Automated clearing house transactions have long required one to two days to settle. Many banks process them overnight, which makes for an efficient use of time.
But in an age when people expect more instantaneous results, that lag time is being reconsidered. Both of the big networks that handle ACH payments are exploring the option of same-day settlement for at least some transactions, a change that would speed things up but carry its own new set of complications.
Nevertheless, same-day ACH has emerged as one of the most intriguing ideas under consideration in the payments world. If it were developed and put into use, it could mean faster payments and less fraud, according to payments industry executives. In the long term, they say, it could mean that the ACH format would become the dominant payment method in this country.
There are two major ACH networks in the United States, one run by the Federal Reserve Board and the other a private company, Electronic Payments Network. Both are examining how a same-day ACH system would work and what the ramifications would be.
While the Fed is in the early stages of evaluating the concept, Electronic Payments Network is studying the business potential of faster settlement. However, the network is only looking at transactions that emerge from the conversion of consumers' paper checks into ACH payments at the lockbox, a process known as accounts receivable conversion, or ARC.
"There really isn't a technical reason why it can't be done," said Rossana Salaris, a vice president for marketing and training at EPN, a subsidiary of Small Value Payments Co., which is owned by 21 banks and The Clearing House (formerly the New York Clearing House).
EPN is working with a task force sponsored by Nacha, the electronic payments association, to develop a business case study, and plans to present its findings at the trade group's August board meeting. If Nacha approves the concept, Ms. Salaris said, a pilot for same-day ARC transactions could begin in early 2004.
The idea is already popular with billers, who would get paid faster under a same-day system. "I think it's a great idea," said Dean Pinou, a district manager for remittances at AT&T Corp., which is piloting ARC payments with several hundred thousand customers in multiple states.
But a same-day system could pose a number of problems. Banks' resources could be taxed by too many payments hitting them at the same time, and there could be complications when payments must be settled between banks in different time zones. Some people say that, as a general proposition, the industry is not ready for it.
"This seems a bit premature," said Dennis Feterl, a vice president for treasury services at First Premier Bank in Sioux Falls, S.D., a division of United National Corp. and one of the first banks to pilot ARC conversion.
Mr. Feterl noted that ARC is just a year old and said that it is far too soon to tinker with the format. Though same-day settlement may be a good idea for the future, he said, so few banks are using ARC now that it makes no sense to change the rules until it becomes more widespread. "I think we've got to get the plumbing in the house before we can paint it," he said.
Under existing rules, ACH payment files containing information about which accounts to credit or draw money from, the amount, and the date the transaction is scheduled to post are typically transmitted to the payment network operator late in the afternoon. They are then processed by the ACH operator and forwarded to receiving banks, generally by the end of the business day.
Because ACH credits do not have to be available until the start of the next business day - and debits can be paid anytime that day - many receiving institutions process the files overnight. Once the transactions are all prepared, the information is transmitted back to the network operator and then forwarded to the originating banks. Total elapsed time can be almost a full day from the time the bank initiates the transaction for credits, and almost two days for debits. Shifting to same-day transactions would require that this entire routine be dramatically compressed.
Richard Oliver, a senior vice president and the retail payments product manager for the Federal Reserve System, said his group is interested in the concept of clearing all types of ACH transactions but that it has only begun to explore the idea with some of the Fed's major clients.
The central bank completed a proof-of-concept study in March but has not yet decided what the next step will be, or whether there will be any. Options include moving forward with its own pilot or teaming up with EPN if it organizes a same-day ARC pilot. "We think the idea of same-day ACH is one that deserves consideration," Mr. Oliver said.
"I think there will be a demand for this," agreed Keith Theisen, a senior vice president with the treasury management group at Wells Fargo & Co. and the chairman of the Nacha task force studying same-day ARC payments.
Besides receiving payment faster, which is likely to find broad appeal across the industry, clearing payments within the day would also make return items available sooner, Mr. Theisen said. Discovering that a payment request has been denied even one day earlier could make it possible for a credit card issuer to shut off a fraudulent account sooner, and potentially block more purchases. "That adds a lot of value," he said.
The idea EPN is considering requires the originating financial institutions to change the effective entry date for which they are requesting payment, to specify that the transaction settle the same day as it is initiated. Currently EPN has banks submit ACH files every day by 2 p.m. eastern standard time so the company can forward them to the receiving financial institutions that afternoon.
With same-day ARC, the deadline for submitting files may be pushed back to 3:30 p.m. This would give the originating banks more time to collect the same-day payment requests, but would also require the receiving institutions to download the files earlier than they are doing now, in order to process the information and post payment faster.
Ms. Salaris said that the receiving banks would have to do extra work to settle transactions before the close of business instead of overnight. Some banks may also need to buy Fed Funds to cover transactions that settle earlier than today's ACH payments.
To offset these expenses, EPN expects to charge the originating banks a higher fee for same-day ARC transactions. This fee has not yet been determined, but she said it could be in the neighborhood of 100 basis points - high enough to make the service attractive to receiving banks but not so high as to discourage originating institutions.
Ms. Salaris also said that same-day ARC is envisioned as an optional service, and billers could continue to initiate standard ARC transactions using the current fee structure.
Mr. Pinou of AT&T said an additional fee makes the idea less appealing to his company. "We would have to evaluate that," he said. "It's hard to say without knowing the size of the fee" if AT&T would be interested in using a same-day payment service.
One of EPN's goals with same-day transactions is to attract more customers to the ACH network. Some companies, such as local utilities, already get next-day settlement on many of their bills even with paper checks, said Richard Crone, a vice president with the research firm Dove Consulting in Boston. As a result, they have little incentive to invest in the scanning systems needed to support a transition to ARC. "Same-day settlement with ARC would change this completely," he said.
If ACH payments within one day do become available, it could shuffle the deck of available payment options, observers say. Avivah Litan, a vice president and research director at the Gartner Inc. research and consulting firm in Stamford, Conn.., said same-day ACH transactions would make the format more popular than other payment technologies, especially wire transfers, which are much more expensive. "The ACH network is going to become the network of choice over time."
Mr. Theisen of Well Fargo agreed. "ACH is about as economical as you can get in a payment system," he said.
However, since same-day is not the same as real-time, wire transfers may still be preferable to customers who send large payments and want immediate settlement.
But same-day ACH could get far wider use for the smaller payments, Ms. Litan said. "It will dominate retail payments. I guarantee it."
