By Patti Murphy
ProScribes Inc.
Does anyone find it disturbing that the automated clearing house (ACH) system is siphoning retail payments from the card networks? I do. The ACH was created 40-plus years ago as a replacement for checks. Credit cards were a relatively new phenomenon at the time, and ATMs had yet to be invented.
Corporations and government agencies began using the ACH for disbursing and collecting routine payments, like direct deposit of payroll and automatic deductions for insurance premiums. In the earliest days, corporate treasury folks and their bankers would initiate payment instructions based upon a veritable alphabet soup of transaction codes; that information got loaded onto giant computer tapes and trucked to a central clearing point.
This went on for decades until, in the 1990s, the Federal Reserve (operator of the largest ACH) decreed all banks clearing payments through the Fed must link electronically to its networks.
The ACH was built as a batch processing network, and by and large, payments cleared through the network settle on a next-day basis. Only recently have there been serious discussions of enhancing the ACH with same-day functionality.
NACHA - The Electronic Payments Association consists of ACH associations, banks and service providers that set the rules and technical requirements for ACH payments. It's not quick, nor is it easy to move new rules and technical changes through any association. And NACHA is no exception.
For example, it took close to a decade for NACHA to develop, test and approve requirements for moving Internet-initiated payments through the ACH, and by that time PayPal Inc. had practically become a household name. Electronic check conversion for clearing through the ACH took almost as long to reach complete fruition. So it's anybody's guess when a recently proposed same-day settlement feature is hammered out and agreed upon by the NACHA membership.
And even if it took less time, same-day is not real-time processing. "It's tough to innovate in an association environment," said payment veteran Richard Crone, Chief Executive Officer of Crone Consulting LLC. Ironically, PayPal had a booth at Payments 2012, NACHA's annual conference, which was held in Baltimore from April 29 to May 2.
I've been attending NACHA's annual payment event for about 20 years. In the early years, those in attendance were mostly bank operations folks. Then for many years, attendance seemed to be dominated by wholesale bankers and their corporate customers. This year card payments were a dominant theme, both in the sessions and on the exhibit floor.
Not that PayPal is necessarily about card payments. PayPal customers can also fund purchases directly from their bank accounts, which PayPal uses the ACH to access. According to published reports, 31 percent of PayPal transactions are routed through the ACH.
And the company has plenty of incentive to drive even more volume through the network since ACH transaction fees substantially undercut credit and debit card interchange.
PayPal reported that it handled $118 billion in payments last year, an increase of 29 percent over 2010 numbers. And the company appears on track for another year of stellar growth with $34 billion in payments during the first quarter of 2012 alone - a 24 percent increase over the first quarter of 2011. PayPal expects to initiate close to $50 billion in ACH items this year.
Those totals may seem like drops in the bucket of overall ACH volume: last year the ACH was used to move $33.91 trillion in payments. Still, it's a heck of a lot of consumer POS spending to clear and settle through a network that wasn't created for credit and debit card payments.
I asked industry consultant Paul Martaus about this. "The ACH was never designed to be an interactive processing alternative," he said, adding that some large retailers have managed to push through custom applications for POS payments, but none like PayPal.
Mobil Oil rolled out a POS debit application in the mid-1980s that cleared payments through the ACH. It was a feature of the company's proprietary credit card. I was a customer. I liked the idea of filling my tank and still having a few days to play around with the money. (It was the 1980s; anyone who could do so played the float.)
But the folks who controlled the ACH at that time were wholesale banking purists. I recall asking a NACHA executive back then why more companies weren't using the ACH for POS payments. He responded that the ACH was "owned" by the wholesale side of banks, and in those days, the walls erected between retail and wholesale bank operations were rock solid.
Eventually, Mobil pulled the plug on its POS debit program. The idea was resurrected in 2008 with introduction of "decoupled debit" cards, but got shot down with implementation of the Durbin Amendment to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act: the Fed's Regulation II implementing the amendment specifically states all decoupled debit card issuers are subject to interchange caps regardless of size.
"The Durbin Amendment took the wind out of the sales of so many decoupled debit programs," Crone said during a recent interview. Although Crone sees opportunities for using the ACH to clear retail payments - especially in terms of mobile payments - he concedes it's not an ideal choice. "The challenge for the ACH is that it's a batch system," he said. And card payment systems operate in real time.
"Every processing segment is moving toward transaction-based processing, line-item processing," Crone added. "The ACH needs to adapt [otherwise] it puts the entire infrastructure at risk."
Then there are the complications that come with getting the NACHA membership to agree to even consider a change of this magnitude. The ACH was not intended as an alternative to the card networks.
It was designed as a replacement to the check clearing house system. And the last time I checked, banks were still exchanging trillions of dollars in checks each year, although much of the paper has been removed from the system thanks to check imaging.
I'd feel better if the ACH remained true to its original purpose.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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