The Role of ACH in Driving Payments Innovation
Over the past 40 years, innovators of all shapes and sizes have used ACH to enable an array of payments opportunities. According to Jan Estep, President and CEO of NACHA, the ACH network has been in a state of continuous change to meet the needs of its end-users. Now, the ACH blueprint, she says, will set the course for the network in the future, as it serves as the “backbone” from which payments can grow. MPD CEO Karen Webster sat down with Estep and Jeff Thorness, CEO of Forte Payment Systems, to understand how ACH is being used today, the impact of same-day ACH on payments innovation, and how ACH measures up to next-gen schemes like Apple Pay.
KW: First, for a little context, NACHA is the enterprise that manages the development, administration and governance of the ACH network in the U.S. Forte Payments provides a variety of payments solutions for businesses including ACH.
Jeff, to start us off, give us your perspective on how innovators, the businesses that you interact with, are using ACH to enable a variety of payments opportunities.
JT: Over the years, we’ve definitely seen a lot of different innovators with their own approach for payment acceptance. But when it comes down to the core of things, ultimately you’re going to have buyers and sellers or merchants, businesses or organizations that need to have a mechanism to fund payments made in a variety of different ways. There really isn’t anything better than the ACH network for facilitating funding. Most credit or debit card activity is ultimately settled to merchants performing the transactions via ACH, and I still think that ACH serves at that backbone – it’s efficient, reliable and just a great mechanism to settle out those funds once that payment activity has taken place.
KW: So Jan, that must be music to your ears. What are you hearing from innovators that are interested in exploring ACH as an opportunity for their innovation?
JE: I really agree with Jeff’s comments. I’d also back up a bit and call out that this year in 2014 we celebrated our 40th anniversary. For individuals who have watched the ACH network over those past 40 years, they know that the network has been in a state of continuous change. It’s been evolving over time to meet the needs of end-users in a lot of different ways.
So you can think about the introduction of check conversion, mobile ACH payments, opt-in programs to support things like QR codes, B2B information, and e-invoicing. All of this has been done with a lot of input from and consultation with the industry, and really meeting the needs of end-users over time.
If we look forward, the other thing that I would call out is that a couple of years ago in 2012 we worked with the industry to layout the ACH blueprint. That will really set the course for the evolution of the network into the future for the next 10 years, calling out that the network can serve as a platform for innovation, with an architecture that provides the backbone of payments that can be built upon and improved over time.
KW: Let’s talk about the blueprint for just a minute. Jan, you and I had a conversation not that long ago about the proposal for same-day ACH. That’s a big initiative for NACHA to really enable enhanced functionality for the network. What impact do you think that will have on innovation in payments?
JE: You’re right in that the work we have now is focused on helping the industry move payments faster via same-day ACH. That functionality will really allow for both clearing and settlement of ACH transactions three times each day. What does that really do for people in the industry? It’s a foundation for innovation. It’s really one example of building blocks that can provide an opportunity for layered functionality.
But what do we really mean by faster payments? Is it validation of good funds, is it official settlement of funds, is it a message telling you that funds are good, or is it the availability of funds in the bank? Jeff said earlier that settlement function as well as the ability to perform a payment as an ACH itself are really good examples of where companies can take that new foundation and determine what they want to do on top of it for more innovative payment services.
KW: So Jeff, what’s your perspective on the broader ACH blueprint that Jan called out and what is currently being proposed around same-day. How do you think that will influence your business and those you have served?
JT: I think that the initiatives that NACHA has laid out have identified the key pain points that really have been challenging innovators, causing roadblocks. There are some creative ways to get around that, but ultimately, if it’s done at a foundational or network level, that is really going to allow ACH to take off from an innovative payment perspective. The real-time settling, or the same-day settling, are absolutely critical elements to expand the viability of ACH well beyond what it is today.
JE: I think the key to the solution in the U.S. will be to have ubiquitous adoption on the receiving side of the ACH network – a mandate that all receiving financial institutions participate so that the originator has the certainty that their payment can get to any account or financial institution. With that, you don’t need the work-around that Jeff referred to. Very often you see innovations occurring – but they’re on-offs because everyone isn’t engaged in supporting is as end-points. That’s a big deal in the U.S. where there are thousands of financial institutions. So we look forward to that because I think it gives everybody the freedom to innovate more fluidly.
JT: I agree with Jan on that. It will be extremely challenging because there are a wide variety of capabilities within those thousands of financial institutions that are part of the network, but ultimately the key to success is that ubiquitous adoption.
KW: Well, I think ubiquity is critical. As we’ve seen, without it, not only do you have work-arounds that introduce friction, but it’s very hard to ignite solutions where consumers or businesses don’t have certainty that whatever it is they’re asked to do isn’t something they’ll be consistently asked to support.
