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A fresh proposal to introduce a same-day settlement capability for the automated clearing house network is encountering cautious optimism mixed with a healthy dose of skepticism among expert observers.
But NACHA officials clearly see the new proposal not only as a blueprint for speedier payments but also as a first step toward enabling more payments innovation. “It’s a solid foundation that can support new offerings in the future,” Janet O. Estep, president and chief executive of NACHA, tells Digital Transactions News.
The proposal, which NACHA, the regulatory body for the ACH, floated on Tuesday, comes more than 18 months after the organization’s members vetoed a similar proposition to speed up settlement time on the network. The vote in August 2012 featured a majority in favor of changing network rules to permit same-day settlement, but not a big enough majority to carry. NACHA’s largest bank members were understood to have opposed the proposition.
NACHA’s new proposal is far from coming up for any membership vote. Indeed, the organization says it is launching a study to gauge the potential costs and transaction volume same-day ACH could generate. The earliest rulemaking could begin is this fall, while the “most optimistic” scenario calls for a vote on the new rule in the first quarter, Estep says.
“It’s still pretty much theoretical,” says Nancy Atkinson, a senior analyst at Aite Group LLC, a Boston-based payments-research firm. That’s bound to disappoint many payments players who champion same-day, and in some cases, real-time, settlement and have urged NACHA to streamline rulemaking.
Consumers and businesses expect faster service, they say, and other countries have already moved to speed up settlement. “The market is moving very quickly right now, and a slow, methodical approach may not be all that attractive,” says James Wester, research director for global payments at IDC Financial Insights in an email message. Currently, ACH transactions settle between banks in two days.
The same-day ACH concept NACHA released this week differs from the proposed rule that fell short of passage in 2012 in two key respects: it would be phased in over time and it would offer two settlement windows, rather than just one. Like that 2012 proposal, however, the new one would make same-day settlement mandatory for all receiving financial institutions—the banks and credit unions that act as counterparties to the instititions that originate transactions on behalf of persons and businesses.
Perhaps the trickiest part of the proposal is the idea of multiple same-day settlement times, one in the morning and one in the afternoon. “It’s definitely more work for the whole industry to have two settlement windows per day,” says Estep, but the proposal creates flexibility for institutions on both coasts to prepare files to meet a daily Federal Reserve cutoff. “Think of it as a full 24-hour clock,” she says.
The phase-in calls for ACH credits to be subject to same-day settlement first, followed by debits at a later point. Credits are often used for payroll, person-to-person payments, and expedited bill payments; debits for utility, mortgage, and credit card payments.
Estep says that while the effort for financial institutions will be considerable, it will be worthwhile. Unlike real-time messaging, which doesn’t involve the actual transit of money, same-day ACH will offer actual faster payments. “It’s not just real-time messaging but multiple settlements per day underneath that,” she notes. “We’re actually moving money between the banks.”
Still, a welter of questions remain to be worked out. Two big ones concern pricing and frequency of settlement, says Rene Pelegero, a former PayPal executive who is president and managing director of Retail Payments Global Consulting Group, Woodinville, Wash. Margins on ACH transactions are pretty thin, while at the same time businesses won’t tolerate sizable fee increases for same-day treatment, he warns. “Fair pricing has to be determined in a transparent manner with participation from all parties and, finally, we certainly do not want another interchange model,” he notes in an email message.
While applauding NACHA’s latest same-day gambit, Pelegero also questions whether two settlement windows per day are enough. “Why not [five] times a day as Colombia does it? Why not settle continuously as the Swiss and other countries do?” he asks.
Still others question whether bankers and NACHA officials may use the new proposal as a starting point to force the ACH to perform a function it wasn’t designed to do. “I’m in the camp of leaving the ACH alone to do what it does best (and does very well). If we want and need a real-time payments system (and we do) it’s not the ACH,” says Robert Meara, a senior analyst who follows the ACH and the checking system for Celent.
But even those who want faster progress on faster payments see the latest proposal as an important step in the right direction. “It’s a necessary step,” says Bob Steen, chairman of Bridge Community Bank in Mechanicsville, Iowa, and a long-time champion of same-day settlement. “It’s going to take a long time, and it’s disappointing, but [NACHA] is providing leadership to get it going, and I appreciate that.”
