The first phase of faster ACH is now underway. This isa big step forward and it’s really encouraging. What’s discouraging is thediscussion about what the service will cost. Same day ACH could be a win forconsumers, business and banks—unless banks decide to overcharge for theservice.
The problem is some banks seem to be approaching this as a premiumservice. US Bank already tried offering same day ACH at $6.95 a pop, and hassince wisely backed off that pricing. The reality is, the ACH system is decadesold and there haven’t been major changes to it since the ‘70s. Over 30countries already have real-time payment systems. In the US, fintechs such asSimple and Venmo have been offering free real time peer-to-peer payments viamobile phone for a few years now.
Even SWIFT, in its white paper on real time payments, notes that thephysical supply chain has gotten much faster, while the financial supply chainhas not. The result is that the movement of funds often takes longer than themovement of goods. In 2016, same day ACH is not a premium service. This is along overdue upgrade banks need to do to simply to meet the expectations oftoday’s consumer.
Weaning businesses off paperIn business payments, there isn’t the sameexpectation of speed. It’s a rare vendor that gets paid instantly. Most of thetime, you get an invoice in, you get it into your system, route it for approvaland then make the payment. It’s typically a 30-day cycle. Speeding up thetransfer of funds by a day or two is a good thing, but it doesn’t have a hugeimpact on this cycle.
But, businesses will still benefit. How much will depend on what bankscharge.
One benefit will be to improve visibility over payments and when theysettle. Payment issues and errors really slow accounts payable down, andresolving them takes up a big chunk of time. Knowing sooner that a payment hassettled—or hasn’t–will speed up the reconciliation process. Fasterreconciliation in turn will help business get a better handle on cash flow andmake more timely and accurate predictions.
The biggest benefit though, for businesses and banks alike, would beweaning businesses off of paper checks.
While consumer payments are a $3 trillion market where customers arealready moving off checks, B2B payments are a $38 trillion market where most USbusinesses still make at least 50 percent of their payments by check.
All that paper processing is costing both banks and businesses a lot ofmoney. Same day ACH could help push the business customer base toward digitalpayments—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 $2thing. It’s an opportunity for banks to cut their own processing costs andimprove customer relationships at the same time.
Wire revenue worries?Banks could be concerned that same day ACH will eat intotheir wire revenue. For a long time, wires were the best way to send moneyinstantly. At $15 – $40 a pop to send a wire, and $15 for receiving one, that’snot something consumers will do unless they have to.
But businesses make a fair number of payments by wire. If they have alarge payment that has to get there overnight, the wire fee looks economicalnext to the potential fines or late fees. Even at $6.95, same day ACH couldcannibalize the B2B wire business.
What it won’t do is cannibalize the current ACH business, or the checkbusiness.
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. Thereality is that after the initial infrastructure upgrade–which, after 40 yearsof no upgrades, is bound to be costly–it probably isn’t going to cost banksmuch more to do a same day ACH than a regular old ACH. If the system allowsthem to go faster, they should deliver it to customers faster. Why hold thatback unless people pay extra?
Banks fiddle while fintechs nibbleI think this something that’s deeplyingrained in the banking DNA: To find more things they can charge for. Somebanks still have online access fees. Who charges for online access anymore?
With fintechs nibbling at the edges of bank margins in just about everyline of business, banks should be thinking about this more as a cost of doingbusiness. Fintechs are already undercutting banks on fees and speed. As soon assome banks offer a low rate for same day ACH, there will be a lot of pressureto follow suit.
Then there’s the specter of a distributed ledger system, which is stilla few years away, but may upend everything. The distributed ledger has thepotential to be instantaneous. That’s another reason banks should be driving tooffer customers the fastest, most transparent, lowest-cost system they can.
Fintechs spend constantly on infrastructure and R&D with theexpress purpose of figuring out how to do things better, faster and cheaperthan banks. Banks’ continued focus on hitting margin targets has left the fieldwide open for them. The banks who do the best in a world of change are going tobe the banks that are willing, when necessary, to cannibalize their ownrevenue, for the good of their customers and ultimately, themselves. These arethe banks that will maintain their customer base and ultimately thrive.Offering a competitive price and helping us all move off paper would be a goodstep in that direction.
Karla Friede is CEO andCo-Founder at Nvoicepay. Friede has 20years of experience in management, finance, and marketing roles in both largeand early stage companies. Along with the founding team, she has grownNvoicepay into the leading B2B Payment Network. Prior to founding Nvoicepay,Friede was President and CEO of Zevez Corporation; VP of Marketing for GeoTrust(acquired by Verisign in 2006); Co-founder of The Ascent Group; Director ofMarketing at Mentor Graphics, and part of the PBAS team at KPMG. Friedereceived an MBA from Harvard Graduate School of Business.