Same Day ACH and the Road to Real-Time Payments
What business leaders need to know about how transaction processing is changing so they can anticipate and capitalize on same-day payment capabilities—and prepare for real-time payments in the future.
Change is coming to the US payments system. This year, financial institutions in the United States will begin settling digital transactions on the same day they're received. This will be a big improvement for consumers, businesses and governments alike, affecting things like payroll, same-day bill pay and person-to-person payments. It will also have international implications as the US payments system begins to harmonize with the global trend toward real-time processing.
For businesses, the new same-day capability will create market opportunities, efficiencies and cost-savings, and it's an important step toward realizing system-wide real-time payments in the US.
The Digital Shift in Payment Processing
The US noncash payments system is rapidly evolving. According to the Federal Reserve, between 2000 and 2012, the volume of paper checks paid fell more than 50 percent, while noncash payments from electronic clearinghouses and credit and debit cards more than tripled. The two biggest benefits of this shift away from paper-based noncash payments are that it's far faster and more economical to transfer the data electronically. For example, many businesses, consumers and government agencies already enjoy the convenience and time and cost savings of direct deposit.
The Automated Clearing House (ACH) Network is among the largest payment systems in the world, moving more than $40 trillion—about 23 billion electronic financial transactions—per year. It transfers money and data between banking institutions through batch processing, which means that the transactions received are not processed immediately; rather, they're accumulated throughout the day and then processed simultaneously in one batch.
Currently, US financial institutions have a 48-hour guarantee for settling transactions, though many settle in 24 hours. Moving funds faster than that requires a wire transfer, which can be expensive (relative to using ACH). With the trend toward digital transactions, there is also the potential to further increase payment processing speed. Achieving methods and standards for faster clearance, however, requires consensus from thousands of financial institutions, merchants and other stakeholders.
A Consensus-Driven Rule
In 2015, the Federal Reserve Board released recommendations for improving the US payments system, among them a call to achieve faster payment processing. Speedier clearance supports confidence, facilitates business-to-business payments, improves security and supports faster international transactions. It also aligns with what companies and customers want: Federal Reserve research shows nearly 70 percent of consumers and 75 percent of businesses prefer instant or one-hour transaction clearance.
In May 2015, the voting membership of the National Automated Clearing House Association (NACHA), which administrates the ACH Network, approved an amendment to their Operating Rules that will make payment processing faster. This agreement from NACHA members will allow the payments system to evolve toward real-time payments. With all stakeholders agreeing to the same standards for faster processing, the system as a whole can move forward with the confidence needed to implement this substantial change.
Same Day ACH, as the rule is called, will begin to take effect on September 23, 2016, when all receiving financial institutions must have the capability to process transactions on the same day they're received. The rule will be introduced in phases, allowing financial institutions and other stakeholders to modernize capabilities and adjust to the faster payment speed. In Phase 1, ACH credit transactions $25,000 and under are eligible for same-day processing, impacting things like payroll, bill payments and person-to-person payments. Phase 2 brings in ACH debit payments, impacting consumer bill pay for items like mortgage and credit card payments. The last phase, Phase 3, adjusts bank credit funds availability requirements, where Same Day ACH credit transactions must be available to customers by close of business.
Although accommodations will need to be made for deadlines, utilization may also depend on how quickly the federal funds rate rises. If the economy continues to improve and the Federal Reserve continues to raise interest rates, corporate practitioners may want to take advantage of Same Day ACH debits (assuming they're able to realize same-day availability of funds for investment purposes, and bearing in mind the added cost of processing these transactions). NACHA has predicted that within 12 years of deployment, 3 percent of all ACH items will ride the same-day rails, although many factors—including the advent of real-time payments and future payment options, the cost of processing and the ease of reconciliation—will determine actual use cases.
Looking Ahead to Real-Time Payments
According to Celent, there are already real-time payment systems operating or being built in at least 39 countries, including the United Kingdom, Singapore and Poland, and the Mexican SPEI system has had near-real-time processing since 2003. By comparison, the United States is behind the curve. However, the Same Day ACH rule is an important step in modernizing the US payments system and moving toward real-time payments.
Acclimating to same-day processing will require that financial institutions, merchants and others change and improve their infrastructure, and this sets the stage for reducing processing times. With the ubiquitous same-day option, consumers, businesses and governments can look ahead to improved products, services and business models that capitalize on faster processing and cater to consumer trends.
The result will be not only a modernized US system, injecting more confidence and convenience into the payments landscape, but also a series of business benefits, including cash flow forecasting, improved working capital and same-day payroll.