The first phase of faster ACH payments rolls out September 23. This is a big step forward and it’s really encouraging. What’s discouraging is the discussion about what the service will cost. Same-day ACH could be a win for consumers, business and banks—unless banks decide to overcharge for the service.
The problem is some banks seem to be approaching this as a premium service. US Bank already tried offering same-day ACH at $6.95 a pop, and has since wisely backed off that pricing. The reality is, the ACH system is decades old and there haven't been major changes to it since the ‘70s. Over 30 countries already have real-time payment systems. In the U.S., fintechs such as Simple and Venmo have been offering free real-time peer-to-peer payments via mobile phone for a few years now.
Even SWIFT, in its whitepaper on real-time payments, notes that the physical supply chain has gotten much faster, while the financial supply chain has not. The result is that the movement of funds often takes longer than the movement of goods. In 2016, same day ACH is not a premium service. This is a long overdue upgrade banks need simply to meet the expectations of today’s consumer.
In business payments, there isn’t the same expectation of speed. It’s a rare vendor that gets paid instantly. Most of the time, you get an invoice in, you get it into your system, route it for approval and then make the payment. It’s typically a 30-day cycle. Speeding up the transfer of funds by a day or two is a good thing, but it doesn’t have a huge impact on this cycle.
But, businesses will still benefit. How much will depend on what banks charge.
One benefit will be improved visibility over payments and when they settle. Payment issues and errors really slow accounts payable down, and resolving them takes up a big chunk of time. Knowing sooner that a payment has settled—or hasn’t—will speed up the reconciliation process. Faster reconciliation in turn will help business get a better handle on cash flow and make more timely and accurate predictions.
The biggest benefit though, for businesses and banks alike, would be weaning businesses off paper checks.
While consumer payments are a $3 trillion market where customers are already moving off checks, B2B payments are a $38 trillion market where most U.S. businesses still make at least 50 percent of their payments by check.
All that paper processing is costing both banks and businesses a lot of money. Same day ACH could help push the business customer base toward digital payments—but not if they cost ten or twenty times as much as a regular ACH payment, which is between 20 and 50 cents. This is not a $6.95 thing. It’s not even a $2 thing. It’s an opportunity for banks to cut their own processing costs and improve customer relationships at the same time.
Banks could be concerned that same day ACH will eat into their wire revenue. For a long time, wires were the best way to send money instantly. At $15 to $40 a pop to send a wire, and $15 for receiving one, that’s not something consumers will do unless they have to.
But businesses make a fair number of payments by wire. If they have a large payment that has to get there overnight, the wire fee looks economical next to the potential fines or late fees. Even at $6.95, same day ACH could cannibalize the B2B wire business.
What it won’t do is cannibalize the current ACH business, or the check business.
Banks’ position seems to be that this represents a massive expenditure, and not only does somebody have to pay for it, the bank needs to profit. The reality is that after the initial infrastructure upgrade—which, after 40 years of no upgrades, is bound to be costly—it probably isn’t going to cost banks much more to do a same day ACH than a regular old ACH. If the system allows them to go faster, they should deliver it to customers faster. Why hold that back unless people pay extra?
I think this something that’s deeply ingrained in the banking DNA: To find more things they can charge for. Some banks still have online access fees. Who charges for online access anymore?
With fintechs nibbling at the edges of bank margins in just about every line of business, banks should be thinking about this more as a cost of doing business. Fintechs are already undercutting banks on fees and speed. As soon as some banks offer a low rate for same day ACH, there will be a lot of pressure to follow suit.
Then there’s the specter of a distributed ledger system, which is still a few years away, but may upend everything. The distributed ledger has the potential to be instantaneous. That’s another reason banks should be driving to offer customers the fastest, most transparent, lowest-cost system they can.
Fintechs spend constantly on infrastructure and R&D with the express purpose of figuring out how to do things better, faster and cheaper than banks. Banks’ continued focus on hitting margin targets has left the field wide open for them. The banks who do the best in a world of change are going to be the banks that are willing, when necessary, to cannibalize their own revenue, for the good of their customers and ultimately, themselves. These are the banks that will maintain their customer base and ultimately thrive. Offering a competitive price and helping us all move off paper would be a good step in that direction.