E-Checks Are for the Banks

  New data from NACHA-The Electronic Payments Association show the explosive growth of consumer-initiated Internet automated clearing house debits, known in the ACH world by the three-letter transaction code WEB, or more generically as "e-checks." In 2003 there were 689 million WEB payments, up 195% compared to 2002, and the second consecutive year in which the number of WEB payments tripled.
  It may surprise some to learn how these Internet e-checks are being used. NACHA's analysis of WEB payments concludes that 80% are used to pay bills, 18% are used to transfer funds, and a mere 1% are used to make purchases online. The dominant role of bill payment is even stronger when looking at dollar values, where the breakdown is 94.7% for bill payment, 5% for funds transfer, and 0.25% for online purchases. This equates to $500 million of online retail purchases by e-check in 2003.
  These data should provide fresh air in contrast to some doom and gloom scenarios about banks' payment revenues, including those portrayed by Gwenn B?zard of Celent Communications in CCM's March Afterthoughts column, "Why Banks Need Payment Czars." In that article, Mr. Bezard overstated e-check purchase amount by a factor of 14.
  Mr. Bezard's thoughts on Internet ACH payments are puzzling, and sometimes contradictory. The following two statements are a good example:
  * "For a card-issuing bank, the fact remains that every e-check is cannibalizing a more profitable card transaction."
  * "Online retailers often have embraced e-checks because e-checks broaden their market by reaching out to buyers who are uncomfortable using a card on the Web for fear of fraud, or who simply don't own a credit or debit card."
  These statements cannot both be true. The following two statements are another example:
  * "The advantageous pricing of e-checks has attracted a great deal of attention in the merchant community."
  * "In fact, for a merchant, an e-check may be as expensive as accepting a credit card."
  Again, these statements cannot both be true.
  There is no evidence of any cannibalization of card payments by e-checks. In fact, Visa says this is not happening. In the March 18 American Banker, Jim McCarthy, senior vice president of emerging products at Visa, said, "We're not seeing any falloff in terms of volume to competitive payment systems."
  The fact is that most e-check volume has come at the expense of checks. Many people who used to pay their bills by check are now paying some or all of them online. Over 50% of consumer ACH payments on the Internet are to pay credit card bills. So it is actually the card issuers that are achieving the benefits from e-checks. In 2003, NACHA estimates this benefit was $71 million in loss reductions, faster funds availability and lower clearing costs.
  This is far more significant to card-issuing banks than a small number of e-checks being used for online retail purchases. When including other banking products such as mortgages and loans, banks are the payees for 67% of all e-checks, and the benefit is an even greater $95 million.
  In October 2003, NACHA surveyed 18 card issuers, representing 90% of the industry in terms of receivables, on their collection practices. All 18 allow customers to make payments on their Web sites using ACH e-checks.
  We can expand this discussion to cover consumer ACH payments initiated over the telephone. Sixteen of the 18 allow consumers to make telephone e-check payments. Customers calling on the phone are often in a payment deadline situation, in which they want to have their account credited immediately. The majority of card issuers-13 of 18-reported that they collect a convenience fee for providing this real-time account-credit service, and that a typical fee is $10 to $15. This is an entirely new source of fee revenue that has been made possible by ACH e-checks. NACHA estimates that card issuers collected $770 million in such fee revenue in 2003. When including other banking products, the benefit is an even greater $1 billion.
  NACHA and its members are positioning the ACH network to be the payment system of choice for collecting receivables from consumers, including by Internet, telephone, direct payment, and ARC (accounts receivable entry) check conversion. These are all check replacements, and card-issuing banks use them all extensively.
  Mr. Bezard is correct that many banks' "payment activities remain heavily siloed." If banks were less siloed, they would have moved toward electronic payments more quickly, efficiently, and effectively.
  Michael L. Herd is director of public relations at Herndon, Va.-based NACHA-The Electronic Payments Association. He can be reached at mherd @nacha.org.