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Deconstructing Payments to Drive Value

One of the hot topics at the recent NACHA conference was the question of same-day ACH: should the US adopt a solution framework similar to “Faster Payments in the UK”? Under such a solution, banks would offer ACH credits (and possibly debits) that would settle on a same-day basis.

Notably, same-day ACH under the BACS system in the UK, commercially referred to as “Faster Payments,” arose not from banks feeling the pressure of market demand but from regulators who felt that banks should offer consumers less expensive ways to effect a settlement than what was currently offered through CHAPS, the real time gross settlement system (equivalent to FedWire).

Just as in the UK, US banks earn a massive multiple on wires versus ACH, so one immediate reaction to a same-day ACH concept is the fear of cannibalization.  Replacing wires at $10 to $20 per payment with ACH at a fraction of the price is not the greatest idea during a time in which banks are seeking to grow fees to offset low interest rates, price caps on overdrafts and debit interchange and higher costs due to new regulations.  For this reason, banks in the UK were permitted to limit same-day ACH for small to medium size payments – e.g., those below 25,000 pounds.

The economics of same-day ACH will vary by bank – some may view this as an opportunity to offer a wider array of options to grow payment volumes with clients – both upselling current ACH volumes as well as responsively diverting some wires to same-day ACH.  Treasury Strategies recognizes that the economics of same-day ACH will vary by bank but we encourage banks to think of payments as multi-dimensional solutions and to recognize that the maximum value to consumers and businesses occurs when we can flexibly align those solution dimensions to the needs of each client.  Consider ACH, card, check, wire and other payment media.  Each has unique information content, unique methods of tagging transactions to specific GL codes (responsibility center, expense type, etc.), ease of execution both in an automated host-to-host fashion and in a geographically distributed method (e.g., point of sale for card or field execution of drafts).  And each payment media has unique characteristics around return procedures, revocability fraud protection, and legal considerations.

Today, these solution components are largely “hard-coded” within each payment type.  To offer clients the most powerful solutions, banks would do well – within the constraints of regulation and the law – to break out each of these components and flexibly configure them as solutions.  For example, what if the robust ability to tag card transactions to assets, individuals or other segment criteria could be applied to ACH?  When it comes to same-day ACH, or even trends like the JPMorgan VISA flexible interchange agreement, Treasury Strategies believes these moves are largely inevitable, as part of a larger trend to deconstruct payments to their core attributes so that solution providers can best reconfigure payments to meet customer needs.  For those banks evaluating same-day ACH, it’s not enough to simply look at the cannibalization and upsell potential – it’s critical to think through a target state in which the bank maximizes its flexibility in configuring a portfolio of payment solutions to a client’s needs.

Dave Robertson

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