July 2015 Issue Posted July 20, 2015
At the last few conferences including NACHA 2015, Elliott and I have been on panels and have made presentations about risk management in a same-day ACH environment and the need for banks to adopt a deliberate pricing model to cover the costs of the resulting changes (See Elliott’s article in this issue). The onetime cost of implementing this program is estimated at 118M dollars with recurring annual costs of 49M dollars.
The questions from the audience we heard were about the value of this program. Consider NACHA’s prediction that by 2027 roughly 1.4 billion transactions will be same day ACH. This seems like a small number compared to the 23 billion transactions reported for 2014. And, by 2027 the industry would have spent nearly 500M on system implementation! Even though Same Day ACH will be phased-in starting in 2016, only in 2018 will we see integration with ATM networks. And, it’s not clear when Same Day ACH will be available on weekends.
NACHA points to several scenarios where the banking industry would benefit from B2B payments, P2P payments, Payroll and many outlier cases such as emergency payroll or emergency payments to a contractor. The question becomes – will ACH replace Wire transfer in some of these scenarios? The general consensus seems to be “not likely” because ACH transactions can be returned over 4 and 60 day windows. In essence, this case for modernization has not changed the return windows. A larger question is – Has the bank’s risk exposure changed? Could there be unintended consequences for banks that make revenues off LOCs and other credit facilities with the availability of the low-cost same day ACH alternative?
No one will argue against the need to speed up the payment system. Everyone points to speedier payments in Europe and EMV adoption as an example. But in no one country are there 12,000 + financial institutions as we have in the US. We have seen upstart companies like The Lending Club make a dent in the lending market and digital currency companies attempt various experiments with alternate currencies. The transparency of the block chain model underlying BitCoin is lauded widely and a successful variation of that product will surface one day, but the message I heard at these conferences was that each payment vehicle – ACH, Wires, Checks or Cards has a distinct role and fit in the market which need not change for the sake of modernization. The sustained success of ACH lies in its reliability and economics. Isn’t that good enough?