ACH replacement – a way to optimize national payment infrastructure?

The modernization and extension of Real-time Gross Settlement (RTGS) systems, coupled with the deployment of instant payments systems (IPS) is diminishing the ongoing requirement for separate, batch-based automated clearing house (ACH) systems. This is particularly the case for those countries that handle relatively small daily volumes of retail payments.

While traditionally a country’s payment processing infrastructure would have included both RTGS and ACH by default (as well as systems for processing cards and cheques), the rapid uptake of IPS is calling into question whether smaller emerging economies need to continue operating a separate ACH system at all. The option to consolidate and optimize their national payment infrastructure and to re-route payments via a modernized and more efficient RTGS and IPS infrastructure is increasingly attractive.

A changing landscape

Demand for faster payment processing and greater convenience has resulted in the rapid uptake of instant payments as these systems have been rolled out around the world, resulting in IPS systems now processing a larger share of payments from individuals, merchants and corporates. As well as handling an increasing number of transactions that would have previously been made using domestic cheques and card payments, IPS systems are also absorbing some of the payments traffic that was historically routed via ACH systems.

In parallel, RTGS systems are being modernized to support Liquidity Saving Mechanisms (LSM) and operating hours are being extended to facilitate the settlement of transactions outside of business hours and during national holidays. The objective is to avoid settlement delays that could result in participants not having the necessary liquidity needed to cover their obligations.  Greater efficiency and a reduction in liquidity costs for all participants is making RTGS a more viable option for businesses wanting to send certain payments more quickly than via traditional ACH networks.

While large economies will continue to evolve and maintain their ACH systems to manage the large number of transactions routed this way (as well as the complex netting and liquidity management arrangements associated with such ecosystems) for smaller economies the cost of continued ACH operation in the face of diminishing volumes is less easy to justify, and the netting requirements are typically a lot more straightforward to manage.

Modernization trends

Many countries today are looking at how they can optimize their national payment infrastructure architecture. Common enhancements include:

• Extending RTGS to accommodate liquidity saving mechanisms, increased onboarding of non-bank financial institutions, and adoption of extended business hours (including 24x7 operations);
• The implementation of payment overlay services such as Request-to-Pay, pre-validation of payee, and the capability to track payments end-to-end;
• The ability to re-route retail payments from ACH to RTGS and IPS, and to include options for online batch processing.

Central banks can define the rules for how payments are re-routed and can also opt to provide participants with a choice. By setting out clear criteria for how each payment should be handled, a Central bank can optimize its monetary and payment policies and provide more efficient and less risky ways for processing retail batch payments. For example:

• Direct credits and bill payments, previously processed in ACH, can be handled via:
  • RTGS operating LSM functionality on a net-settlement basis, with settlement occurring more frequently (e.g. every 10-15 minutes)
  • IPS as individual payments, or as batches, depending on IPS system capabilities
• Direct debits can be replaced with “Request-to-Pay and direct credit”, removing the risks associated with direct debits and opening up the more powerful functionality of Request-to-Pay
• Cheque processing (where required) can continue to be handled via the country’s cheque truncation system
• CBDC implementations can be more easily accommodated, an important consideration given the potential for CBDCs to absorb a proportion of retail payment volumes in the future.

In considering the options for ACH replacement and to ease the migration process, it’s important to approach the modernization of both RTGS and IPS systems as part of a staged process. While the Central bank will continue to operate the RTGS system, the IPS system can either be operated by the Central bank or by a third-party such as a national clearing house or bank association. In an optimized environment, additional value-added services – such as pre-validation, national registry (aliasing), and end-to-end payment tracking services – should be provided through infrastructure that can be shared between both the RTGS and IPS systems, thus improving the user experience and maximizing efficiency.