The implementation of same-day Automated Clearing House (ACH) transactions has been getting a good amount of media attention lately. In a letter to NACHA (the Electronic Payments Association) on February 4, the American Bankers Association expressed their support for a proposal to implement same-day ACH transactions. ABA believes that widespread adoption of same-day ACH transactions represents a fundamental step to promote faster payments across the entire industry, as it would level the competitive playing field for all financial institutions while allowing account holders to benefit from expedited settlement.
Initial reaction has been that same-day settlement will pinpoint fraud more rapidly and as a result, customers will be alerted quicker. While part of this is true, there is major work to be done to pinpoint fraud faster.
Same-day clearing provides a small window of opportunity to stop or reverse payments once authorized and completed. Processing transitions in near real-time, instead of batch processing, will require effective near real-time fraud detection methods and credit checking to ensure that appropriate funds are available. Decisions on whether a transaction is legitimate or fraudulent will have to be made extremely quickly.
Some large banks have already implemented same-day ACH. In September, Bank of America Merrill Lynch launched Digital Disbursements, which uses a proprietary electronic payment system called clearXchange, developed by Bank of America, JPMorgan Chase and Wells Fargo, to allow for digital payments to be deposited right into bank accounts. The large banks also have the resources to utilize real-time fraud detection, and massive implementation of same-day ACH will have little to no changes to their current fraud program and environment.
However, the story couldn’t be more different for smaller banks and credit unions ($10 Billion in assets or less) as many will have to reassess their fraud prevention processes and solutions. Currently, a good number of those banks offer ACH Positive Pay or ACH Debit Blocks to help customers block unauthorized debits on their accounts. Those system are entirely based on the overnight settlement paradigm, where companies make decision on exceptions the following day.
If financial institutions decide to offer same-day ACH, they will probably have to forgo offering ACH positive pay in its current form to prevent unauthorized debits. System providers would have to build a real-time ACH positive pay, where customers have to be on standby, and would have about a 1-2 hour window to determine the validity of the transaction.
In terms of fraud operations, right now most banks processes have a 2-day timeframe to tell the Federal Reserve that they want to return the ACH debit.
With same-day ACH, banks will be forced to reengineer their entire fraud program and compress all their current processes into the 2-hour window. Lots of banks use ACH processing solutions (i.e PEP+) which are architected around overnight settlement for positive pay, return item processing, etc. Those solutions will have to be enhanced to provide another process flow for Same-Day ACH. System providers will definitely charge for that new service.
All ACH fraud prevention processes will have to start to be automated for those transactions. For example, it will be almost impossible to do callbacks on same-day ACH transactions in such a short timeframe. It will be very similar to wire fraud prevention programs, but on a different scale in terms of number of transactions and liability. Under ACH rules, the financial institution that promises that the payment is authorized, automatically assumes liability for the payment. This is much different than for wire transfers , where the liability typically lies on the customer side, as part of the terms of the wire agreement.
Overall, the impact of same-day ACH on fraud prevention programs will be an added barrier for large and small community banks, including credit unions, to adopt Same-Day ACH. The business case to get additional budget money for staff and system upgrades to support Same-Day ACH will be difficult. Those banks already have limited staff and budget to handle current ACH volumes. The promise of leveling the competitive playing field on expedited settlement will come to great expense for the smaller financial institutions and of course, their customers and members.