s the automated clearing house a mature payment system? Does the future hold sustainable growth in ACH payments, particularly for retail transactions like POS and Internet payments?

Will ACH payments ever eclipse check writing? Or more to the point, is it in the best interests of the marketplace, and the overall U.S. economy, to eliminate paper checks?

These are questions that came to mind this spring while attending Payments 2006, the annual conference put on by NACHA - The Electronic Payments Association.

In my mind's eye, the answer to the first question came through as a resounding yes when NACHA's president and Chief Executive Officer, Elliott McEntee announced to a packed opening session that NACHA would collect per-transaction and annual fees from financial institutions using the ACH: The news didn't register a blip on the industry's radar screen; and as of mid-June, I couldn't locate a single mention of the new fees in the trade press or elsewhere, even with extensive Internet searching.

Contrast this to what happened about 10 years ago, when ATM owners began assessing convenience fees (surcharges) on certain transactions. Consumers and executives at many small financial institutions cried foul, and the pricing decision was even visited briefly by Congress. Today, of course, surcharges are a critical revenue stream for banks and nonbanks, alike. ATMs are a mature market.

Or rerun the hue and cry that ensued more than a decade ago, when the Federal Reserve (then the primary processor of ACH payments) announced something akin to a surcharge for its ACH processing work.

If a mature payment system is one in which new fees can be adopted and nobody seems to care, the ACH has reached that pinnacle. However, the jury is still out on whether the ACH can grow its retail payments load, or if the ACH will ever supplant the check system.

Modest pricing

The new ACH fees, effective January 1, 2007, seem modest: $0.0001 per transaction; the annual fee assessed financial institutions hasn't been cast in concrete, but NACHA spokesman Mike Herd said it will probably be set at $40 to $45 a year. Monies collected, Herd said, will be used to fund NACHA's functions as rule-making body and administrator of the ACH network.

Historically, NACHA's operating budget has been funded by assessments on members. Industry consolidation, however, has rendered that funding mechanism ineffective. At the peak of membership, NACHA counted as members about three dozen ACH associations, including many large banks that had enough ACH business to warrant individual NACHA memberships. Now there are just 19 regional ACH associations, each made up of hundreds (in some cases thousands) of individual financial institutions.

(Visa operated an ACH association, and for a time was the only alternative to clearing ACH items through the Fed; it bailed out of the business in the late 1990s.)

ACH versus checks versus cards

It's been more than 30 years since a group of bankers and Federal Reserve officials began collaborating on a new payment mechanism (the ACH) that would eliminate the costly and redundant processes associated with clearing paper checks. Since that time, the ACH has enabled banks to migrate billions of checks to electronic payments.

Yet, billions more checks continue to be tendered as payment for goods and services every year by consumers and businesses alike. Just over 34 billion last year, by most estimates. Plus, banks continue to invest in check technologies and processes (like imaging and remote deposit capture) that make it easier, faster and cheaper to clear check payments than previously imagined. Celent LLC, a Boston-based research and advisory firm, estimates that U.S. banks spent more than $900 million last year on technologies just to support check image exchange.

Last year, about 1 billion checks were cleared through the banking system as electronic check files, using a process known as check image exchange. Collected data suggests that many of these are large-dollar (presumably business) transactions.

Nearly 14 billion payments cleared and settled through the ACH in 2005. That represented a 17.4% increase over 2004 and twice as many payments as ran through the ACH in 2000, according to NACHA.

ARC transactions (consumer remittance checks that get converted to ACH payments by billers or their agents) accounted for 2.15 billion in ACH volume last year, or about 47% of total ACH transaction growth for the year, NACHA said.

An additional 1.34 billion ACH payments were initiated via the Internet; NACHA estimates that about 80% of these were initiated by consumers using online bill-pay services. With nearly one in four ACH transactions tied to consumer bill payments, the ACH clearly has played a pivotal role in moving the paper-laden world of consumer payments to EFT. (Business transactions, however, have been slow to migrate. Only 2 billion business-to-business payments went through the ACH last year, according to NACHA.)

Now NACHA has set its sights on a relatively new consumer market: Internet-based payments. A pilot set to begin early next year will test using the ACH to authenticate and initiate consumer online purchases via their financial institutions.

These, of course, aren't payments typically made by check. Credit cards are tops among consumers who shop online: At least 85% of online purchases are credit card transactions. But many consumers are leery of using the Internet to exchange payments. Boston-based JupiterResearch estimates that just 65% of Internet surfers made online purchases last year, and nearly 59% of Internet surfers who don't shop online are concerned about credit card and related frauds.

A Harris Interactive survey sponsored by MasterCard International last fall found 49% of American consumers believe their personal financial information is most vulnerable when transmitted online.

In the NACHA pilot - as demonstrated at Payments 2006 - consumers choosing this as yet unnamed payment method at a participating Web site get redirected, via a secure network, to their financial institutions' online banking sites, where they log in using established procedures. Once there, the consumers confirm transaction details and authorize payment.

No personal financial information is ever sent to or stored by the merchant. Clearly, this new online method has merit. Consumers will like the added security. Merchants also may like it, but that will depend on pricing. NACHA has said it plans to assess interchange once the new online payment method goes live (probably some time in 2008).