The ACH’s Star Still Burns Bright

Despite increased competition from real-time payments networks, the automated clearing house remains a force in payments and is expected to remain one for the foreseeable future.

“Ubiquitous,” “reliable,” “low-cost,” and “highly efficient” are the adjectives that payments executives seize on when asked to describe what makes the automated clearing house the dominant network for account-to-account payments.

But with the launch last July of the Federal Reserve’s FedNow network, which followed the 2017 debut of The Clearinghouse Payment Co.’s Real Time Payment network, real-time payments systems have firmly established themselves as competitors to the 52-year-old ACH. Indeed, the emergence of these new networks raises in the minds of some observers the question: Just where does the ACH fit in the payments landscape going forward?

While slower than real-time payments, transactions routed through the ACH, whether they are same-day ACH or traditional ACH—which processes in up to three business days—the ACH provides plenty of value to businesses and financial institutions. This is especially the case when it comes to processing transactions in bulk.

And it is the value that businesses and banks see in the ACH that drives their continued use of the network, even in the face of real-time alternatives, payment experts say.

ACH volume so far shows no signs of slipping. During the third quarter of 2023 alone, the latest figures available, the network handled 212 million same-day payments with a total value of $608 billion, increases of 20% and 27.1%, respectively, over the third quarter of 2022, according to Nacha, the ACH’s governing body.

Through the first three quarters of last year, the ACH handled 597.6 million same-day payments totaling $1.78 trillion, up 16% and 42.4%, respectively, compared to the first three quarters of 2022, Nacha says.

“Banks are bolted to the ACH, which is why it is so ingrained in the payments ecosystem,” says Cliff Gray, a senior analyst for the payments consultancy TSG. “Asking a bank to move away from using the ACH is like asking Ford Motor Co. to completely retool its plant. It would be an extremely heavy lift.”

ACH’s Cost Edge

Nevertheless, real-time payments networks are already proving they are better suited to certain types of transactions, such as paying gig workers, sending funds that must be available immediately, expediting refund and disbursement processes, and handling rebates and peer-to-peer payments.

But, just as real-time payment networks have their own strengths, so too does the ACH. Transactions for which the ACH is well-suited include recurring payments, payroll, and business-to-business payments, observers point out.

“The ACH continues to work well for many use cases, including pay-ins where real-time rails don’t have a mainstream solution yet, and payouts that don’t require speed,” says Ajay Andrews, payments product lead at Plaid Inc., which enables fintechs to connect apps with users’ bank accounts.

“Many of our customers are using the ACH and Plaid Signal for account funding use cases for investments, digital wallets, [and so on],” Andrews says. “For low-risk transactions, companies can confidently provide near-instant access to those funds so users can start buying stocks or using the app right away.” Plaid Signal enables businesses to evaluate the likelihood that a specific ACH transaction will result in a return.

Other transactions well-suited to the ACH include consumer and business bill payments and recurring payments between known counterparties on known due dates—such as payroll and benefits—donations, and payments for health-care claims. “The ACH also works well for one-time and not-previously-scheduled payments of all sizes and volumes for consumers, businesses, and governments,” says Michael Herd, senior vice president of ACH network administration at Nacha.

The greatest strength of the ACH, however, is that it can reach all bank and credit union accounts in the United States, and can be used for both debit and credit payments, something the RTP network and FedNow can’t do, according to payments experts.

Also, one other advantage the ACH has lies in recurring payments, such as monthly bill payments or subscriptions. Those payments can be set up with relative ease by the consumer, according to Herd. “Furthermore, ACH payments enhance security by reducing the risks associated with paper checks,” Herd adds.

Transaction cost is another advantage of the ACH. The Federal Reserve’s public fee schedule shows that it most commonly charges financial institutions $0.0035 (three-and-a-half tenths of a penny) per ACH payment originated, compared to 4.5 cents per payment as the system operator for FedNow, according to Nacha.

For business users, the cost of an ACH transaction is also far lower than it is for real time networks. The median cost of processing an ACH debit or credit is 40 cents. By comparison, the median cost of an RTP payment is calculated to be below $2.50. “Banks won’t find a lower cost alternative to the ACH,” Gray says.

The lower cost of ACH transactions is a big selling point to businesses initiating large numbers of payments on a regular basis. “When it comes to large volumes of transactions, cost is a factor, as the savings from initiating an ACH transaction can add up quickly,” says Eric Grover, proprietor of payments consultancy Intrepid Ventures.

The Value Chain

Still, while cost will always be a factor in determining whether the ACH or a real-payments network is used to initiate a transaction, there are times when the speed of real-time networks will be seen as a value add—and an imperative.

To help financial institutions and businesses understand the value that real-time payments bring, Elena Whisler, chief client officer for The Clearing House, says the company regularly talks with users to help them understand the economic value of real-time payments, as well as use cases for the RTP and ACH networks.

“We talk to banks about the customers they serve, what their customers’ needs are, and what kind of experiences those customers want, such as faster payments,” Whisler says. “There are certain types of transactions that work well for the RTP network and some that work well for the ACH.”

While Whisler says The Clearing House sees the ACH co-existing long-term with real-time payments as a payment option, she adds there will be use cases where the ACH does not offer the same value as real-time payments. An example: cases when a recipient needs immediate confirmation of funds.

“The payments industry is used to looking at [the] cost of the transaction, not the value chain associated with processing that transaction,” Whisler says. “We look forward to the day when real-time payments will be recognized for the value it brings as opposed to the cost of a transaction.”

Transactions for which real-time networks are well-suited include pulling money out of an investment account, getting a loan disbursement, or paying an insurance claim. “These are all areas where speed provides a huge benefit for consumers,” says Plaid’s Andrews.

Paying a gig worker daily is also a frequently cited use case where real-time payments add value. “When someone can do a few jobs and then get paid instantly, the speed element offers a tangible benefit for consumers,” Andrews says. “There is still a ton of opportunity on the payout side.”

‘Not in Our Lifetime’

Even so, the ACH’s lack of real-time capabilities is not expected to be a hindrance to growth, observers say. “Real-time payments are only better if the recipient has an immediate need for the money,” says Grover. “Same-day or next-day ACH payments are perfectly adequate in a lot of use cases, which is why ACH volume is growing.”

Even though the ACH is slower, Nacha’s Herd says an estimated 80% of all ACH payments still settle in one banking day or less. That’s why the ACH “remains a preferred payment choice over paper checks for use cases that rely on debits, such as consumer bill payments,” he adds.

Given the inherent strengths of the ACH, payments experts doubt it will be eclipsed any time soon by real-time networks. So far, there has been no appreciable cannibalization of ACH transaction volume attributable to the real-time systems, as RTP and Fed Now are still working to achieve critical mass, Grover says.  “The ACH may go away one day, but not in our lifetime,” he adds.

If nothing else, the ACH and real-time networks will operate as complementary systems. “These faster-payment networks will coexist [with the ACH] and offer more choices, which benefits customers and the payments industry,” says Nacha’s Herd. “Nacha is forecasting that ACH payment volume will continue to grow,” he adds, “especially as businesses reduce check usage and shift to traditional and same-day ACH.”

If the ACH and real-time networks do indeed wind up as complementary networks, it will mean banks and businesses have embraced a multi-rail payments strategy to optimize each network’s efficiencies for different use cases, according to Andrews. “Ultimately, it’s about using the best payment rail for the use case,” he says.