Is Same-Day ACH In Our Near Future?

NACHA, the Electronic Payments Association, is the organization that manages the development, administration and governance of the ACH Network.  They recently proposed the Expedited Processing and Settlement (EPS) amendment to the NACHA Operating Rules (“Rules”) that would enable ACH entries to be processed and settled on the same day that they are originated.  There are several forces that are driving the proposed changes:

1. Market demand and customer expectations
2. Competition from alternative settlement networks 
3. Offerings from geographic markets outside of North America
4. Regulatory influences to reduce counterparty, systemic and liquidity risk

The current “Rules” allow an Originator to specify an Effective Entry Date, which is the date the transaction is to settle.  For ACH credits, the Effective Entry Date must be one or two banking days in the future.  For ACH debits, the Effective Entry Date must be one banking day in the future.  The EPS amendment would allow Originators to specify the same day as the Effective Entry Date for both ACH credits and debits.  This amendment could pave the way for banks to create new premium service offerings or enhance existing premium service offerings such as emergency payroll deposits, just-in-time tax payments, or expedited bill payments.

How would Expedited Processing and Settlement work?  It would essentially enable same-day settlement by modifying the existing afternoon clearing and settlement window so that ACH Operators would be open for all types of ACH entries – credits and debits; consumer and corporate entries; forward and return entries; non-monetary and administrative entries.  The afternoon window would have a file submission deadline for Originating Depository Financial Institutions (ODFI) of 2:00 p.m. Eastern Time, with output files available to Receiving Depository Financial Institutions (RDFI) no later than 4:00 p.m. Eastern Time.  Settlement would take place at 5:00 p.m. Eastern Time.

Because the EPS amendment would become part of the Rules, all RDFIs would have to be able to receive or pickup ACH files from their ACH Operator for this window. With this timeline, it is important to note that while some ACH transactions could be processed “same day,” ACH processing would not take place in “real time”.  Settlement in “real time” means payment transactions are not subjected to any waiting period. The transactions are settled as soon as they are processed. 

The results of a recent survey by the Association of Financial Professionals shows that there is corporate interest in same-day ACH capabilities and that corporate users recognize same-day ACH as a premium service. The EPS amendment could potentially enhance a number of ACH products offered by banks to their customers including expedited processing of late or failed payroll originations, allowing billers to collect consumer payments faster, and faster delivery of consumer payments made via a mobile device or online.

Other potential beneficiaries of the EPS amendment include recipients of disaster assistance payments;  government agencies could offer a premium service permitting expedited tax payments to be made on the due date; corporate treasurers could concentrate cash from multiple accounts more quickly;  reversals of erroneous entries could occur more quickly;  administrative transactions such as pre-notes could complete more quickly.  The amendment also offers the opportunity to reduce overall settlement risk, including counterparty risk, by accelerating settlement and thus reducing the duration of exposure.

In 2010, the Federal Reserve rolled out a same-day service limited to consumer ACH debits.  Adoption has been slow, in part because participation is voluntary.  Due to the nature of the Rules, the EPS amendment, if adopted, will impose additional costs on financial institutions as they modify and enhance their applications. 

The ever increasing adoption of technology by consumers has raised and will continue to raise expectations for the B2B world.  Near instantaneous settlement of mobile P2P payments will inevitably lead to a demand for quicker settlement of B2B payments.  Users will ask, “If banks can do it for my personal checking account, why can’t they do it for my business checking account?”  Same-day ACH is a step in the direction of meeting those expectations. 

Ultimately success of same-day ACH will depend upon adoption by banks.  Will same-day credit cannibalize bank’s more lucrative wire business and even exert downward pressure on the price of wires?  Will ACH prices increase?  Will same-day be enough to satisfy market needs?  Let us know your thoughts.