By Brandes Elitch
CrossCheck Inc.
In "Critical issues in payments today – Part 1," The Green Sheet, Sept. 26, 2016, issue 16:09:02, I mentioned that you can't read an article on the web without seeing breathless commentary about how "disruptors are changing everything" in payments, but just like the harvest in Sonoma County's Wine County, the most essential activities aren't always so obvious.
In that article, I discussed the first two of four such issues: disruption of the banks by fintech companies, the extent of which has been exaggerated by some, and mobile transaction security, which is of great concern to consumers and payment providers alike. In this article, I'll discuss the remaining two topics: the push to bring the Durbin cap to credit card fees and same-day automated clearing house (ACH) payments.
In June 2016, a federal appeals court threw out a $7.25 billion antitrust settlement reached by Visa Inc. and Mastercard with millions of retailers. U.S. District Court Judge John Gleeson of the Eastern District of New York in Brooklyn had approved the settlement in December 2013. The merchants alleged that the card brands were improperly fixing both credit and debit card fees.
Interestingly, at least 8,000 retailers opted out of the original settlement because they felt it was inadequate. Aside from the very largest retailers, such as Amazon.com Inc., Costco Wholesale Corp. and Wal-Mart Stores Inc., the National Retail Federation was also involved.
The NRF stated that retailers pay about $60 billion annually in debit and credit "swipe" fees, which typically average around 2 to 2.5 percent. Just to put this in perspective: the average for-profit business makes about a 16 percent net profit. Many very large enterprises, such as grocery stores and hospitals, generate as little as a 2 percent profit, so paying 2 percent to clear an all-electronic transaction is not appealing to them.
A report from CMS Payments Intelligence Ltd., a U.K. based consultancy, indicated that capping credit card interchange at 22 cents plus 30.5 basis points per transaction could cut $15 billion from the total of $33 billion that U.S. merchants pay in credit card interchange today.
CMS arrived at the $15 billion figure by using the Durbin framework devised under the Durbin Amendment to the 2010 Dodd-Frank Act, which caps debit interchange at 22 cents and 0.05 percent per transaction for issuers that have over $10 billion in assets. CMS estimated that Durbin has eliminated $8 billion in debit interchange fees.
To date, nobody has developed a meaningful alternative to the card brands' interchange-based platform, but there are dozens of fintechs focused on that very thing. You can bet that as soon as a large retailer such as CVS Health or Walgreen Co. decides to implement a test program (as they did with decoupled debit before a major bank pulled the plug on that), there will be intense interest from other top 200 retailers, which will eventually lead to a critical mass – in my opinion.
The ACH system is a batch, store-and-forward, next-business-day settlement framework designed for bulk processing of high volumes of small-dollar payments. It was never designed for POS, single transactions or high-dollar transactions. Its primary success story is direct deposit of payroll and, of course, many government entitlement programs pay via an ACH credit.
Unlike checks, which are governed by the Uniform Commercial Code, the ACH is governed by the rules and regulations of the National Automated Clearing House Association, a trade association governed (practically speaking) by the large originating banks.
NACHA – The Electronic Payments Association tried its hand in the ISO space, with the idea of converting checks to ACH payments at the POS. This was a failure in the marketplace. Then there was a do-over, back-office conversion, which never met with much success either. When Check 21 came along, there was no reason to convert checks to ACH. Now you could run a check through an imager and send the image to your reconverting bank, and it would clear the next business day, the same as an ACH transaction. Since it was all digital, it didn't cost any more than an ACH payment either.
Now NACHA is trying another approach: same-day ACH. However, it is taking a phased approach, to be implemented over three years. In the first iteration, a bank receiving a request for a same-day payment just has to have the payment ready to be posted by 5 p.m. local time. Of course, from a practical standpoint, this is really a next-day payment. Moreover, banks have never really figured out how to perform rigorous risk management around ACH transactions, which is why any high-dollar transfer that must have finality of payment today is run on the rails of the Federal Reserve's wire transfer system.
This is a moot point, because of a consolidation of efforts by the largest banks, including Bank of America Corp., BB&T Corp., Capital One Corp., JPMorgan Chase & Co., U.S. Bancorp and Wells Fargo & Co.. Collectively, these banks own something called ClearXchange, which is akin to a digital clearing house for its members. Coincidentally, they also own a business called Early Warning Services LLC, which shares information between the banks about closed accounts, NSF's, etc. on a next-business-day basis. Early Warning developed programs that provide risk, fraud detection and authorization parameters, which are very useful if you want to cash a high-dollar check right now. In August 2016, Early Warning rebranded ClearXchange as Zelle, as a peer-to-peer (P2P) payment service with same-day settlement.
Of course, the same banks that own Zelle are board members at NACHA, but they decided to build a clearing house themselves, since combined, these banks must have at least 75 percent of all the demand deposit accounts in the country. This might work well for small-dollar P2P payments, but don't count on it for commercial transactions of any magnitude, at least not anytime soon.
So there you have it: the last two of four not so obvious changes going on now in the payments system. 
Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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