The Federal Reserve banks are developing a way for financial companies to clear and settle some automated clearing house transactions in one day.
The move, announced Monday, is the first significant change in ACH schedules in 35 years, and comes as banks are showing increased interest in other electronic payment systems that offer same-day settlement.
"It makes sense from a policy perspective to expedite clearing," Richard R. Oliver, an executive vice president at the Federal Reserve Bank of Atlanta and manager of the Fed's Retail Payments Office, said in an interview Monday.
ACH payments generally settle on the first business day after they are originated, though Oliver said a handful of banks are now sending payment files to one another directly instead of through the two ACH networks, a method that offers faster settlement.
Citigroup Inc., the No. 5 ACH originator, and Capital One Financial Corp., No. 10, for example, have established direct ACH connections with other banks, specifically to accelerate the clearing of credit card payments made by check and received at lockbox operations.
"Demand clearly exists" for faster ACH settlement, Oliver said.
(Neither Citi nor Capital One has publicly discussed its strategy for direct ACH exchange, and neither one would say Monday whether it would consider using the Fed's faster ACH service.)
The faster ACH will still employ batch processing, and will settle intraday rather than in real time, Oliver said, making ACH more competitive with check-image exchange networks, Oliver said.
Banks already "have check collections that can occur intraday," he said.
Oliver said that faster settlement service is scheduled to take effect in the second quarter of 2010, and would apply only to "e-check" debits as defined by the electronic payments association Nacha — consumer checks that are converted to ACH transactions and debits initiated over the telephone or the Internet. It would not apply to ACH credits, such as payroll direct deposits or online bill payments.
He said the accelerated settlement service would be voluntary, requiring both the originating and receiving banks to opt in.
Faster settlement would also enable participating banks to identify return items earlier, and potentially reduce fraud.
Analysts said the move is a step toward a broader rollout of faster ACH applications, which could have implications for other kinds of payment instruments.
George Thomas, the principal of Radix Consulting Inc., said payments executives have been talking about same-day ACH services for years, but the idea never gained much favor with banks, in part because of concerns that faster ACH payments could cannibalize volume from their more lucrative wire transfer business.
"Technology was never the issue. It was always politics," which stifled discussion in banker-dominated forums such as Nacha, the rulemaker for the ACH business, Thomas said. "But the Fed, they're not owned by banks, so if they want to offer the service, they can offer the service."
Thomas is a former executive vice president at The Clearing House Payments Co. LLC, which operates the Electronic Payments Network, the nation's only private-sector ACH operator; the Fed operates the other ACH network.
In the long term, same-day settlement will become common, Thomas predicted, but it will require coordination not only between banks' ACH and wire businesses, but also in the fragmented debit market, where more than a dozen networks compete.
Faster settlement will also lead to more price competition for wires, he said. "Wire transfer people need to stop sitting on their golden goose and find ways to increase volume."
Rossana Salaris, a senior vice president at The Clearing House, said Electronic Payment Network is considering offering a similar settlement service, though she could not say when it might be available.
"A number of our banks see some clear benefits in same-day ACH," she said. "They believe that it is the direction the industry needs to move."
Oliver said the Fed chose to focus on e-check payments to minimize bankers' concerns that its faster settlement would cut into other payments businesses. "These are already existing ACH transactions. They are not being taken from any other network or application," he said.
Faster clearing will also make it easier for receivers to spot risky items, Oliver said. "It aids the integrity of the system by allowing participants to identify returns sooner."
The change, which will require amending the Fed's operating circular for ACH payments, but not Nacha rules, will probably not have fast uptake by the industry, apart from a few large originators and receivers, Oliver predicted. "In this economy, people are having trouble getting authorization to spend money on things."
But if the accelerated settlement is a success for ACH debits, faster payments eventually could extend to other forms of payments, including credits, Oliver said. "Maybe at some future time, the Fed will engage the industry in that discussion."
