Fast Track

The U.S. Postal Service has gone from Pony Express to airmail to next-day delivery. And there’s always email.

Following a similar progression, Automated Clearing House payments will move one step closer to real time with the introduction in September 2016 of optional same-day credit transactions, to be followed a year later with the same option for debits. Those transactions must be settled by receiving financial institutions in two daily windows (see sidebar on next page for details).

What will this change in the NACHA rules mean for credit unions? In the short term, maybe not much, suggests Linda Coven, senior analyst of Aite Group and author of the report Same Day ACH: It’s About Time, available to Aite Group subscribers.

Ready, Set…

For one thing, Same Day ACH will be optional. For another, it will cost originating financial institutions 5.2 cents per transaction, compared to the 1-cent fee for next-day service, so users will need to justify that premium. Coven suggests that the most likely use for the first-up option of credits, at least immediately, will be employers that miss a payroll deadline—and the direct deposits that arrive in that event will be low-risk transactions for receiving CUs. Companies processing late payrolls are more likely to be able to justify the additional fees for same-day transactions to avoid violating laws requiring that employees have access to their wages on payday, she notes.

While originating same-day ACH will be optional, all CUs must be prepared to receive and process the transactions promptly. “They will need to be reviewed and posted,” Coven says. “For credits, it’s not that big a deal, but when debits start to roll out (in September 2017), that becomes more of an issue for receiving CUs.

“It’s unlikely that they’ll receive so many of them that it will be a big burden, but it does mean they’ll need to take another look at the way they process transactions,” she adds. Employees handling same-day debits will receive them in two batches a day and will have less time for processing than the current schedule allows.

On the debit side, it’s harder to predict the most likely source of same-day ACH transactions. CUs serving small businesses might see an uptick in charges to their accounts. In addition, ACH payments by members for utility bills and gym memberships might also migrate to the same-day window, “but generally, those kinds of payments are scheduled so the likelihood of using a same-day methodology is pretty low,” Coven suggests. “I am not privy to PayPal’s strategy, but expect that if it is seen as a competitive advantage and there is a market demand, they will likely offer this as an alternative.”

To get ready for these changes, she recommends working with vendors handling ACH processing and with operations staff to forecast potential volume and ensure that everyone is planning for the new schedules.

Bill-pay systems at most CUs that employ ACH for this member service will likely continue to go next-day, though down the road some bill-pay providers may offer premium same-day options. It will be interesting to see if there is a demand among consumers willing to pay for this service, Coven says.

“Real time or near-real time is definitely the ultimate goal, but that doesn’t mean it’s appropriate for all payments,” she notes. “There is still, I think, a rational way of doing payments that allows for this less-expensive bulk payment process that we have in place today.”

When Americans are surveyed about their expectations for payment promptness, the results skew toward immediacy, but Coven suggests there might be differences in what people mean by real time and whether they’d pay a premium for real-time funds availability. She cites an example of two friends meeting for lunch. One pays the bill, and the other sends a mobile payment to her friend for her share. Both parties want to know the payment has been authorized, but that doesn’t mean it needs to be settled immediately. Even if it settles overnight, that will likely satisfy their needs and wants.

The parties involved in electronic payment processing are ultimately looking to build out a “payments wizard” that handles best routing of payments based on customers’ specifications about how quickly payments need to be made, she adds. “If it doesn’t need to get there in a couple days, why pay a premium to get it there? And frankly, you may not want it to go any more quickly than it needs to go.”

Exploring the Opportunities

At Corporate One Federal Credit Union, Columbus, Ohio, Lee Butke is advising client credit unions to think about Same Day ACH as an opportunity, not just a compliance issue.

“This is one more tool to add to our payment system, and the one thing I don’t want to see is for other institutions to own this,” says Butke, president/CEO of the $3.8 billion CU and a CUES member. “Why can’t we own it? When does real time become some sort of everyday activity for folks? That’s already happening, and the financial institution is the preferred place for the activity to take place, given its position of trust.”

The move toward faster payments “is a mega trend and it’s happening now,” he maintains. In addition to NACHA’s plans, the Federal Reserve has been a strong advocate for faster, more efficient e-payment systems, as advocated in a January 2015 report, Fed’s Strategies for Improving U.S. Payments Systems.

Real-time electronic payments are already happening in at least 35 countries, including Japan, Mexico, and the United Kingdom, he notes. The UK system, regulated by the Bank of England, has been going strong since 2008 and facilitates such services as the ability to issue small-dollar loan advances in a day and deliver proceeds directly to borrowers’ accounts.

This spring Corporate One FCU was testing the technology for Same Day ACH processing. The corporate CU stands ready to work with credit unions interested in new opportunities, such as quicker member loans and P2P payments, as well as services for business members and SEGs.

“ACH provides the technical foundation to do the types of transactions that are becoming part of our social infrastructure,” Butke says. “The expectation is increasingly for faster, easier payments.”

He cites the example of a small CU serving a newspaper among its SEGs and developing a system to process 15,000 ACH debits monthly in newspaper subscriptions and advertising fees. Another credit union won over the local YMCA as a business member because the CU was able to process membership dues as e-payments, and other CUs serving churches help them collect tithes and offerings via ACH.

CUs will need to be sure they have training, staffing, and scheduling lined up to handle three batches of ACH transactions per day (two for Same Day ACH and one for next day) instead of one, but they should also start planning how to parlay this new payments option in the marketplace.

“We don’t want to be late to the game,” Butke says. “Credit unions were among the first financial institutions to be real-time financial providers. We were unbatched before the banks. And we’ve done a lot of things with technology. Credit unions have proven that we can be innovative as a group if we’re able to work together and take a leadership role.”

Having systems in place with trusted partners for back-office operations frees CUs to pursue business opportunities stemming from e-payment advances, he adds. Driven by those types of opportunities, he expects Same Day ACH to get traction even more quickly than NACHA’s implementation schedule. On the financial institution compliance side, CUs and their business partners could put new processes in place to clear items and serve members more quickly than the NACHA schedule requires.

Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Middleton, Wis.