NACHA Chairman Looks to Retry NREF, Will Push Internet Payments

The chairman of the board of NACHA, the rules-setting organization for the automated clearing house network, looks for widespread adoption of a new point-of-sale payment application the association approved this week and says the network will try again this year to introduce a controversial fee aimed at controlling risk. Chairman Stephen Ellis, who is an executive vice president at Wells Fargo & Co., also told Digital Transactions News during a wide-ranging interview at NACHA's annual payments conference this week in San Diego that one of his top priorities before his term ends at the end of the year is to see progress in NACHA pilot programs, including one that will test Internet payments to merchants and billers. “I'd like to see them move forward,” he says. Ellis says he expects NACHA will put the network return-entry fee to a vote again before the end of his two-year term as chairman at the end of the year. “We'll be going back out [with a ballot],” Ellis says. He's hopeful NACHA members will approve the proposal this time. “It's important,” he says. “I don't know why we wouldn't do it.” The NREF proposal, which would have obliged originating banks to compensate receiving banks in the network for payments returned for certain reasons, was voted down by NACHA's members in June (Digital Transactions News, June 10, 2005). The fee, estimated at $17 per transaction, stirred controversy because it imposed an additional cost on ACH processing at a time when transaction volume was building rapidly and when the ACH was receiving favorable attention from merchants who were growing weary of rising interchange rates for credit cards. Some members objected to the proposal's automatic imposition of the fee for each payment returned as unauthorized. While increasing volume in the network had reduced unauthorized debits to 0.07% of all transactions by the fall of 2004, when NACHA announced its proposal, the number of such returns had risen 68% over the previous three years. Each return, a 2004 NACHA study estimated, cost receiving banks on average from $12 to $17 each to handle. Had the proposal become effective, an independent panel would have set the fee based on its best estimate of actual costs borne by receiving banks. Ellis sees the NREF as a key to ensuring transaction quality. “NREF is one tool where the system can clean itself up,” he says. “People got hung up on the cost, but when you move from paper to electronic you need this.” At the same time, Ellis hopes NACHA's new Internet payments application, which it promoted heavily at the conference, will win widespread support from banks as well as online billers and merchants. The proposed new application, for which a pilot is expected to get underway early next year (Digital Transactions News, March 14), is drawing criticism from some banks that fear NACHA hasn't spelled out in sufficient detail business rules for handling disputed transactions, such as those that involve merchandise arriving not as described or in partial shipments. Ellis, however, says this concern shouldn't hold back progress. “I don't think it works for every merchant,” he says. “There aren't 100% solutions for everybody.” One feature of the system, he suggests, might be a requirement that participating merchants be capable of real-time inventory updates so that no order can be accepted unless it can be fulfilled. “Maybe that's one of the requirements we set up,” he says. Ellis is bullish on another new payment application known as back-office conversion, which NACHA approved this week and which takes effect March 16. The new application will allow merchants to bundle up consumer checks accepted during the day and convert them to ACH debits in central locations, or so-called back offices, rather than at the point of sale. Merchants will be able to post notices about the conversion rather than be required to obtain customers' signed authorization. The extra time in-lane required to get explicit customer authorization for each conversion has been a factor in slowing down adoption of NACHA's existing point-of-sale e-check application, known as POP. Ellis predicts fast adoption for BOC, however, since it addresses merchant concerns about POP. “I think it's going to go fast,” he says “This is something [merchants] wanted to have.” He says many merchants are already installing check scanners and other gear for imaging related to remote check capture, a trend he says will reinforce BOC adoption.