Following the Federal Reserve’s announcement that it will create a real-time payment network named FedNow, it became clear that there were misconceptions about how faster payments impact the speed with which people receive their paychecks.
Faster payments does not mean payday will come earlier or that paper checks will clear in an instant. This belief was refuted in not one, but two PaymentsJournal articles by Sarah Grotta, director of Debit and Alternative Products Advisory Service at Mercator Advisory Group.
But it is important to make the distinction that not all paydays are created equal. With direct deposit, your money is available faster than with a paper paycheck. And there is a significant distinction between a “paycheck” which arrives electronically via direct deposit for 93% of American workers and a “paper” paycheck, which may take days to clear.
To understand where the misconception comes from and why it is wrong, PaymentsJournal sat down with Bill Sullivan, the senior director and group manager of Government and Industry Relations at Nacha, and Bill Dunn, the director of Government Relations at the American Payroll Association (APA).
During the conversation, Sullivan and Dunn also dispelled other misconceptions around direct deposit and Same Day ACH, which is Nacha’s faster payments solution.
“No one complains that their direct deposits didn’t arrive on time”
Sullivan explained the root of the misconception was the belief that “the current pay system in the United States has a negative impact on those in our country that live paycheck to paycheck.” While he granted that living paycheck to paycheck is exceedingly difficult, the current payment system is not making it worse.
Since people believe that the current system is flawed, there’s the erroneous belief that the creation of faster payment rails will result in people getting paid faster. However, Sullivan pointed out this was simply not true.
If an employee is slated to get paid on the 15th of the month, they will get paid then regardless of which rail is used, he said.
Sullivan traces the origin of the misconception to a recent Senate bill that urged the Federal Reserve to create FedNow. In the bill’s talking points, it called out how too many Americans are paying expensive fees because their paychecks are taking days to clear. According to Sullivan, the problem is that the talking points made no distinction between direct deposit and a paper paycheck.
Dunn agreed, noting that almost no one complains that their direct deposits didn’t arrive on time. He pointed out that APA surveys consistently show that over 90% of employees use direct deposit via ACH. This means that a switch to real-time payment rails won’t make them get paid faster.
While payday wouldn’t come sooner, Dunn did say that the push for real-time payments would benefit companies trying to move away from paper checks, as there would be faster settlement of B2B payments. But he said this would benefit the accounts payable and accounts receivable departments, not payroll.
Some background on the ACH Network
To alleviate any confusion about the ACH Network, Bill Sullivan of Nacha offered some details on how the Network operates, explaining that the Network is open for processing for just over 23 hours every business day.
“Files can be submitted to an ACH operator, which would be the Federal Reserve or The Clearing House until 2:15 a.m. Eastern Time for settlement at 8:30 a.m. Eastern Time that same day,” he said. However, the Network can only settle payments when the Federal Reserve Settlement service is open, which is between 7:30 a.m. and 5:30 p.m Eastern Time.
Since this limits the Network, Nacha has worked with others in the industry to encourage the Fed to extend its settlement hours.
Despite the Federal Reserve Settlement service restrictions on when settlements can occur, Dunn asserted that ACH payments still clear very quickly, especially when it comes to normal payroll.
He said that Same Day ACH would be helpful in times of emergency, when making a quick payment is necessary, a fact the Fed highlighted when it made the FedNow announcement. For example, 10 states have laws mandating that when an employee is terminated, they must receive their last paycheck by the end of the day.
In these situations, it’s often hard for companies to cut a paper check for the employee by the end of the day. Same Day ACH makes it easier, because most employees are already set up for direct deposit. The company simply needs to make the payment along the faster rail.
“The ACH Network is thriving”
As Sullivan mentioned at the beginning of the interview, many people have the faulty belief that there’s something wrong with the current payment system in the U.S., and that it’s somehow outdated and ineffective.
When it comes to the ACH Network, the data proves otherwise.
“The ACH Network is thriving,” said Sullivan. In 2018, there were over 23 billion transactions, totaling over $51 trillion in combined value. These numbers are the continuation of steady growth: the volume of ACH transactions has increased by 1 billion each year for the past four years.
As the numbers show, the ACH Network continues to grow and evolve, said Sullivan. He explained how the Network has added new capabilities and transaction types, improved processing speed, and expanded operating hours.
Dunn agreed that more people are turning to ACH. “Overall, we are absolutely seeing employees move away from paper checks and into direct deposit via ACH,” he said.
Same Day ACH has also witnessed remarkable growth. Between the second quarter of 2018 and the second quarter of 2019, Same Day ACH volume grew by 46%.
Getting paid by check is more expensive than ACH
Another misconception about direct deposits through ACH is that it costs the consumer money. Sullivan promptly refuted this idea.
“Banks, credit unions, and employers do not charge employees to receive a direct deposit to a bank account,” he said. He cited a 2016 study that found that 95% of Americans who receive direct deposit via the ACH Network are happy with it. A major part of favorability is that there is no associated fee with getting paid this way.
Dunn said that while it can be difficult to calculate the cost of individual transactions due to economies of scale (companies often make payments in large batches, thereby securing cheaper rates), it is clear that getting paid by check is more expensive, for both employer and employee.
It costs employers far more to write and mail checks than making payments electronically. And if an employee loses a physical paycheck, it can cost the employer up to $20 to replace it, according to an APA study.
Given that the ACH Network is thriving, and millions of employees are happily receiving direct deposits through it each month, any misconceptions around the Network are easily dismantled.