How Same-Day ACH Transactions Would Actually Work

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A couple of weeks ago, we posted a piece discussing how the implementation of same-day Automated Clearing House (ACH) transactions would affect the fraud operations of American banks. Essentially, same-day settlement would provide a very small window of opportunity to stop or reverse payments once authorized and completed.

In a previous life, I was a CIO at a small financial institution in Florida and I have some reservations on the benefits of same-day ACH transactions when compared with the challenges that come with it. In an effort to gain a better understanding of how this implementation would work in real life, we spoke to Gustavo Vega, who leads ACH Colombia, the Clearing House in that country and where same-day ACH transactions are already implemented.

“In Colombia, same-day ACH transactions have been in place since 1993. We started with one daily cut-off time of 3 pm, transactions would be posted the same day and funds were available by dinnertime,” said Vega. “Today, we have five daily processes at 9 am, 11 am, 2 pm, 4 pm and 6 pm, which is as real-time as it gets.”

Vega explains that times have changed as the pace of business as increased significantly and millennials' on-demand lifestyle have forced them to change and adapt by adding more processes, making funds available very quickly. Nowadays, if you make a deposit at 9 am, funds will be available at 11:30 am. This timeline is true for all of the financial institutions in the country, large and small.

In order to fight fraud, Vega says that most financial institutions offer a variety of authentication and approval methods to their customers and they monitor transactions in real time. Some of the methods include second-factor authentication (second password, token, OTP), double participation or segregation of duties (one for including transactions and other for approve them), limits per transaction, behavioral rules on the customer profile, among others methods of protection.

“Same-day ACH transactions are possible because we have a small network of banks that are all connected to the Central Bank of Colombia (similar to the Federal Reserve in the US), and this is crucial when it comes to guaranteeing that the funds will actually be paid” said Vega.

In the US, the situation couldn’t be more different. The banking environment is enormous compared to other countries as there are 6,799 commercial banks in the United States connected to the Federal Reserve, and 90% of adults have at least one bank account. With millions of transactions being processed daily, posting and clearing ACH transactions would significantly reduce the window to detect anomalies in transactions, from 2 days to 2 hours! As a result, banks will see increasingly more fraud unless they are prepared to scale their fraud operations. As you may have guessed, this is especially more challenging for community banks and credit unions.

The ever evolving business environment is forcing the financial sector to become more agile and as a result, technological innovation will make this possible. Keeping in mind that making same-day ACH transactions will require an important overhaul of the payment system, there are some key actions banks can take to prepare for it. As a basic level, banks will have to invest to update their backrooms and upgrade fraud operations and systems as well as implement strong authentication methods and transaction monitoring. At the end, it will come down to finding a balance between increased resources and accepting additional risk of electronic fraud.

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