Defining the Landscape for the ACH Network

(2005)

NACHA's Strategic Plan Development

PAYMENTS 2005, NACHA's annual conference on electronic payments, was held this year in San Antonio, Texas from April 10-13, and included a review of the industry's agenda to develop a new strategic plan for the ACH Network. Elliott McEntee, NACHA's President and CEO, hosted the forum that gathered input from five panelists and the payments industry audience. This article will summarize some of the educated perspectives and discussions from this forum, and what is happening with the strategic plan.

Panelists: Elliott McEntee; Richard Burke - Vice Chairman of NACHA 's Board of Directors, Senior VP at Commerce Bank, who is overseeing strategic plan development; Steve Ellis - Chairman of NACHA and Executive Vice President of Wells Fargo & Company's Wholesale Banking Group; Mary Ann Francis - NACHA Board Member, Senior VP at National City Bank; Danne Buchanan - NACHA Board Member, Executive VP at Zion National

The Plan: Why and How?

NACHA describes the strategic planning process as the most important project undertaken by its Board of Directors, because it lays the foundation for future roles and payment applications in the ACH Network. Eight years ago, a series of recommendations were made about the payment applications that would be supported - namely, ARC and the other check conversion process processes that are growing today, such as TEL and web transactions. Another plan four years ago was focused on risk management and quality control. Since that plan was adopted, several new roles, rules, and proposals were approved dealing with risk management, and the Network Return Entry Fee proposal was adopted.

Panelist Perspectives

Richard Burke explains that every four years the strategic planning process attempts to discern the evolving needs of the ACH network to create a cohesive view of the future. For the last decade the strategic planning process has set about to reenergize and recreate electronic payments in the U.S. Given the speed of payments system change and the growing utilization of electronic payments, the strategic planning process will "quite likely set the stage for the most significant period of advancement in the history of the ACH Network," describes Mr. Burke.

As part of the process, three task forces have been formed to consider the following issues:

• The ACH Network as it relates to meeting the transaction needs of its customers (led by Mary Ann Francis)
• NACHA as a trade association, a regulator, and educator (led by Norm Robinson)
• Risk management across the broader payments systems landscape (led by Ward Gailey)

The task forces are being formed from board members, regional payment associations, and financial institutions. The plan will be reviewed in spring and early summer, and approved at the August board meeting.

Steve Ellis describes how methods used for paying are changing significantly and so is the way we move information tied to those payments. He states that payment services, which have historically been based on how customers bought and sold with one another other, have evolved over time and have changed our behavior. People adopt new payment technologies and then adapt their behavior to fit those technologies. He states that payment tools are being used in new and unexpected ways today, and it will bring new concerns in the area of risk management. This is an important area to be considered in the strategic planning process.

Mary Ann Francis heads the task force to look at the overall direction of ACH Network and its ability to meet customer needs. She describes how the ACH Network is being used today in ways we may never have intended. When the ACH Network was first formed in the 1970s, it was built solely for money movement with the intention of replacing paper checks for high-volume, low-dollar, repetitive transactions. Within a couple of years, light direct deposit payroll info was traveling along with these transactions, and moved the ACH Network into the realm of being an information and transportation network that required different levels of security authentication.

She explains how everyone wants the ACH Network to remain a low-cost, high-quality, fast network; but as it evolves, there are tradeoffs. The Network was not originally intended for spontaneous purchase transaction, but rather for planned batch file transfers. Questions about how or if the Network should be global, a 24/7 product, delivering real-time transactions, and/or used in business check conversion ( . and the related security and authentication issues) need to be considered by this planning task force. The idea of using the ACH Network for $0 transfers - for pure information movement, rather than money - is also something to be reviewed. The infrastructure is old, so how will it adapt? Ms. Francis describes that, in the end, the driving force will be what the customer wants.

