Tech Talk – Independant Community Bankers of America
By Patricia A. Murphy
For years, bankers have been pushing the automated clearinghouse (ACH) as an alternative to paper-based debit payments, like checks. Today some ACH mavens are pushing to change that business model. Rather than « pulling » debits from paying banks to payee banks (as is the case with many ACH transactions today), these folks say it’s time to start thinking in terms of « pushing » credit payments through the ACH network.
« We really think that trying to leverage the ACH credit functionality makes sense, » says Mike Herd, a spokesman for NACHA-the Electronic Payments Association.
Driving home this point, NACHA next year will launch what it is calling a « proof of concept pilot. » Four banks, including community bank participant, $680 million-asset Gardiner Savings Institution, FSB in Maine, have signed on for NACHA’s planned credit push pilot, according to Herd. The pilot is expected to provide insight s on the business case and technology requirements for sending more credit transactions across the ACH, especially consumer-initiated credit payments.
The ACH is a low-cost, batch processing system that supports the « electronification » of routine payments. In its earliest years, the ACH was seen as a way to electronically handle recurring check transactions, like direct deposit of payroll and direct payment of bills. Over the last several years, however, there’s been growing interest in migrating non-recurring payments to the ACH, including consumer transactions initiated at the point of purchase (in person and via the Internet).
NACHA, which provides the rules structure for the ACH, has created operating rules to support consumer-initiated debits for both face-to-face and Internet transactions. While these applications have gained traction-growing at double-and triple-digit rates year to year, according to NACHA’s data – total transactions remain but a small fraction of bank card totals.
The planned pilot is not NACHA’s first attempt at promoting the idea of ACH credit push. Several years ago the group launched a program it called Project Action (for ACH Credits Initiated Online), but that project never really took off. Proponents say Project Action galvanized support for consumer-initiated ACH credits, but not enough to support wide-scale implementation. Now, with consumer acceptance of online banking growing, they believe the market is in a better position to adopt ACH credit push.
Weeding Out Fraud
Adding to the demand is growing concern over Web-based payments fraud. Last year, for example, nearly half a million ACH debit payments initiated via the Internet were returned as unauthorized, according to industry data.
Using the Internet as a payments network poses its own unique challenges to banks as well as customers. For starters, the underlying rules and technologies supporting the ACH differ quite a bit from those that support credit and debit card networks. What’s more, because the ACH historically has been seen as a vehicle for low-risk recurring payments where payers and payees have established relationships, it hasn’t yet developed the kind of technologies, procedures and rules that support card payments and defend against fraud.
In the ACH world, for example, consumers have 60 days from the date of settlement to return a debit they claim was unauthorized. Also, because ACH transactions settle in batches, it can take several days for a bank originating a transaction and its customer to learn that the paying bank has returned a transaction. As a result, a criminal can conduct numerous fraudulent ACH debits before any of the merchants or banks involved catch wind of the frauds.
There are other problems, too, such as the lack of a standardized account number structure that might help merchants and banks authorize transactions (and identify potential frauds) in a timely manner.
Perhaps even more critically, merchants and their banks are heavily invested in the credit and debit card networks, and some bankers fear ACH credit push could diminish the value their card products bring to the Internet marketplace. This could be perceived as a huge threat to that brand loyalty.
« As e-commerce has grown over the last five to six years, Internet retailers have gained a significant amount of experience managing Internet payments using credit and offline debit cards, » explained NACHA’s Internet Council in an Internet payments primer released last year. « Even the most sophisticated Internet retailers, however, have relatively little experience managing the specific risks associated with Internet ACH payments. »
Ready for Primetime?
Software vendors are taking notice of this situation and developing solutions they say can bridge the gaps in fraud-prevention functionality and keep banks in the Internet payment loop. One idea is to build electronic bridges to online banking systems.
« Online banking systems already have the functionality, » notes Patrick Rioux, president and CEO of Othentik Technologies in Montreal. « We are just bringing this to the merchant. »
Othentik has developed what it describes as a « unique procedure » that allows Web shoppers to, in effect, hyperlink to their account-holding banks to initiate ACH payments without ever having to share private financial information with Internet merchants. Rioux says his firm has seen a lot of interest in the United States for the product, which it calls HyperPayment.
Some experts caution, however, that banks would be better served by focusing more on internal applications for credit push, like consumer bill pay and intra-bank account transfers, rather than taking ACH credit push to the Internet marketplace.
« I think [paying Internet merchant s] is a big leap, » says George Thomas, president of the Electronic Payments Network, a privately operated ACH network. « Eventually, we’ll probably get to that, but starting off with generic bill pay would be a lot simpler. »
Thomas ticks off a list of credit push transactions that consumers should be able to initiate using either a bank’s online banking system, or its ATM or telephone banking platforms. These include:
- Transfers between accounts at the same institution;
- Transfers to a customer’s account at another institution;
- Transfers to stock and mutual fund accounts;
- Transferring funds to accounts of other family members held either at the same bank or an external institution;
- Person-to-person payments; and
- Paying any bill electronically.
« It eliminates a lot of the risks that are inherent in ACH debit transactions, » says Thomas. « It also creates revenue opportunities for financial institutions. » And it keeps banks in the payments loop, explains Cary Whaley, ICBA associate director for payments policy. « Community banks are intrigued by credit push because it positions the consumer’s bank firmly in the center of the transaction, » he says.
Looking ahead, Thomas foresees a scenario in which banks provide consumer payments services using a business model akin to the express package delivery market, where pricing reflects the speed of delivery. Wire transfers, with real-time functionality, would be the highest priced option, followed by ACH payments, while next-day payment might be the lowest-priced option.
Between these extremes, Thomas suggests banks could develop an option that uses existing retail EFT networks, like Star or Pulse. Banks also will need to modify systems to accommodate the matching of customer accounts to Internet identifiers (such as e-mail addresses).
The NACHA pilot is expected t o help banks get a better grip on what changes will be necessitated by consumers using the ACH to initiate credit payments through bank Web sites. The pilot will run in parallel to the ACH network, with participating banks entering into bilateral exchange agreements. If the pilot proves successful, NACHA could create a special council to pursue rulemaking and consumer acceptance issues, explains Herd.
Thomas doesn’t expect much consumer resistance to the ACH credit push concept. « The consumer doesn’t care what railroad tracks a payment is sent over, » he says. « The consumer won’t view this any differently than they do mailing a package. If they need the payment there tomorrow they’ll pay accordingly. »
Patricia Murphy is a free-lance writer in Meyersville, Md., who specializes in payments and technology