When NACHA’s Automated Clearing House (ACH) payments add same-day settlement in September, the new option will come in handy for treasurers in certain situations. But companies aren’t expected to be big users of same-day ACH, at least not initially.
Will companies use same-day ACH?
Currently, ACH payments generally settle in one day. In September of this year, NACHA will roll out same-day settlement for ACH credits, to be followed in September 2017 by same-day settlement for ACH debits.
Same-day ACH will be optional for both banks and companies, but a NACHA survey released last week shows the vast majority of banks that are big ACH originators are on board. All of the 22 banks NACHA surveyed said they will offer same-day ACH by the end of the year.
At this point, however, a corporate stampede into same-day ACH seems unlikely.
“Corporate practitioners are taking a wait-and-see approach,” said Nasreen Quibria, founder of Q insights, a payments research and consulting company. “It’s not really top of mind for them; they have other, more critical issues.”
“Same-day ACH is new. Anytime you have something new, you have to integrate it into your procedures and practices,” said Dean Henry, head of global high-volume payments at Bank of America Merrill Lynch. “Just think about changing payment methods in large corporate ERP systems. That’s going to cause some delay.”
Rick Burke, head of corporate products and services at TD Bank, said speeding up payments isn’t that big of an issue for corporate treasurers. Instead, he said, they’re more focused on “certainty of pay, certainty of information, removing paper from the process, and allowing for more straight-through processing that allows companies to turn deposits into working capital.”
Quibria noted the $25,000 limit on the size of same-day ACH transactions as a factor that will limit companies’ use. “If they’re trying to do cash pooling, netting, etc., they may not be able to take advantage of it because of this specific constraint,” she said.
There’s also a cost factor. NACHA will require the originating bank to pay the receiving bank a 5.2-cent fee for each same-day payment, and banks are expected to pass that cost through to participants.
Lex Litton, senior vice president of operations at Phoenix-Hecht, which does market research for the financial services industry, said that added cost could be “pretty significant” for companies.
“Corporations that actually send lots of ACHs obviously do it by creating files, and the files might have a cost of only three cents or something per transaction,” he said. “The higher the volume, the more aggressive price the corporation will be given. In some of those cases, the [additional] five cents will be quite significant.
“If you’re just sending a few ACHs and you’re using the bank’s Web portal, you might be paying as much as a quarter to initiate a transaction now,” Litton added. “Maybe five cents is fairly trivial in that case.”
Ways same-day ACH could prove useful.
Henry cited three areas in which companies could use same-day ACH: individuals paying businesses, businesses paying individuals, and businesses paying businesses.
“Within person-to-business, we expect the lion’s share of the volume to come into play with billers,” he said, citing the example of a utility company that wants to let its customers pay more quickly, perhaps because otherwise their payment would be late.
Business-to-business (B2B) uses might include vendor payments such as those between distributors and retailers, said Henry, pictured at left. “Think of products where there’s a need for cash on delivery or close to cash on delivery, where a beverage distributor drops off pallets of beer at a store and wants to be paid quickly.”
Companies might want to use same-day ACH to pay consumers or employees for a variety of reasons, he said, including disaster-relief payments, such as those made by insurers or aid organizations like the Red Cross; per diem payments; reimbursements, such as an airline’s payments to customers for lost luggage; and payroll.
NACHA’s survey suggests payroll and B2B payments are the uses expected to be most popular, with 100% of the banks surveyed planning to provide same-day payroll payments and 95% planning to offer same-day B2B payments.
TD Bank’s Burke said payroll situations that could be addressed with same-day ACH include remedying problems with payroll files and settling up with a terminated employee.
Missing a payroll file can be “quite a harrowing experience” for companies, he said. “Now there would be the ability, if that [problem] is recognized in the morning, to get the file in and have it settle on the same day.”
In the case of employee terminations, a number of states require companies to pay employees what they’re owed on the day they’re terminated. “Today that requires a laborious process that ends up with a manual check,” Burke said. “This will remedy that. [The company] will be able to calculate the amount, go to the bank’s online site, create the transaction, and it will be in the employee’s account by the end of the day.”
Will same-day ACH replace wires?
There’s speculation that companies could substitute same-day ACH payments for wire transfers since the time frame is identical and same-day ACH will be cheaper than wires.
“There are going to be some situations when you have a low-value wire and it might be just as reasonable to send a same-day ACH,” said BofAML’s Henry.
But he cited the $25,000 cap on the size of same-day ACH transactions as a factor that will limit the shift.
“Candidly, there’s not a tremendous volume of wires under $25,000,” Henry said. “And when you think about the use cases for sending a wire and the kind of information and security required to send one, versus the use cases for same-day ACH, I don’t know that we’re going to see a huge cannibalization of the wire business by ACH.” While some companies might use same-day ACH for some payments that otherwise would have been done by wire transfers, wires have two features companies might want that aren’t present in same-day ACH transactions, Burke said: Wires are irrevocable, and they are credited immediately to the account of the party being paid, while same-day ACH transactions will be posted as of the end of the day.
“If you’re sending a [payment] and someone expects to use the proceeds of the wire within that day, the only way to ensure that is to use a wire,” he said.
Things treasurers should keep in mind.
Companies aren’t required to use same-day ACH payments, but they need to be prepared to receive them.
Quibria noted that companies receiving same-day payments “have to be able to recognize the settlement date and accordingly handle the downstream accounts in a timely manner. This can impact their operations.”
To the extent that funds arrive at a company later in the day, it could pose a challenge in terms of investing the money, said Magnus Carlsson, manager of treasury and payments at the Association for Financial Professionals, since money market investing tends to occur earlier in the day. In the current interest-rate environment, that may not be a big concern, since there’s little difference between rates on money market investments and those on bank accounts, but it could become a bigger factor when rates head higher, Carlsson said.
There are also concerns that same-day ACH may facilitate payments fraud.
“The faster payments move, the greater the likelihood there could be a problem,” Burke said. “You need to be aware of that and have the right capabilities and systems in place to monitor that.”
The $25,000 cap on transaction size is a risk management measure, he said. “The audiences that weighed in suggested there should be a limit, and the $25,000 was a level that kept everyone feeling we were doing the right thing. It wasn’t too high, it wasn’t too low, it gave us a starting point.”
But Quibria noted that when it comes to fraud, same-day ACH offers an advantage over wire transfers because wires can’t be reversed.
With same-day ACH, “if it does turn out to be fraud, the unauthorized transaction can actually be returned,” she said. “That’s a huge win and positive in terms of same-day ACH.”
Same-day ACH and the U.S. payments landscape.
Henry noted that same-day ACH is just one of a growing number of payment options for companies. In addition to the traditional methods of checks, wires, and ACH, companies are starting to access the same alias-based payment methods that consumers use to pay others via an email or cell phone number, he said.
“There may be instances where it makes sense to send an ACH payment a few hours earlier, but there are other options—new payment types or ones growing in popularity—that provide more real-time or more data or a better customer experience that we’re excited about and committed to providing to our corporate clients,” Henry said.
Quibria argued that same-day ACH represents progress being made toward faster payments.
“Around the globe, there are many initiatives that have already been implemented and are under way. We really risk falling behind,” she said. “As a nation, we have to remain competitive and to be able to offer various products and solutions, whether it’s to corporate practitioners or consumers.”