Another innovation that’s been part of the payments conversation these days is Apple Pay. It’s raised the decibel level about mobile payments and its ignition, not only in the U.S. but also around the world. I’m curious to get your perspective on conversations you may have had with your stakeholders about the interest in embracing ACH as an alternative.
JE: I do think it’s interesting to look at Apple Pay because it offers a unique option for end-users that actually embraces traditional payments. So the payment itself is not new, but the user interface and services around it are new. That excitement really solidifies the next generation looking for that simple, fast, frictionless use of payment interfaces.
Putting that within the context of the ACH network, again, we have a foundation that allows people to innovate on top of it. You see the same thing – traditional payments with different interfaces, allowing you to meet the evolving needs of customers of any size and type.
JT: I agree. The Apple Pay platform is really nice in that it does embrace the existing infrastructure and players within the marketplace that provides the innovation on top of that, that could be opened up to support other solutions such as ACH. One of the key things for ACH adoption in a more mobile or e-commerce type environment is to be able to have that information stored within a wallet such as Apple Pay. That will really be a critical component.
KW: Speaking of critical components, let’s talk about authentication using the ACH network. Does that introduce friction today, and if it does, what has to happen to overcome it? If it doesn’t, perhaps you can clear up misperceptions about authentication in the ACH network as a friction point?
JE: That’s a question I’ve thought a lot about in my career, moving from cards to ATMs to merchant acquiring to the ACH network. It’s important to distinguish terminology, and also to differentiate an authorization from authentication, then perhaps to distinguish what’s needed for an ACH debit versus an ACH credit.
Thinking about authorization first, it’s really given in different ways, but the purpose is always the same. An individual has to authorize a payment to be made – and that’s especially important with ACH debits. There, someone is saying it’s OK to take money from my account and I give you the authorization to do that.
Within the ACH network, we have a tremendous rule set around authorization of debit payments. The result is an unauthorized return rate that’s actually lower than cards’. With that said, ACH authorizations will continue to evolve as the network evolves.
Let’s separate that from authentication. In this case, the purpose is to ensure that the person making the payment is who they say they are. In the ACH network, online banking, or maybe a treasury management portal, does authentication. For an ACH credit, that’s really important because the authentication of the person moving their own money out of their account to make a payment is critical. So good authentication isn’t really within the ACH network, it’s within those processes and portals in place before you initiate a payment. So today, and in the future, I think authentication has to be done very effectively and securely. Again, it’s those layers of functionality on top of the network that allow people to innovate and secure innovators transactions as they evolve over time.
JT: I think authentication is one of the biggest challenges we see as an ACH provider today. We have a variety of different merchants that use the system, whether it be for disbursing funds to employees or performing other types of payroll, commissions, and more, as well as setting up automatic debit. It’s really critical to have that ability to verify that you’re sending the funds to or collecting them from truly belongs to the organizations or individuals performing the transactions. There’s definitely a lot of room for innovation there – there’s a wide variety of approaches that can be taken to perform that authentication.
KW: Let’s talk about the opportunity on the enterprise payments side. We’ve spoken about the retail payments side, but we all acknowledge that there’s a tremendous amount of opportunity on the side of the industry where businesses are enabling payments to one another. Jeff, what kinds of opportunities do you see and how are the businesses that you serve using ACH to more effectively streamline that process?
JT: I think enterprise is one of the areas that is prime for ACH to solve for today. There are still a ton of paper checks in the system today, and many of them are between businesses. They are buyer-seller type arrangements where they are using paper checks to fulfill those payments. ACH is the logical choice to replace paper checks for those types of transactions. It is successful today, but that ubiquitous adoption across all businesses hasn’t taken place yet – there are strides being made to get there.
KW: Will same-day make that opportunity more appealing?
JT: Generally speaking, when a buyer is disbursing funds to the supplier, that normally can happen very quickly. I don’t know that that’s such a critical component to it – it’s definitely helpful, but not as critical as some of the other use cases for same-day.
KW: Jan, how do you view the opportunity on the enterprise payments side with respect to leveraging ACH?
JE: I agree with Jeff that B2B payments continue to be a significant opportunity for the ACH network. Part of what a lot of people don’t understand is that the capability of the ACH network to send remittance information directly with the payment has existed since the 1980s. Since then, companies have been able to benefit from the option of straight-through processing – remittance information and invoices right with the payment. That’s of great benefit.
I think adding the same-day ACH capability to that existing ability to move information with the payment will be a choice that businesses will appreciate. No one is saying that every payment needs to go same-day, but delivering that payment on the day that it’s needed or perhaps on the last day a payment is due provides a great option for businesses.