Dan Buchanan describes that a relationship between check conversion and Check 21 has been going on over the last couple of years, especially in the area of ARC. There is a question whether image exchange and Check 21 are at odds with check conversion. Mr. Buchanan advises avoiding a singular-mindset about payments - that each approach, conversion or truncation (with an IRD or image exchange), has unique characteristics with regards to settlement, cost, and how risk is divided between the parties. Whether you choose Check 21 image exchange or conversion will be based on the types of check being delivered, whether they are eligible or not, where they are drawn, the dollar amount, and possibly even the time they are drawn. Financial institutions and their customers need to make informed decisions based on available options and potential risks.

Answers to Some Big Questions

The following gives a snapshot of panelist input.

What will be the major influence on the future demands of payments services?

• Adding efficiency and reducing costs
• Designing technologies to meet customer needs, wants, and demands (It is not about competing technologies.): new ways for them to connect, added convenience, simplicity, and reliability, low-cost, different payment choices/value-add choices
• Finding the best ways to move money, with consideration for customer demands and security
• Managing Risk: We do need rules to protect customers from themselves, and we must consider the cost of security

With the growing problems of ID theft, hacking, and phishing, what is needed with regards to processes and rules to prevent fraud and protect privacy of info - from the originator, ACH operator, ODFI , RDFI, or combination of all these participants?

The media has really magnified these problems; but by building electronic services the right way, these problems are minimized. Payment systems are largely staying ahead to combat these problems and insure integrity of their systems. Care for information and privacy has gained a lot of visibility. The risk issues that face various payment types is of concern to the ACH Network and will be addressed as part of the planning process.

ARC (Accounts Receivable Conversion) has grown faster than any other ACH product - reaching the billion dollar processing mark in a very short period of time. Are there any ACH products on the horizon that could grow as rapidly?

We could increase an ARC-like transaction if we move to business check conversion, and that could make another check-conversion standard-entry class grow. ARC has filled a broad need. The focus should be on a product that makes sense, not to seek growth for growth's sake.

It is hard to envision something growing as rapidly as ARC. One reason ARC has been so successful is that it did not really impact the users way of paying. Another rapidly growing product would possibly meet the demands of an issue that touches a value prop up front - the right value prop.

The banking industry spends billions of dollars supporting several different payment networks and systems. Could the banking industry lower costs and provide better service to customers if different networks were more closely aligned in terms of legal framework and rules?

Reaching the ideal of 'a single payment set' is limited by the differing, intended objectives and characteristics of various payment systems. It is probably just too late to find common ground. It is a valid idea that these payment structures share a common experience, and should take advantage of that. But, for example, with conversion, signature risk all rests with the merchant or the financial institution; with checks, it is with the paying institution. To try to bring these divergent systems together is difficult to picture.

Steve Ellis, expressed that the ACH has enough work to do internally just to make its own framework a little clearer. He suggests looking at what the ACH Network can do better across the payment industry associations and banks, and aiming for a strong framework as an alternative priority.

Does NACHA rulemaking effort serve the industry adequately? Is it too cumbersome or is there not enough research? Should it be looked at in the strategic plan? Should it be sped up or slowed down?

The rulemaking process is growing in its complexity, and it needs to be made more efficient, but also needs to adequately consider the issues. The industry moves ahead even in the absence of rules, but that is not a good thing. It is important that if we can't tackle every issue, that we at least consider whether the rules we write contradict earlier rules. We need to consider the issues that have gotten things to where they are today, and consider the impact of one transaction type on another.

Why is NACHA obsessed with allowing customers to opt-out?

(Question from Kevin Shore of CSI)

The ideal is to not have opt-out or exception processing, but lawmakers were breathing down our throat. Until lawmakers are better educated as to why the payment systems are required, opt-out will be the case. There have been a few customers incensed over the conversion issues and with a great deal of emotion, and so opt-out was created; but we also need to move forward. Opt-out was due to politicians; Congress and state attorney generals quickly became involved after a few phone calls were made. Opt-out was originally mandated in two states, and other requirements were set down that would make the product very undesirable in other states. Opt-out was the way to fix this. Congress was clear that if we didn't fix it, they would. (On April 20th NACHA was scheduled to testify before a house committee on Check 21 and check conversion.)

