve Bank at the platform level, but leans decidedly towards innovators as well as banks for the products.

Traditionally, the operators or banks have led innovation; now, third parties are doing it too. The issue becomes whether the ACH operators or banks will step in to innovate and how banks will decide between using the card rails or the ACH rails to connect payor’s and payee’s accounts. For a third-party innovator, there are fewer issues of the cannibalization of current card revenue that banks will have to resolve.

Back To Products vs. Infrastructure

A mismatch to be recognized and dealt with is that, while the payment-product innovation cycle is relatively short, the timetable for rebuilding the payments infrastructure is measured in seven-year to decade-long spans.

The big challenge, which is a business and governance challenge as much as it is an engineering challenge, will be bridging the cycle periods between innovating consumer/merchant-facing payment products and making the changes to the payments infrastructure that may be needed. Solving this inherent cycle-time mismatch may be the best way to realize not just a re-emergent ACH, but the best new ACH.