Why Banks Are Finally Embracing Same-Day Payments
The organization that runs the automated clearing house network wants to phase in same-day payments in three stages, but backers of a speedier system say the plan -- the second such effort in two years -- still is not enough.March 18
If checks, a payment method that's hundreds of years old, can be updated for the Internet age, why can't America's four-decade-old electronic payments system? It's not for lack of trying.November 13
It took a long time, but the U.S. banking industry has finally embraced the concept of speedier payments.
In August 2012, banks and credit unions rejected an industry-led proposal to let consumers and businesses send same-day electronic payments between the nation's 12,000 financial institutions. They reversed course in a vote announced Tuesday.
The turnaround was partly the result of specific changes to the plan, which helped garner support from banks on the West Coast and other banks that would have borne many of the costs of implementing the earlier plan without enjoying its benefits.
But the same-day proposal also benefited from a wider acceptance of the notion that, in this on-demand age, consumers and businesses have little tolerance for the slow ways of the past.
"The mantra of faster, faster, faster, has gotten louder, louder, louder," said Steve Kenneally, vice president at the American Bankers Association. "And I think everyone realizes you can't stand still anymore. You need to move forward."
The private-sector-led plan will result in upgrades of the decades-old automated clearing house network, which is used for everything from the direct deposit of paychecks to consumer bill payments to business-to-business transactions.
Today, under the best-case scenario, those payments settle the day after they are initiated. After the upgrades are completed, bank customers will have the option of using a same-day settlement window for weekday transactions.
Nacha, the bank industry group that oversees the ACH network, will oversee improvements that are due to be completed by March 2018. Support from the organization's voting members was "near unanimous," Janet Estep, Nacha's president and chief executive officer, said in an interview Tuesday.
Estep also supported the 2012 proposal, but said that this year's version is "much stronger."
Industry observers pointed to two specific changes since 2012 that bolstered support for same-day payments.
The first key change was the addition of a second same-day settlement window. West Coast banks had been pushing for such a change because, under the previous proposal, they could not process transactions that came in after East Coast banks closed until the next afternoon. Under the new plan, those same transactions could be processed first thing the next morning.
That change also means that funds will move among financial institutions three times per day rather than once, which is how the system operates today.
The second key change was the addition of a fee which will be set at no more than 5.2 cents per transaction to be paid by any bank or credit union initiating a same-day payment to the financial institution on the other end.
This interbank payment was crucial to garnering the support of banks that are frequently on the receiving end of ACH transactions, but don't as often originate the payments. Under the 2012 plan, those banks would have had to make expensive investments in technology without reaping many benefits.
"There just needed to be this nudge to bring everybody to the point where they're in agreement," said Bob Steen, the chief executive at the $84 million-asset Bridge Community Bank in Mechanicssville, Iowa, and a longtime supporter of same-day payments.
Referring to the 5.2-cent per-transaction fee, he added, "It's not a big incentive, but it's enough."
Under the plan, all 12,000 or so banks and credit unions in the United States will be required to accept the same-day payments on behalf of their customers.
Banks will not be required to offer same-day service to consumers and businesses that want to make fast payments. But those banks that choose to do so may be able to recover the cost of the 5.2-cent fee and still earn a profit by charging for services such as last-minute bill payment.
All domestic transactions under $25,000 will be eligible for same-day service, a category that accounts for more than 99% of all ACH transactions, according to Nacha. Still, the majority of transactions will likely be settled the next day for many years to come. Nacha estimates that by 2027, there will be 1.4 billion same-day transactions per year. For the sake of comparison, 23 billion ACH payments were made in 2014.
Industrywide, implementation costs are estimated at $118 million, plus $49 million annually, according to Nacha.
The same-day system is scheduled to be implemented in three phases. The first phase, to be completed by Sept. 16, 2016, will result in two new same-day windows for transactions in which the sender pushes money to the recipient.
Phase two, which is to be completed by Sept. 15, 2017, will add same-day options for instances where the recipient pulls money from the sender's account, as in recurring automatic bill payments.
The third phase, to be completed by March 16, 2018, will ensure that the funds are actually available to the recipient on the same day the money is sent, by linking up ATMs and other infrastructure.
Critics have argued that even with the upgrades, the ACH network, which processes payments in batches, will still be too slow.
Same-day service will not be available for transactions initiated over the weekend or on a holiday. Meanwhile, many countries, including the United Kingdom and Sweden, have built near-real-time payment systems.
Efforts to build a near-real-time payment system in the United States are under way. One such initiative is being led by the Fed, while The Clearing House, a group that is owned by many of the nation's largest banks, laid out its own vision for a faster payment system late last year.
But supporters of the same-day plan called it a concrete and relatively quick step forward, even as the banking industry contemplates larger upgrades that will take more time to complete.
"I think it's a significant step forward," said Cary Whaley, vice president of payments and technology at the Independent Community Bankers of America. "I think the industry has seen the need for faster payments, even at the beginning of this dialogue. But with each passing day it becomes more urgent."