After plenty of grumbling, the U.S. financial industry has finally begun the slow trundle toward faster payments for all. Same-day payments were approved by members of the industry group Nacha in May, approved by the Federal Reserve last week, and will begin going into effect in September 2016.
Nacha's goal is to create an inclusive and ubiquitous system of faster payments — a difficult and unenviable task. In order for the change to be effective, all member financial institutions must honor same-day ACH payment settlement requests, including business-to-business payments with remittance information. There's just one problem: only a very limited number of businesses are generally able to originate business-to-business ACH transactions.
The underlying issue is that financial institutions do not ubiquitously offer ACH to businesses. ACH origination is a highly specialized product that is only sold by a specialized bank sales force to larger corporate customers with higher payment volumes.
Moreover, even though the short same-day ACH settlement windows will reduce credit risk, financial institutions will likely want to continue putting businesses through a full ACH underwriting process. This involves a complex application and lengthy reviews that at the very least are an annoyance for banks and their customers. But more importantly, the associated costs are only worth it for banks if they're gaining large corporations that process a high volume of payments. There's very little incentive for banks to underwrite smaller companies, so they'll still be left in the dark.
ACH products are not exactly priced for mass adoption. A typical ACH package includes a setup fee, a monthly “maintenance” fee, a file transmission fee, and a per-transaction fee. When everything's added up, businesses have to make at least 500 ACH payments a month to average a reasonable 15 cents per transaction. And based on estimates from the Association of Finance Professionals showing that companies who use ACH only use it to process 30% to 50% of their total payments, a company would have to be making more than 1,000 payments each month to make it worthwhile. Once again, small businesses are excluded.
Security poses an additional problem with ACH for business-to-business payments. As it stands, a business needs to handle extremely sensitive payment information from its counterparties: their bank account and routing numbers. At a time when major data breaches seem to occur every week, it's unclear why anybody would want to do that. Payers that store this sensitive information are liable if they suffer a data breach, and payees that supply it are putting their financial accounts at risk. They have no assurance that payers will keep the information safe and encrypted. The more this information is shared among dozens, or potentially hundreds of companies, the greater the risk.
Some might argue that paper checks have account information printed on them too. But as a payment method that will be more prevalent in the future, ACH must be held to a higher security standard. For all that industry insiders object to PCI compliance, it is still a standard that forces card-handling entities to be diligent about security.
We must pat ourselves on our collective backs for the recent advances in business-to-business payments. More electronic payments are on the right side of history. The last decade has seen promising growth in electronic payments by larger businesses. Faster payments have obvious benefits and are inevitable. And same-day ACH represents a significant feather in Nacha's cap.
But what we have today is an exclusive, not very ubiquitous system that will not be available to most businesses and is insecure by design. However, these are not insurmountable problems. Nacha should look into rules to support pre-funding and eliminate the need for underwriting. It should also explore processes such as account masking to ensure that the security of the underlying system is maintained.
In the end, ACH is just one potential solution to the ultimate goal of obtaining faster and more secure payments. Other payment rails such as debit, credit, electronic funds transfer, and virtual cards are in a good position to solve these challenges as well.
While some of these options are currently focused on consumers, they have the infrastructure to potentially improve business payments too. The only thing holding them back are rules that the industry associations and governing bodies managing them have put in place. And rules can be changed — just as Nacha is beginning to do with ACH. Stewards of all the different payment rails need to come to the table to ensure the infrastructure we need for the future is in place.
BC Krishna is founder and CEO of MineralTree. He is also a member of the Federal Reserve Bank's Secure Payments Task Force and Faster Payments Task Force, and is working with the Remittance Coalition to lead the creation of a B-to-B payments directory.