The first phase of faster ACH is now underway. 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
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 US, 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 white paper 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 to do to simply to meet the expectations of
Weaning businesses off paperIn 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
One benefit will be to improve 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 of 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 US
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.
Wire revenue worries?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 - $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
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?
Banks fiddle while fintechs nibbleI 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.
Karla Friede is CEO and
Co-Founder at Nvoicepay. Friede has 20
years of experience in management, finance, and marketing roles in both large
and early stage companies. Along with the founding team, she has grown
Nvoicepay 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 of
Marketing at Mentor Graphics, and part of the PBAS team at KPMG. Friede
received an MBA from Harvard Graduate School of Business.