New Costs Imposed on Banks by Same-Day ACH Could Reshape Pricing Approach

By John Stewart

Merchants that use the automated clearing house network to accept transactions may not be happy about a new fee expected to be part of a proposed same-day settlement plan, but the plan will impose significant new costs on financial institutions as well. And those costs could reshape banks’ approach to how they price ACH services, according to experts who spoke this week at an ACH conference.

The proposal, which members of NACHA, the regulatory body for the ACH, are expected to vote on some time in the coming weeks, will create a system to clear and settle most ACH transactions the same day rather than the next business day. But it will also force banks to reckon with new costs. NACHA for example estimates receiving financial institutions will incur $49 million in net new operating costs and $118 million in implementation costs related to the same-day plan by 2027.

Much of these costs, as well as costs incurred by originating institutions, are related to the need for stricter review of transactions for risk, more comprehensive reporting systems, and more due diligence directed at originators, according to speakers at NACHA’s Payments 2015 conference in New Orleans. “With all this going on, costs are going to go up,” warned Jason Carone, head of product management at Silicon Valley Bank. “Once we get same-day [settlement] in place, there’s more due diligence you have to do.”

NACHA’s proposal calls for an 8.2-cent interbank fee on each transaction, to be paid by originating institutions to receiving institutions, to compensate for these costs and provide some return on investment. Sensing that originating banks will simply pass the interbank fee on to them, merchant groups have raised objections to the fee.

“This fee is the biggest thing everybody worries about,” noted Carone. “The [fee] set by a central agency seems to be a highly controversial number.”

But originating banks should price the service to merchants according to a mix of factors rather than impose one global fee, the speakers said. “You may want to look at something a little more complex than just charging the same price for each transaction,” recommended Elliott C. McEntee, president and chief executive of Payment Advisory Service and a former chief executive of NACHA.

Factors originating institutions could consider, he noted, include the merchant’s SIC code (some are riskier than others), the value of the entry, the mix of debits and credits, and return rates.

If approved by the NACHA membership, the same-day ACH proposal will be implemented in three phases, starting with credits in September 2016, adding debits in September 2017, and adding a third settlement window in March 2018. Receiving institutions will be required to handle same-day transactions, while participation by originating banks will be optional.

A comment period on the proposal, which received wide support from the industry, expired Feb. 6. Balloting is expected early in the current quarter, NACHA has said.