The world seems to have it out for ACH, with lots of talk about replacement tech like Real-Time Payments (RTP) and the use of crypto solutions as an alternative for financial transfers, but ACH isn’t all bad. It’s overwhelming coverage and low cost will likely keep it in use for years to come.
In Q3 of 2021 in the US, there was $18.1 trillion transferred via ACH. More interesting than the sheer volume is that volume across the ACH network seems to be growing at a solid clip, nearly 18.7% year-over-year. So despite more alternative methods for financial transfers than ever, why is a nearly 50-year-old technology so prevalent and growing in popularity?
The good:
Coverage – Unlike some of the newer technologies like RTP, almost every bank in the US system is accessible via ACH. If you are sending a significant amount of transfers, knowing that more banks are available to receive an ACH is a huge process win.
So cheap – At the moment, there is no cheaper way of moving funds between two accounts than via ACH – and it’s not even close. If you need to move $1,000 and you want to do that via wire, that would be an extra $35 fee. Instant cash out to your debit card? $15. If you have an extremely tech-forward bank you might be able to create a transfer involving a USD to ETH to USD transfer but the “gas fees” are quite real. ACH wins on price.
The less good:
Fraud – The amount of fraud on the ACH platform is non-trivial. In 2021, losses due to fraud in the ACH network exceeded $55B overall. The opportunities for fraud stem from the exploitation of two components of the ACH system: 1) settlement timing, and 2) chargebacks.
Kinda slow – Nearly every experience has been altered through digitization: you can book a flight instantly from your phone or order a movie from an endless database of content and watch it instantly. All of this and yet money, primarily traveling on ACH, can still take days.
I won’t make excuses for the shortcomings of ACH, but I do think that many of them stem from the implementation of the transfer technology and not the technology itself. Moreover, I think that addressing these shortcomings in the near term can unlock faster transfers for more consumers than RTP can in the same time frame.
ACH is a rail and not a full-stack solution. As a financial transfer technology, ACH is actually quite powerful – letting you move large amounts of money between financial institutions with very little friction, but developers can end up in trouble if they view ACH as a complete solution. Although you can clear large sums of money for very little expense between almost any two U.S. accounts, all of the risks associated with confirming account ownership, problems with available funds, return codes, and transfer failures all fall to the developers to reconcile, on an almost daily basis.
It’s not just enough to integrate an ACH API into your platform and begin to move money. You need to build all of the components for account verification, balance checking, and return code risk mitigation if you don’t want to find yourself with mounting losses due to failed or fraudulent transactions. The opportunity presented then is to acknowledge the shortcomings of ACH and package the other components that are needed for a successful transfer process around the technology. As a result, you can have a ubiquitous transfer protocol, capable of handling large transfer amounts between almost any account with the low risks associated with other transfer types, like debit.
The early part of my career was spent in two very different arenas – asset management and aerospace. On the surface, it seems like they couldn’t be less similar, but where both were completely aligned was risk. No one wants to fly on a plane with risky design features or technologies, and no one wants to bank at an institution with faulty infrastructure. That’s why planes have looked nearly the same for 70 years and banks use software from the early 2000’s and verify wire requests by matching signatures sent by FAX to those on card files.
Risk is bad for everyone – new things can break and are therefore risky, until proven otherwise. Recently, we have seen some advancements in aerospace with faster airframes and new propulsion technologies, and over at banks a steady hum about new asset classes, adoption of new protocols like RTP, and the importance of embracing crypto and or DeFi in some capacity. But, nothing beats tried and true technology, and in finance, the technology of transfers is ACH.
ACH volumes will keep growing. The usage of wire transfers will fall. And the technologies that make ACH into the powerful, fully-functioned payment solution that it can be, will get bigger and better.
Long live ACH.
