The Federal Reserve banks will start offering same-day settlement for some automated clearing house transactions in August, but several major payments companies say there's no need for it.
Though the Fed said the service could drive up traffic on its ACH network, payments executives say its strategies have serious flaws.
The Fed expects same-day settlement will draw back a chunk of the transaction volume that has been lost to direct connections that some banks have created to handle payments between themselves. Few experts, however, think financial companies will abandon the work they have already put into establishing these efficient, private networks.
Also, the same-day service was designed to compete against other payments systems, but observers say its opt-in format will limit the number of participating financial companies and therefore limit its appeal to corporate users.
"That opt-in nature is the Achilles' heel to this service that will result in very, very sparse activity," said Bob Meara, a senior analyst in the banking practice at the research firm Celent.
Unless a significant number of banks choose to participate, users will have few trading partners to which they can send and receive payments, Meara said.
When the service goes live Aug. 2, originating banks will pay six-tenths of a cent for same-day ACH payments.
And to entice banks to opt in as receivers, Jim McKee, a senior vice president with the Federal Reserve's Retail Payments Office in Atlanta, said it will be free to receive the transactions and to handle returns.
"We think the idea of getting returns back faster is a really important aspect … for this service," McKee said in an interview Monday. "We have a lot of interested originators, but really the focus is on the receiving base."
The Clearing House Payments Co. LLC, which operates the only other ACH network, doubts there will be significant demand for the same-day service.
Last year the New York company evaluated the potential interest and technical feasibility of offering its own same-day settlement service, according to Alex Romeo, a vice president and product manager for The Clearing House's ACH service, Electronic Payments Network. Member banks were concerned about the time and costs associated with developing and implementing such a service, as well as the effort it would take to bring the receiving depository financial institutions "to the dance, so to speak," he said.
The Clearing House hasn't "killed the project," but it's been shelved until there is sufficient demand, Romeo said.
The Association for Financial Professionals, a Bethesda, Md., organization that represents treasurers and other payments executives, agrees enough banks need to opt in to make it a valuable service for businesses, said David Bellinger, the group's director of payments.
Same-day settlement will be available for ACH transactions using the accounts receivable conversion, back office conversion, point-of-purchase, telephone-initiated, represented check and internet-initiated standard entry class codes.
Banks will also need to update their payments systems to handle the faster transactions.
According to Nacha, the electronic payments association, there were 18.76 billion transactions in 2009, up 2.6% from the year before. Of that figure, 15.26 billion were conducted within the ACH network.
The remainder were "on-us" transactions, or payments in which the originating and receiving institution is the same, and those conducted via direct-send relationships.
A small number of banks have set up these direct connections in recent years, usually when they have a significant number of payments with one another. These partners have included Citigroup Inc. and Capital One Financial Corp. Frost National Bank and Southwest Corporate Federal Credit Union set up a direct link in 2005 to exchange check images. Wells Fargo & Co. and Bank of America Corp. have created a joint venture, Pariter Solutions LLC, to handle ACH transactions between themselves, though it is not yet live.
The Fed estimates that it has lost about 100 million ACH transactions annually because of direct exchanges that can already handle same-day settlement for some payments, McKee said.
"That's the type of volume that we see that could potentially … be coming back into the network," he said.
Others disagree. "I think the question is, for those institutions who have elected to go outside of the operator network and do direct exchanges with bilateral agreements with" specific banks, "would this same-day service be a compelling reason to come back into the network?" Meara asked.
The same-day service "might stem the tide of other banks going out of network, but I think only modestly," he said. At least one large bank said it has no plans to offer the Fed's same-day settlement to its ACH customers.
"Our clients have not expressed an interest in the service based on the way the product is currently structured," said Bob Johnston, the product management executive for ACH and check at Bank of America.
The Charlotte banking company sees little demand for the service, especially given that the ACH categories for which same-day settlement will be available are primarily check-based, he said.
Given the decline in checks, the benefit "would be fairly minimal," he said.
The Fed's service uses existing SEC codes, and does not require Nacha to change any of its rules.
Celent's Meara and other analysts said in order to drive adoption of the service, a rule change by Nacha mandating that banks be able to send and receive items for same-day settlement is likely necessary.
The Brookfield, Wis., core vendor Fiserv Inc. has added a feature to its PEP+ ACH software that can help banks flag ACH payments that are eligible for same-day settlement.