SEATTLE — What do payments executives want from the automated clearing house network in the future?
Judging from a show of hands at one session Monday during Nacha’s Payments 2004 conference here, they want the network to run faster, handle more international payments, and include stronger fraud and risk management controls.
Nacha, the electronic payments association, asked five executives representing different core constituencies — large and small financial institutions, retailers, vendors, and the Federal Reserve banks — to draw up lists of improvements they would like in the ACH system. After they presented their cases, the audience voted informally for their favorites.
Perhaps the top vote-getter was a faster payment cycle, whether real-time or not. This is a controversial area, in part because banks are fearful they would lose a good deal of float revenue if the now-common batch payments, which settle in a few days, were to one day become instantaneous.
Some industry executives also argue that, even though the technology exists to make the ACH a real-time system, it is both unnecessary (since there are real-time alternatives, such as wire transfers) and too difficult from a logistical standpoint, since it would involve banks in different time zones and with varying abilities to post items throughout the day.
Interestingly, the top proponent of a real-time ACH system was the panel representative from the Federal Reserve, which functions in this part of the industry as both a regulator and an ACH operator.
Richard R. Oliver, a senior vice president of the Federal Reserve Bank of Atlanta and the retail payments product manager for the Federal Reserve System, said the Fed has actually gone so far as to execute a proof-of-concept of real-time ACH with some major financial institutions.
“It could be done, and here is the opportunity” for the ACH to broaden its reach and mission, Mr. Oliver said.
Real-time ACH transactions would be attractive for payroll, debit, and other applications, he said. Under the current system, “More and more volume is building to be sent around the industry at three in the morning,” Mr. Oliver said. “We have the opportunity to distribute the volume.”
He acknowledged that there are “big hurdles,” including the fact that “a lot of financial institutions are incapable of accepting payment during the business day … and posting it to their customers’ accounts” either themselves or through their service bureaus. The other issue is “whether such a service becomes competition for the wire transfer system.”
Don Davis, the system and business solutions manager for Intel Corp., argued in favor of an ACH system that is faster — but not instantaneous. Real-time processing is not necessary, he said; just “don’t make me wait 24 hours.”
Mr. Davis also won some votes for his suggestion that the common format XML, or extensible markup language, replace the proprietary formats in CTX, the ACH format used for sending electronic data interchange transactions. This replacement would have tremendous benefits for banks’ corporate customers, he said, as well as for the banks themselves, which could use the service to sell additional products and services to those customers.
“What corporate needs is for the remittance advice to work its way through the system in XML the way it does through EDI,” he said. “The reason why we’re suggesting this now is because major corporations are changing their systems from EDI to XML.” Some companies, such as Nokia Corp. and Cisco Systems Inc. are already doing this through a project called RosettaNet, he said.
Mr. Davis and Mr. Oliver came out as proponents of some form of the “push credit” model Nacha itself has been encouraging the industry to examine. Today most ACH payments involve debits, in which billers instruct banks to debit the accounts of their customers. The push credit model, in which the customer — either a consumer or business — issues the instructions, could reduce fraud and the number of transactions rejected for insufficient funds.
It could also permit the industry to raise the dollar-value limits on ACH payments, Mr. Davis said. Example: “I have a customer who wants to pay me $100 million. Since it’s a push transaction, it’s not a matter of whether my customer has the money, but whether my bank can handle the transaction.”
Mr. Oliver said European nations have been using push credit systems for some time, and U.S. financial institutions already have the template in place for such a system, in the form of home banking programs that let customers pay their bills remotely.
He, Mr. Davis, and other panelists also talked up the potential for cross-border ACH transactions, which so far have been happening in a very limited way with Canada, Mexico, and parts of Europe. Mr. Oliver says he would like to target “smaller, retail-type payments” for these international services.
Rue Jenkins, the director of treasury and banking at Costco Wholesale Corp., wholeheartedly agreed that cross-border ACH was appealing.
Mr. Oliver said the necessity is there, because “the economy is becoming globalized.” But there are “lots of problems,” not the least of which are the Office of Foreign Assets Control’s new, stricter regulations, which are meant to guard against terrorist activities, as well as fraud-related issues.
The panel also offered a direct contrast between the interests of large banks that originate a lot of ACH payments and want faster settlement (in this case, Wells Fargo & Co.), and the interests of smaller financial institutions that primarily receive ACH payments and are happy with the status quo (such as Navy Federal Credit Union).
Dave Willis, the credit union’s vice president of debit card and funds transfer services, argued that the receiving depository financial institutions often get stuck with tough dispute resolution tasks. This is often because of the new ACH products, such as those in the WEB and TEL categories, that are generating disproportionate amounts of returns.
“The new payment categories are being driven by the ODFIs on behalf of their merchant customers, but they’re not always a win-win for all the constituents,” he said.
His advice about changing the network: Move slowly and look at the big picture, particularly when considering faster payment cycles. “The concern is we might try to turn the network into something it was never intended to be.”
Mr. Willis took a surprise stance against Nacha’s proposal for return network entry fees, which an originating depository financial institution would pay for items that it sent to a recipient institution but had to be returned. Part of the fee money would be used to compensate the recipient institution for its trouble.
“As an RDFI which is supposedly going to benefit, I am incredibly opposed to it,” he said. “I’m not sure this is the direction we want to go — it’s party A compensating party B.”
Sanjiv Sanghvi, an executive vice president at Wells Fargo, said the debates about the future of the ACH system involved far more than mere back-office issues, because the ACH has become much more than a direct deposit facilitator, the function for which it is perhaps best known.
“At the end of the day, what we’re describing here is how we interact with customers,” he said. “It’s a lot bigger than how we assure settlement.”
His message included warnings about fraud and risk management and an assertion that banks do more on the regulatory side for most loans than for operating risk. Among Wells’ wholesale customers, “we have not blocked more transactions electronically than we have paper, so this is a big problem,” Mr. Sanghvi said.
He proposed more scrutiny and caution in the realm of Internet-based ACH payments.
“I don’t think we’ve done enough as an industry or as an organization … to make sure we actually have a mechanism to support Web payments, and if we don’t, I think we better just back off,” Mr. Sanghvi said. “Can you do it through fees, fines? Is that going to be enough? I don’t know.”
ACH “is a behind-the-scenes settlement thing,” he said. “If we’re going to be more, we will have to expand our mission and add more of the payment information” to transactions. “I vote that we probably want to be part of the whole value proposition.”
In a later conference session, Jane Larimer, the general counsel at Nacha, put the panelists’ wish list into perspective. When asked why the ACH networks have not invested in Web authorization tools, as credit card networks have done, she replied, “When we have all the bells and whistles of the credit card network, then we’ll have the pricing structure of the credit card network. If people say ‘Hey, we need real-time fraud authentication and these 75 things,’ ” then the ACH will lose its low-cost advantage and become something entirely different.
Christopher J. Haney, the founder and director of Politzer & Haney, a provider of corporate cash management software, moderated the wish-list panel and said there were “some tensions related to some very basic issues of competition and cannibalization between and among [payment] systems.”
If the ACH widens its scope, he explained, it could cannibalize volumes from other payment systems that banks also want to support. On the other hand, if it does not widen, it risks “marginalization” as other systems become more relevant.
One way or the other, the discussion illustrated “the need for more forums to discuss these things,” Mr. Haney said.
