While banks have clamored for faster processing of ACH payments, few have the software necessary to make the full use of the Federal Reserve Banks' same-day settlement service, though that may change in the coming months.
Citigroup Inc. will be the first to implement upgrades to Fiserv Inc.'s payments processing software that will eliminate at least one hurdle holding banks back. And Citi's move, which would make it easier to add its volume to the same-day service, could lead other banks to commit to similar upgrades.
"If a large bank gets on board, then there's opportunity certainly for more volume to go through" the same-day automated clearing house payments service, said Nancy Atkinson, a senior analyst with Aite Group LLC in Boston.
Fiserv said Citi will use an add-on to the its PEP+, or Paperless Entry Processing, program. The Brookfield, Wis., vendor aims to complete the upgrade for Citi by the end of June and make the additions available to other banks in August.
A Citi spokeswoman declined to comment last week about the software or whether it plans to enroll in the Fed's service, which currently only a handful of small and medium-sized bank holding companies use. In an emailed statement Citi said it supports "the evolution of a same-day ACH environment in the U.S." and that its decision to opt in for clearing services "would be driven by customer demand and critical mass in terms of market adoption."
The upgrades to Fiserv's software are an important step, though most banks won't flock to the Fed's service because of other limitations, including the opt-in nature of the service and the fact that the types of ACH payments that qualify are restricted.
The software upgrades make it "more palatable to the back-office guys, but to the C-level folks it doesn't change the economics of the decision," said Emmett Higdon, the principal of consulting firm Prizm Strategy in Charlotte, N.C.
Analysts estimate about three quarters of banks use PEP+ for delivering their ACH payment files to the Fed and The Clearing House Payments Co. LLC, the two operators of ACH settlement services in the U.S.
Currently, the software lacks tools for automatically flagging the types of ACH payments that qualify for same-day settlement. Banks that want to use the same-day service must manually review their files to get an idea for how much money would be settling same-day and whether the banks they are pulling funds from participate in the service. Without clear visibility, "it can throw your accounting off balance," said Laura Clary, the product manager for global payment solutions at Fiserv.
Currently "the onus is on the bank … to determine if the item is eligible for the program," Clary added.
Fiserv has been working on both a software module that can be added to PEP+ and a companion piece of software than can run in conjunction with the existing program to automate that process, Clary said. As a result of the upgrades, the program will check the eligibility of transactions within a bank's ACH files as well as identify whether the bank receiving the ACH instructions are enrolled in the service.
The Fed in August 2010 rolled out the same-day service in an effort to recapture payments volume that the ACH network was losing to direct exchanges between individual banks. Some banks that do a significant amount of ACH volume with each other had set up private connections to more quickly and cheaply settle their payments.
Experts say the ability to settle ACH payments faster would also help reduce fraud and manage risk because banks could determine more quickly if a customer has funds available.
"We speed that up by a full day by being able to get returns and stop fraud more quickly," Higdon said.
The Fed's service allows only six ACH categories to be processed on a same-day basis, including categories that pertain the conversion of consumer checks to electronic payments as well payments initiated over the phone and online that are debited from a consumer's checking account.
One scenario that banks have said would make a same-day settlement service most useful is to make last-minute payroll payments for businesses that are late submitting files, which is not covered by the six ACH categories eligible today.
Additionally, "the lack of any kind of mandate to participate means that [there] is going to be this very slow, painful growth," since banks want to know that there will be other banks to do business with, Higdon said.
The Fed is unable to require banks to use the service because such a mandate would require changes to the ACH operating rules.
Nacha, the electronic payments association that sets and manages the rules for how banks use the ACH network, is studying the topic but has made no official announcement about potential rule changes.
A Nacha spokeswoman said an executive was not available to comment last week.
At Nacha's annual conference in Austin, Texas, in April, President and Chief Executive Janet Estep said it is "hard to imagine a future without settlement times changing" from what "they have been for the past 35 years."
The lack of uniform standards is one reason why The Clearing House, which operates the Electronic Payments Network service for ACH payments, says it has not offered its own same-day service.
"One of the huge values of the ACH network is how it reaches all or virtually all financial institutions," said Dave Fortney, a senior vice president with The Clearing House. "It's a ubiquitous network. As you introduce new capabilities that really are fundamentally different in terms of timing and in terms of frequency, in terms of types of transactions that are allowed to flow through it — to do that in a way that is only a partial solution … doesn't embrace the value of the network."
For a same-day service to benefit consumers and businesses, "it would need to be reinforced into rules," Fortney added.
Still, lagging technology has been a persistent roadblock for banks interested in the limited same-day service.
Even with Fiserv's upgrades there are technical issues banks will have to contend with if they want to use the same-day service.
For example, even if a bank's payments are settled on a same-day basis it does not mean the bank will be able to post to a customer's account on the same day because of outdated account processing systems, which often post transactions in batches rather than in real time.
"The limitation is really on how frequently a receiving bank takes the file it receives from the [ACH] operator and actually posts those files to the DDA," said Rossana Salaris, a partner with Radix Consulting Corp. and a former executive who oversaw payments services at The Clearing House.
Steven Cordray, a product manager with the Federal Reserve Bank of Atlanta, said, "It's taken a while for this processing software to be upgraded … the banks want to know which have opted in and which have not as they're creating their ACH files [and] which payments clear today versus tomorrow."
