Deploying Same Day ACH with Businesses

By William J. Schoch, President & CEO, wespay
Center for Payments Executive Committee Member

In 2020, we watched the continued decline of both cash and checks as preferred payment options. Clearly, the pandemic is impacting payment behaviors, and as we approach the one-year milestone of COVID in the U.S., the data shows an accelerated shift to electronic payments. This is supported by volume growth in a variety of payments networks.

The Zelle network saw 62% transaction growth in 2020, which was largely driven by P2P payments.  Visa reported 2020 debit card volumes in the U.S. that are 9% higher than the comparable 2019 period. Meanwhile, Nacha announced an 8.6% year over year increase in payment volume during 2020. While nearly all electronic channels are demonstrating robust growth, wespay members tell me that check volumes are decreasing by double-digits, and the Fed reported a 10.7% decline in commercial checks during the second quarter of 2020 and a 7.9% decline in the first quarter. This is the largest percentage drop in check volume since 1994.

So how do you plan for the future of payments? Clearly, electronic payment services and digital delivery channels will increase in importance to end-users. Expanding these capabilities will enable financial institutions to meet their business clients today and help prepare for future demands.

The ACH Network, particularly the Same Day ACH (SDA) service, holds significant potential for further innovation with payments. A third SDA window in March 2021 will allow originators more time to prepare ACH transactions. It will enable the participation of more businesses in the Mountain, Pacific, and Hawaiian time zones.

There is a strong business justification to leverage the capabilities of a third SDA window.

Faster Direct Deposit and Direct Payment

The ACH network was first deployed more than 40 years ago and has been a workhorse for recurring disbursements, payroll, and bill payments by providing next-day transaction settlement.  A significant change in 2016 facilitated ACH money movement the same day; however, the early processing schedules favored financial institutions in the eastern U.S. A number of us petitioned Nacha to approve processing schedules more favorable for financial institutions and their customers in the western U.S.

Beginning March 19, 2021, a new processing window will allow financial institutions to send ACH transactions to the Fed as late as 1:45 p.m. Pacific Time (PT) for settlement at 3:00 p.m. PT. This empowers the ACH network for a new set of customer use cases:

• Direct Deposit for hourly, off-cycle, emergency payroll, and termination pay
• Expedited bill payment for past-due or near-due obligations
• Business-to-business payments, such as tax payments and merchant funding for settlement
• Account-to-account transfers for moving funds between accounts at different banks
• Person-to-person payments for gifting and personal commitments

SDA enhancements enable financial institutions to provide their account holders with a wide range of new services. The chart in this section shows the projected use of SDA services in the coming years.

The reasons for SDA adoption are simple. Businesses appreciate ACH payments because of the wide range of use cases that are supported, the lower cost of these payments, and the inherent security of the ACH network. Most businesses send and receive ACH payments today and have developed a high level of trust. Additionally, every financial institution in the U.S. participates, so there are no duplicate processes for in-network and out-of-network participants. Businesses of all sizes value process simplification.

A 2019 survey conducted by the Center for Payments discovered that 75% of financial institutions in the U.S. offer Same Day ACH services to business customers. An earlier study of wespay members showed that only half of the financial institutions in the western U.S. were offering these services. We believe the initial early deadlines for submitting payments to the Federal Reserve and businesses’ inability to comply with these early cut-offs were the key reasons for lower participation rates in the western U.S.

The SDA changes in 2021 and expanded participation across the country are expected to result in service innovation. Same Day ACH supports both debit and credit entries up to a maximum value of $100K per payment.  This dollar threshold can accommodate 97% of all ACH business-to-business payments and a higher percentage of payments in other use cases.

Nationwide, Nacha recognized 39% SDA growth between 2019 and 2020, and nearly 347 million transactions were processed last year. This service has outstanding potential for further growth and customer engagement.

Follow the Trends

So why are faster payments important? Increasingly, consumers and small businesses are turning to non-bank service providers for fast and innovative payment services. A streamlined user experience, trust in the service provider, and surety in funds flow are critical components to a successful solution. 

The emergence of non-bank payment solutions also provides several risks. It not only jeopardizes a bank’s relationship with its business customers, but it also impacts its bottom line through lower balances and reduced fee income. Revenue diversification, especially non-interest income from business accounts, is critical in an extended low-interest-rate economy.

Financial institutions have no shortage of options when it comes to emerging payments solutions. Expansion of ACH origination services by using new Same Day ACH features provide upside potential and aligns with the trends of businesses and consumers.

To learn more about the Center for Payments and its work, contact your payments association.

About the Center for Payments

The Center for Payments is a joint program sponsored by ten payments associations for the purpose of helping members and staff better prepare for the continued evolution in U.S. payment systems. The Center for Payments’ mission is to advance the payments industry as a united voice through market intelligence and thought leadership. Follow us on Twitter and LinkedIn or email info@CenterforPayments.org.