Given the largest attendance ever of commercial depositors at NACHA this year, how do the panelists recommend creating an integrated suite of payment services so that commercial depositors aren't forced to deal with the separate silos within the bank?

It is an agenda item for any bank that services corporate customers. National City was recognized at this year's conference for the work it has done to integrate its payment systems. These ideas are starting to move into the mainstream, but we're not quite there yet. It is an organizational issue and solvable. Banks need to stop thinking about products and start thinking about customer processes. Web services are a great enabling technology to deliver bank services with customer processes in mind. Development will require customer feedback and involvement. Danne Buchanan explains that Zion has been developing a seamless integration behind the scenes for the silos; corporate customers now have a product that allows them to send an image file and determine how they want it to clear - whether that is ACH or IRD image exchange.

It's the bank's responsibility, but corporations share this responsibility as well. 10 years ago, we would train our corporate customers to buy controlled disbursements or ACH debits or another application - when the real need was around collection or disbursement; it is important to consider the variety of needs around a particular transaction. Customers were all guilty of silos; in the old world, the company treasurer was the only person you had to deal with. Now, with technology-based, complex, solutions-oriented products that are truly for 'payables' and 'receivables,' you get a whole different set of people at the customer deciding what's best.

Would the panelists address the globalization of payments, and linkages with similar national clearinghouses - that is, linking the national ACH Network with the ACH Networks in other countries?

There is a growing interest in globalization. To the customer, a payment is a payment. If you start thinking globally, the number of rules you face become 10-fold what they are domestically. A lot depends on how open a country is to changing their currency. It becomes very political, and that is as much of a hindrance as the technology itself.

A couple of years ago the WATCH project brought banks together from all around the world and looked at the idea of forming a global ACH network. However, we couldn't make the business case. Banks couldn't justify the investment to make it possible. Right now, European bankers are focused on doing something within Europe, with the variety of ACH networks, formats and rules that exist there. The Federal Reserve has also been trying to develop links into other countries, but it is hard to make the business case for this.

In the next two years, the corporate side will bear more and more of the processing expense with Check 21 and IRDs. How can we make business checks the converted-type instrument going forward?

Businesses will continue to write checks, just due to the nature of payables systems and IS and IT resource availability. Originating all payments electronically is a ways off, especially for corporations. But as checks go through the system, even if electronic, they must marry up with the new controlled disbursement. The float issue is going away due to check conversion or Check 21, but reporting on when a check will clear is still required. The same services - account reconcilement and positive pay - will just look a little different. Paper and electronic must link together; a transaction may start as one payment service and end as another.

In addition, there is simply not a consensus on whether or not business checks should be converted. For example, many accounts receivable managers would like to see every check converted; treasurers want more control over how the payment process goes.

This panel expresses strong support for offering customer 'choice.' Yet, you're down on 'opt-out. Provide some information on this apparent contradiction.

We don't allow opt-out with image exchange for check 21. Opt-out causes some problems operationally. Politicians need to be educated on the reasons that decisions were made. It requires considering the greater good at play - an efficient, low-cost, secure payment system for everyone - not controlling every step.

Opt-out does not change the fundamental equation. On the frontend, consumers can choose to write a check and initiate a payment as they like; yet, conversion allows the bank on the backend to provide as good or better information. It is possible to reconcile the concepts of consumer choice and opt-out.

What can be said about the future of the ACH Network for real-time transactions?

The ACH Network was built as a batch network. Real-time transactions would require not just changes to rules, timing, and what the batches look like, but a different infrastructure at the operator and financial institution levels. The required changes would need to be determined.

About PAYMENTS 2005

PAYMENTS 2005 included more than 160 educational sessions and workshops featuring speakers from financial institutions, companies, government agencies, consulting and research firms, and service providers.

Hot topics included:

• Case studies on ARC, the fastest growing payment application in the 33-year history of the ACH Network
• The impact of Network Return Entry Fees on the ACH Network
• NACHA initiatives and pilots, including the ACH credit-push proof-of- concept, business check conversion, back-office check conversion, EBIDS (Electronic Billing Information Delivery Service), and delivering XML-formatted remittance messages via the ACH Network